In an article in the latest edition of Business 2.0 -- The Return of Monetized Eyeballs -- Om Malik argues that online advertising has returned as a business model. "Based on recent high-profile Web content deals", he writes, "the value of a unique monthly website visitor currently hovers around $38 (the average purchase price per unique user of acquisitions during the past year)."
He then surveys companies with large numbers of monthly users, suggesting (see the table) that Slashdot.org, owned by VA Linux (ticker: LNUX), could be worth $155 million.
Now, this is interesting stuff. Om's article got lots of attention from the Internet cognicenti, but few caught the investment implications of this table. VA Linux, which owns Open Source Technology Group, which owns and operates Slashdot, trades at a market cap of just over $100 million. And it has almost $34 million in cash. (Numbers from Yahoo Finance here; readers should check the company's latest filings for accuracy.) So for an enterprise value of about $68 million, you get: (1) Slashdot (worth $150 million according to Om), (2) e-commerce site ThinkGeek, (3) clipart site Animation Factory, (4) five other tech web sites, and (5) VA Linux' core enterprise software business.
Is Om's $150 million valuation estimate for Slashdot reasonable? Jason Calacanis pours scorn on Om's valuation assumptions:
Weblogs, Inc. was bought by AOL because of revenue and revenue growth. Eyeballs and pageviews had nothing to do with it--zero. No one in the marketplace is buying things based on eyeballs--no one. It's all based on revenue... However, no one--NO ONE--is paying $38 per web user because no one--NO ONE--has any hope of ever making that kind of money back! I can't comment on specifics of our deal, but let me just say this is really, really flawed.
How much money does Boingboing, Gawker or Weblogs, Inc. make off of a user? Well, if they were to read a blog every other day and read two pages each time that would be a total of 350 pages a year. 1,000 pages = 1 CPM (cost per thousand). Blogs prob. monitzie on avererage at $2 to $5 per 1,000 pages. So, what you would make off an a really loyal who came back all the time is around $1-3 per year or 1/10th of the $38 a user number.
Jason then suggests two alternative valuation metrics:
Boingboing, like any other web property, is worth 1-10x revenue and 5-30x earnings.
Where would that leave VA Linux? In Q3 LNUX generated $8.2 million in revenue, of which $1.4 million came from its software business, $3.6 million from e-commerce sales, and $2.6 million from ad sales. (It seems the rest was from the animation site.) Earnings multiples are useless here, as LNUX overall made a loss in Q3, only expects to be breakeven in Q4 (its 2006 fiscal Q1) excluding options expense, and doesn't break out the profitability of its web publishing business.
So here's a back of the envelope calculation/guesstimate: Let's annualize the Q3 ad revenue number, assume some growth, and thus say that LNUX will generate 2006 ad revenue of $12 million. Apply Jason's 1-10x revenue multiple, and you get a valuation of $12 million to $120 million.
But that's too wide to be useful. Here's how to narrow that down. On VA Linux's conference call, CFO Kathy McElwee reported that:
We nearly doubled our average CPM rate during the quarter from $11.28 to $20.63. Our top advertisers during the first quarter included AMD, Microsoft, IBM, Rack Space and HP. (Quotes are from the CCBN StreetEvents transcript.)
Applying Jason's calculation to Kathy's $20.63 CPM number: if each user views 350 pages per year, LNUX generates $7.22 in ad revenue per user per year. That's 0.19x Om's value per user of $38, so Slashdot could be worth 0.19x Om's estimate of $150 million, namely about $27-30 million. That's not far off a 3x forward revenue multiple (using my back-of-the-envelope 2006 ad revenue guesstimate) of $36 million.
Since LNUX has an enterprise value of about $68 million, that values its e-commerce and core software businesses at about $32-41 million. Are they worth more than that, making LNUX an undervalued Internet advertising play? Your call. Click on LNUX chart above to enlarge.
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