…there appears to be a strong relationship between the revenue growth of the product category and its median EV/Revenue multiple.
This excerpt is from our complimentary Q1 2012 Software Industry Financial Report which can be downloaded here: http://www.softwareequity.com/research_reports.aspx
The public market valuations of companies comprising the SEG Internet Index varied widely by Internet category in 1Q12 (Figure 23). Yet, there appears to be a strong relationship between the revenue growth of the product category and its median EV/Revenue multiple (Figure 24).
The outlier, on both TTM revenue growth and median EV/Revenue multiple, is Social Media which racked up a median EV/Revenue multiple of 14.3x – nearly six times higher than the overall Internet median of 2.5x. Companies with market valuations exceeding the median Internet EV/Revenue multiple included Mail.ru Group (17.7x), Yelp (16.3x), and LinkedIn (15.2x). Besides a median growth rate in 1Q12 exceeding 70%, investor enthusiasm for Social plays was bolstered by the success of Facebook and other high flying, yet still private, social media companies that are generating tremendous buzz.
While less spectacular than Social, the Travel product category also had an impressive market valuation in 1Q12, posting a median 4.7x EV/Revenue multiple. Key market performers in the Travel category included HomeAway (8.9x EV/Revenue), TripAdvisor (7.1x) and Priceline (6.2x).
The Commerce category was widely eschewed by investors, closing 1Q12 with a highly disappointing 0.9x EV/Revenue multiple, by far the lowest of our Internet categories. Lackluster revenue growth, well below the Internet median, is surely to blame here. The notable exception was Mercardolibre, which posted a median EV/Revenue multiple of 13.7x, over fifteen times the Commerce category median for 1Q12. Mercardolibre, Latin America’s eBay, was favorably looked upon by investors enamored with emerging markets, particularly in light of its 38% TTM revenue growth rate.