8 Trendy High Growth Tech Companies With Sky High Valuations

by: Lenny Grover

In a previous Seeking Alpha article, I explored the strange phenomenon where a number of high growth tech companies in emerging markets are trading at sky high valuations, while many of the more mature and slower growth tech blue chips looked downright cheap. We can use the Screener.co stock screener to isolate the highly valued tech companies and delve into the valuation metrics that investors have applied to these businesses. Many are in high-growth emerging markets and trade at substantial valuation premiums to the more established blue chip companies that provide similar services. While it makes sense that higher future growth expectations demand a higher price, some of these multiples just look silly! Let's use the following criteria:

Exchange Country
Exchange Traded On
"Over The Counter"
Current EV/Revenue
Market capitalization

We are limiting ourselves to companies trading on U.S. exchanges with market caps of greater than $1B and EV/Revenue multiples greater than 10. This yields 18 results, as of 5/1/2011. Let's sort in descending order of EV/Revenue and pick 9 companies that you probably are familiar with, if you follow the tech sector.

Company Name
Current EV/Revenue
Youku.com Inc (ADR)
Baidu.com, Inc. (ADR)
OpenTable Inc
Acme Packet, Inc.
ARM Holdings plc (ADR)
SINA Corporation (USA)
MercadoLibre, Inc.
VMware, Inc.
Salesforce.com, inc.

At an enterprise value of almost 100x its revenue, YouKu (NYSE:YOKU) is the clear leader of the pack in terms of valuation multiples. It did grow revenue 152% YoY, but the "Chinese YouTube" faces high video streaming costs just like its U.S. counterpart. In addition, with a ~100x revenue valuation, even consistent 150% annual growth over the next two years would give the company an EV/2-Year Forward Revenue multiple of over 15x (still making this list!) -- in a business that is likely to have lower gross margins than many Internet companies.

While the company's gross margin has been increasing, it was a mere 33% last quarter. That compares with a gross margin of over 65% for Google (NASDAQ:GOOG) and over 72% for Baidu (NASDAQ:BIDU). Google was scrutinized for paying $1.65B for YouTube back in 2006, while investors are valuing YouKu at an enterprise value of a whopping $5.8B less than five years later. It is informative to compare the aggregate global traffic of YouTube and YouKu; while Alexa reports ~27% of global Internet users visit YouTube, only ~1.7% visit YouKu. Furthermore, the Western traffic of YouTube likely monetizes better than the East Asian traffic of YouKu. Like many of the companies on this list, YouKu is an interesting business. But with a EV/Revenue multiple significantly higher than Facebook was valued in its recent Goldman Sachs-led financing, you have to ask yourself whether the price is sensible.

Baidu (BIDU) is often called the "Chinese Google". It is the leading search engine in China, and makes money through advertising in the same way as Google. However, Baidu's YoY revenue growth rate is roughly 3x that of Google's (78% vs. 24%) and it should therefore likely command a premium valuation multiple. While Google's EV/Revenue ratio is 4.5x, Baidu's is 36.2x; that is quite a premium! In fact, Baidu's enterprise value of $50.4B is more than 1/3 the enterprise value attributed to Google ($141.8B) despite Google posting more than 24x the revenue in the last full year ($29.3B of revenue relative to Baidu's $1.2B). Again, nobody doubts that Baidu is a high-margin business that leads its category in a rapidly growing emerging market... but at what price is it an attractive investment?
OpenTable (NASDAQ:OPEN) is an unusual candidate to make this list. With a YoY revenue growth rate of 44%, it is high growth but not quite as fast growing as many of the other companies on this list. In addition, at least one Seeking Alpha article has questioned whether its market is getting saturated and how long the company can maintain its rate of growth. It is clearly a category leader with very stong gross margins (72% in the most recent quarter) but with a 25.4x EV/Revenue ratio and $2.6B enterprise value on less than $100M in revenue for the last full year, it is being valued at a multiple well above that of many other category-leading growth businesses. With a P/E ratio of 191, investors are expecting OpenTable's growth to continue well into the future, and any misstep can have significant consequences for investors.

Acme Packet (NASDAQ:APKT) is a unified communications company that grew revenue 63% YoY. It is trading at an EV/Revenue ratio of 22.3x, with an Enterprise Value of $5.7B. Again, an interesting, rapidly growing business trading at a very speculative valuation. In my prior exploration of bubble-like valuations, I mentioned that even if APKT meets two-year forward analyst projections, its current price still represents a high P/E ratio. While the business has a high gross margin (82.5% in the most recent quarter), it is being valued at a 118 P/E ratio and ramped operating expenses faster than revenue QoQ to sustain its rate of growth. As a result, Acme Packet's Q1 operating income was below its Q4 levels.

