Few companies doing IPOs are already household names. In recent times, we have seen Facebook (FB), LinkedIn (LNKD) and Groupon (GRPN) go public with much fanfare and investment enthusiasm. Whether that was really warranted or not might be better understood based on their stock performances over the last few years.
The next household name to go public is going to be Twitter, after they just recently filed their confidential S1 with the SEC. This is a confidential filing not available for public viewing and is used to work with the SEC to get all the paperwork in proper order. It is also certainly a way to stir up interest without having to disclose any real information in terms of revenues, profitability or cash position. Given that these types of filings are only available for companies that have revenues less than $1B, we at least know they are no larger than that. We also know that over the last 7 years, Twitter has raised over $1.1B from venture capitalists and private investors who are certainly looking to cash out at a much higher valuation.
Some of the early valuations for Twitter have them going public with a market cap between $15-20B. Based on maximum revenue of $1B for the latest year, that would give them a multiple of between 15-20X ttm revenue. This number may seem high, but is not out of line with other well-known IPOs over the last several years. It is also reasonable to guess that the early stage investors who have put in the initial $1.1B are looking for at least 15-20X initial investment.
In order to understand whether this type of valuation is valid, let's look at some valuations for some recent tech IPOs, past tech IPOs and other companies in the mobile space. Two recent technology IPOs are RetailMeNot (SALE) and Cvent (CVT). RetailMeNot owns and operates digital coupon websites. These websites include mobile applications, alerts and social media interactions. Cvent is a software company that specializes in event management applications. Some of their applications include planning events, finding venues, managing membership data, creating mobile apps, sending surveys and developing strategic meetings management programs.
According to the chart below, each of these companies is roughly selling at a ttm revenue of greater than 10X. These companies would seem to indicate a valuation of 10X is certainly achievable even if the company is not a well-known name like Twitter.
*Market cap and revenues at the time of their IPO for Facebook, Groupon and LinkedIn
Two other high technology companies that have been around a while are Millennial Media (MM) and Hipcricket (OTCQB:HIPP). Both of these companies have experienced high revenue growth over the last few years and are in the mobile advertising space. Millennial Media, as can be seen in the chart, is selling at a multiple of around 2.7X ttm revenue, and Hipcricket is selling at roughly 2.3X ttm revenue. Both companies have been growing revenues in excess of 40% year over year for the last 3 years. Millennial Media's stock price has recently been down because of their announcement that they would be acquiring a competitor in the space, Jumptap, in a deal that was initially valued at $225M, or roughly 4X Jumptap's estimated revenues for last year. Hipcricket is selling at only 2.3X ttm, and recently announced a new partnership with Google (GOOG) and Mondelez (MDLZ).
Of note Twitter also recently announced a $350M deal for another mobile player in this space called MoPub at an estimated 10X ttm net revenues of $33M. Given these current valuations of companies well-established in the space, it might indicate that 15-20X ttm revenues would be at the very high end of the valuation range. Or it might be a good indicator of companies in the space that might be prime targets for larger companies that can scale their products quickly and efficiently in areas where they do not have an equivalent offering.
Three other household names that have IPOed in the last 2 years are: Facebook, Groupon and LinkedIn. All three of these companies had well-publicized IPOs, and as can be seen in the above chart, at the time of their IPOs came out, they had very high multiples. Facebook was doing $3.7B in revenue and had a market cap around $92B, Groupon was doing $713M in revenue and had a market cap of $16B, and LinkedIn was doing $120M in revenue and had an $11B market cap. All three of these highly recognized IPOs came out at very high multiples, so it would seem Twitter could certainly receive a 15-20X revenue multiple, if not more.
There is little doubt in my mind that Twitter will once again capture IPO fever as all types of investors will line up for a piece of the action. A multiple of recent revenues will certainly be one metric to use to understand valuation. The real indicator for any investment is how it does over time, and looking at the charts of Facebook, Groupon and even Linkedln should give any investor a reason for caution. Facebook just recently returned to its IPO first day high after almost 18 months, Groupon crashed and burned from a high of $25 to around a low of $2.60 and LinkedIn raced to almost a hundred before diving to $60. It has since rocketed to over $250. The bottom line is when the real S1 is publicly available, look carefully at what Twitter really offers and then decide what type of valuation they really should have.
Charts courtesy of Stockcharts.com