Public Internet Company Market Valuations

SEG Internet Index companies grew median TTM revenue an impressive 24.0% in 3Q12, up from 20.8% 3Q11.

This excerpt is from our complimentary Q3 2012 Software Industry Financial Report which can be downloaded here:  http://www.softwareequity.com/research_reports.aspx

The median market valuation of the 90 public companies comprising the SEG Internet Index was 2.0x EV/Revenue  in 3Q12, down sharply from 3Q11’s 2.8x and the lowest in seven quarters (Figure 19).  The decline in median EV/Revenue adversely impacted Internet providers of every size, but those with revenues between $100 million and $200 million were hardest hit by a median EV/Revenue multiples that plummeted from  2.7x in 3Q11 to 1.6x in 3Q12 (Figure 20).

Investors clearly favored public Internet companies with above average TTM revenue growth.  As testament, companies in the SEG Internet Index with TTM revenue growth rates above 40% were rewarded with a median 4.2x EV/Revenue multiple whereas those with lower TTM revenue growth rates had a 2.9x median EV/Revenue multiple or lower (Figure 21).

Yet in a sharp reversal from prior quarters, investors shunned unprofitable and marginally profitable but rapidly growing public Internet companies.  Groupon is the most notable example as its median EV/Revenue multiple plunged from 6.9x at the close of Q1 to 0.9x at the close of Q3.  There’s no question investors have become increasingly circumspect about Internet business models that prioritize user/subscriber growth with no clear path to monetization and profitability.  As a result, Internet providers with negative EBITDA margins at the close of 3Q12 had a median EV/Revenue multiple of 1.7x, well below the median for the index as a whole (Figure 22).

Unlike SaaS investors who seemed indifferent to profitability, Internet investors paid great attention to the bottom line in 3Q12.  Public Internet companies with EBITDA margins greater than 40% in 3Q12 were rewarded with a premium median market valuation of 8.0x (Figure 22).  Leading the pack were Baidu (57.3% EBITDA Margins, 13.3x EV/Revenue), Tencent Holdings (43.9%, 10.6x), VeriSign (54.6%, 8.4x) and Mail.ru Group (44.7%, 9.9x).

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