ARM Holdings (NASDAQ:ARMH) makes chips for smartphone and tablet devices. That is a very exciting market that may grow over the next ten years the way the cell phone market grew over the past ten years. But, while microprocessor market leader Intel (NASDAQ:INTC) is trading at an EV/Revenue ratio of 2.4x, and many other semiconductor companies are trading at discounted valuations because of cyclicality, ARMH is commanding an EV/Revenue ratio of 18.7x, and its EBITDA margins are lower than Intel's. So, even if ARMH had 7x the revenue, it would still be trading at a premium valuation to Intel. In fact, today its Enterprise Value of $13.4B is greater than 1/10 that of Intel ($113B) despite the company having less than 1/50 the revenue in the prior full year and less than 1/90 the EBIT.

MercadoLibre (NASDAQ:MELI) can be thought of as eBay (NASDAQ:EBAY) / PayPal for Latin America. However, while eBay has an EV/Revenue ratio of 4.1x, MercadoLibre's is 18.3x. Making this even more puzzling is the fact that MercadoLibre grew revenue 25% YoY, only slightly faster than eBay's 24% YoY revenue growth. While a $4B enterprise value, MercadoLibre is valued at almost exactly 1/10 of eBay ($39.1B enterprise value) despite having less than 1/40 the revenue and 1/25 the EBIT of its larger rival. While the Latin American market may be higher growth over the long term, MercadoLibre's valuation premium appears somewhat aggressive.

SINA Corporation (NASDAQ:SINA) owns a Chinese social network similar to Twitter, called Weibo, and generates revenue from online advertising. However, an e-mail I received on 4/29 from secondary market SharesPost suggests that Twitter, itself, is only being valued at $6.22B (relative to SINA's $7.4B enterprise value). While Twitter probably has substantially less revenue than SINA and, like SINA, is arguably overvalued, the 17.8x EV/Revenue ratio afforded to SINA seems to assume very aggressive monetization and growth assumptions for its Weibo asset. In fact, the company as a whole grew revenue only 12% YoY, so the current valuation is driven by similar speculation regarding improving monetization rates of social networking assets asTwitter.

Looking at Alexa again, Twitter is estimated to reach ~10% of the global Internet audience while Weibo only reaches ~1% of the total audience. Again, Weibo's audience growth rate is higher than Twitter's (as it burst onto the scene relatively recently) but, given the lower monetization rates for East Asian Internet traffic, its monetization potential is likely only a fraction of Twitter -- which commands a lower valuation.

VMWare (NYSE:VMW) is the leader in the virtualization software market. While this is a very important and high-growth market, it also faces competition from Microsoft (NASDAQ:MSFT) Hyper-V and Citrix (NASDAQ:CTXS) Xen. However, with a $36.8B enterprise value, representing a 12x multiple of revenue and a 54x multiple of EBITDA, its valuation seems rich. In perspective, its enterprise value of $36.7B is >1/5 that of Microsoft ($180B) while VMWare has $2.9B of revenue last year relative to Microsoft's $62.5B (<1/20) and only slightly higher gross margins than Microsoft (82% vs. 76% in the most recent quarter). On an EBITDA basis, VMWare is <1/40 the scale of Microsoft. With 41% YoY revenue growth and a leadership position in a high-growth market, few would argue that it is not a good business. But, the valuation still seems high.

Salesforce (NYSE:CRM) is one of the earliest SaaS and "cloud" companies to market. Its CRM product is a market leader and it grew revenue 27% YoY. However, Google Apps is also a popular "cloud" offering that provides business applications on a SaaS model. Salesforce is trading at 11x EV/Revenue and 108x EV/EBITDA ratios. Its $1.7B in revenue last year commands a $18.3B enterprise value. With roughly the same YoY revenue growth rate as Google (which grew 24% YoY) and lower margins, its EV/Revenue ratio is more than twice Google's and its EV/EBITDA ratio is more than 9x Google's (which was 11.5x). Looked at another way, its enterprise value is >1/8 of Google's while its last year's revenue is ~1/17 of Google's and its EBIT was <1/83 of Google's.

With some tech companies trading at lofty multiples, many have questioned whether we are in another bubble. Given that the lofty valuations appear confined to a select group of companies whose aggregate market cap is a small percentage of the aggregate market cap of U.S.-exchange traded companies, I would characterize this bout of irrational exuberance as something else entirely. It is a small corner of the market where investors chasing growth have bid up prices of very good businesses to the point where price has been decoupled from both underlying value and the relative valuations of similar, more established, businesses.

Disclosure: I am long GOOG, MSFT, INTC, EBAY.