Doesn’t feel like a bubble

Whenever internet companies start being successful, worries about bubbles pop up.

Five years ago, people worried that the acquisition of YouTube by Google for a staggering 1.65 billion dollars was the first sign of a bubble inflating. At the time, I looked at the M&A activities and showed that the YouTube deal appeared to be an outlier.

This year, worries are popping up again, this time due to the kind of valuations many of the leaders in the space are getting. As my friends Jon Battelle and Fred Wilson point out, there is a substantial gap between what happened during the dotcom era and what is happening today.

As someone who believed the same thing, I decided to do a little research to get a sense of what valuation, revenue lines, and user base looked like. I did research on Google to get the valuation, revenue, and number of users of the most talked about companies. And it looked like this:

Name Valuation 2010 Revenue Users
Facebook $50 billion $2 billion 600 million
Groupon $4.75 billion $2 billion 30 million
Twitter $4.1 billion TBD 250 million
Zynga $3 billion $600 million 60 million
LinkedIn $2.2 billion $250 million 85 million
Foursquare $125 million TBD 4 million

The first thing that becomes apparent here is that, outside of Twitter and Foursquare, we’re dealing with companies with strong revenue flows. But does that justify their valuation? Let’s take the data and look at what else we can learn from it:

Name Valuation / Revenue Average Revenue per User
Facebook 25x $3.34
Groupon 2.375x $66.67
Twitter TBD TBD
Zynga 5x $10
LinkedIn 8.8x $2.94
FourSquare TBD TBD

All and all, the valuation themselves actually look quite low when you look at them through the lens of revenue (once again, I’m making exception here for Twitter and Foursquare, which are both still working on developing their revenue models — and I hear that the current valuation of Twitter in this round is dependent on their publishing a revenue model).

The other thing to look at is potential. GroupOn has outstanding revenue per user (more than twice the amount that Google gets for its users) so it seems that its ability to get more users would allow it to become as big, if not bigger than Google if it can maintain this average. Facebook, on the other hand, has a lot of growth opportunity in its average revenue per user. As one of the largest internet companies in the world, even something as simple as a couple of extra dollars in average revenue per user could generate billions in extra revenue.

But how do those compare to existing publicly traded internet companies. Thankfully, some of that data is available (Apple data is here):

Name Earnings per share Average Revenue per User
Apple 22.95 $585
Amazon 75.82 $189
Google 25.25 $24
Ebay 14.76 $39

So is there a bubble? I would say that if those companies are representative of the rest of the industry, there isn’t.

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