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What's it really worth?
Posted By Christopher Grey On 12/06/2010 @ 5:39 pm In Commentary | Comments Disabled
Those who really believe Groupon, Facebook, Twitter, Zynga or many of these other private companies have reasonable valuations should take a look at some of their publicly traded competitors.
For example, compare Groupon’s recent $6 billion valuation to eBay.
More than half of eBay’s current value is PayPal, for which Groupon has nothing comparable, and eBay has several billion in cash. Stripping that out, eBay is valued at about $12 billion. While eBay’s business has some challenges, it has many times the revenue and earnings of Groupon as well as far more sustainable profit margins and the dominant PayPal business on which it can rely for future growth. The notion that Groupon is worth about half as much as eBay is absurd.
Also, Facebook recently was valued at $50 billion. Let’s compare that to Yahoo, Amazon, and Google. Stripping out Yahoo’s cash, its value is only about one third of Facebook’s. Granted, Facebook is doing much better than Yahoo right now. However, Yahoo still has many times the revenue and earnings of Facebook and both of them get basically all of their revenue from the same source, advertising.
Twitter was valued recently at $4 billion, or about 30 percent of Yahoo’s value excluding cash, even though it still doesn’t have much revenue at all. Even Amazon, which is doing great and has diversified sources of revenue, is valued at only about 40 percent more than Facebook excluding its cash. This makes no sense at all. Not only is Amazon a better business in terms of sustainable margins, diversified revenues, and dominant market position, it is still showing strong growth and has revenues and earnings that literally eclipse Facebook.
Google, excluding cash, is valued about three times Facebook. However, Google has an extremely dominant position in a business, paid search, with unusually high and sustainable margins. Google also has what most people consider the best proprietary technology in the world, revenues that are about 20 times those of Facebook and earnings that are off the charts.
Facebook is trying to figure out how to monetize. Google is drowning in so much cash flow that they are running out of things to spend it on, as evidenced by their recent attempt to buy Groupon for five times what it was valued at a few months earlier. There really is no comparison between the two companies except that both of them have a large presence on the Internet.
Let’s finally compare Zynga, at an alleged $5 billion valuation, to public gaming companies like Shanda or Electronic Arts. Excluding cash, Zynga is valued at three times Shanda and about 50 percent more than Electronic Arts. Of course Zynga is the one with the highest growth rate, but the gaming industry is notoriously fickle. This year’s hot company is very often ice cold a year from now. Billions of dollars of Zynga’s valuation is based on nothing more than hope and hype.
How can these bizarre comparisons be explained? It’s easy. The private companies are not getting true market valuations because their financials are not transparent and the trading in their shares in not highly liquid. This is causing a severe distortion in the perceived value of their stock.
It’s very similar to the way oil and gas partnerships for alleged rights in Alaska in the early 1980s reached valuations that exceeded by many times any reasonable estimates of all the oil and gas in the entire state. The reason was that these partnerships were highly illiquid, so it was easy for promoters and speculators to convince people that the value of these partnerships was dramatically higher than under any logical scenario.
This is why none of these technology companies mentioned ever will go public if the people who own them have any business sense. If they went public, their valuations probably would collapse by at least 50 percent or more within a year after the investor lock up expires.
Some of these private companies are allegedly adding billions of dollars of market capitalization every few months even as their revenues and earnings, if they have any, are not growing by any similar pace. This should be a warning flag that the growth in value is an illusion created by an illiquid market for their shares.
Don’t believe the hype about these companies. You’re better off buying the public competitors if you want to own large cap technology names.
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