On May 2, 2011, I wrote an article for Seeking Alpha entitled 8 Trendy High Growth Tech Companies with Sky High Valuations. With the recent volatility in the market and new tech IPOs, it makes sense to revisit this theme, see what has happened to companies previously listed, and identify new relevant companies. We will again use the Screener.co stock screener to re-run the screen looking for companies satisfying the following conditions:
Field | op | Criteria |
Exchange Country | = | "USA" |
Exchange Traded On | != | "Over The Counter" |
Current EV/Revenue | >= | 10 |
Sector | = | "Technology" |
Market capitalization | > | 1,000,000,000 |
As of 6/30/2011, this screen produced 40 results. Many of the companies are speculative companies being valued solely on the basis of their technology, as they have minimal revenue. So, let's add a condition requiring at least $10M of revenue in the most recent quarter, or Total Revenue(I) > 10,000,000. This yields 19 results. Comparing the current list of companies to the prior list reveals that all original 8 companies are still on the list. The comparison of EV/Revenue multiples from May 2nd to June 29th, 2011 is below:
Symbol | Company Name | Prior EV/Revenue | Current EV/Revenue |
Youku.com Inc (ADR) | 97.5x | 49.6x | |
Baidu.com, Inc. (ADR) | 36.2x | 33.3x | |
OpenTable Inc | 26.0x | 17.0x | |
Acme Packet, Inc. | 22.5x | 18.8x | |
ARM Holdings plc (ADR) | 18.6x | 17.9x | |
SINA Corporation (USA) | 18.4x | 13.9x | |
MercadoLibre, Inc. | 18.3x | 14.0x | |
VMware, Inc. | 12.0x | 12.2x | |
Salesforce.com, inc. | 11.1x | 10.8x |
With the exception of VMWare, which experienced slight multiple expansion, you can see that the remaining companies are all trading at lower EV/Revenue multiples. While this is partially due to increasing revenue that could be argued as being evidence of growing into prior valuations, looking at charts of the companies' share performance shows only 3 of the companies near or above the levels they were trading at on May 2nd (BIDU, VMW, CRM). Interestingly, two of those three companies represented the two lowest EV/Revenue multiples on both the current and prior lists. Another way of looking at this is that gravity is pulling some of the prior high flyers back down to Earth.
Symbol | Company Name | Current EV/Revenue |
Linkedin Corporation | 28.4x | |
Homeaway Inc | 19.6x | |
Pandora Media Inc | 17.3x |
There is understandably a lot of excitement around social networking and LinkedIn has been a big beneficiary of that enthusiasm. Boasting a market cap of $8.3B despite reporting meager earnings results in P/E ratio well above 1,000 (not a typo). The company's revenue grew 102% YoY and will likely continue to grow rapidly but being valued at 28.4x revenue means that, even with very strong performance, it will take a long time for the company to grow into its current valuation.
HomeAway has a market cap of $3.2B on full-year revenue of $167.9M and a YoY revenue growth rate of 40%. HomeAway is a vacation rental listing service that generates the bulk of its revenue from property owners listing on the service. However, with $16.9M of annual earnings (~10% net margins and ~200 P/E ratio) and a 40% revenue growth rate, the company will likely take a long time to grow into its valuation even if it continues to post strong performance.
Pandora Media operates the online and mobile music service of the same name. Despite having to pay large royalties to the music rights-holders, the company is valued at a shocking 17.3x EV/Revenue multiple, with a market cap of $2.8B. The company faces competition from upstarts like Rdio, a pending Spotify launch in the US, and margin pressure from its label deals (it is not even profitable on $138M of revenue). Nevertheless, investors are rewarding its 150% YoY revenue growth rate with a very generous valuation.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
