Internet Valuations and Multiples
Valuing internet companies is quite tricky, especially because most of them are growing really fast, losing money in the short term and have different long-term margin profile. Below, I share our method of valuing these companies and plan to share weekly updates on twitter. Would love to discuss and learn!
Choosing a method to value internet companies
People use use different methods to value internet companies, including using DCF, EV/ Revenue, P/E, EV/ EBITDA or EV/ GP. Every method has its pros and cons. EV/ EBITDA and P/E are inefficient as most internet companies are still investing for growth. EV/ Revenue is not uniform because internet business have different long-term margin profile.
Some folks, including us, use EV/ (long-term EBITDA) i.e. EV/ LT EBITDA. LT EBITDA is calculated by multiplying company’s long-term hypothetical EBITDA margin by NTM revenue to calculate pro-forma NTM EBITDA. This method allows you to compare all internet companies uniformly on a single metric.
Creating an index of fast growing internet companies
We created an index of ~30 fast growing internet companies to analyze their EV/ LT EBITDA multiples. Currently, this index has an average multiple of 31x NTM EBITDA.
Companies ranked by EV/ NTM LT EBITDA
Index average multiples over time
To understand how these multiples have changed, we analyzed the average multiples of the index over the past 8 years. Key takeaways:
- current multiple is 31x
- 8-yr average 21x
- peak pre-covid 27x
- peak post-covid 44x
- bottom 13x
Current multiples are 20% above pre-covid peak and 50% above long-term average.
Growth vs. Multiples
Chart below shows EV/ NTM LT EBITDA divided by NTM growth expectations, depicting how cheap / expensive the companies are relative to growth. Current average of this metric is 1.0x. Pre covid, average varied between 0.6x and 0.8x.
Scatter plot of growth vs. multiples
Apart from growth, the following qualitative factors determine EV/ LT EBITDA multiple:
- Nature of revenue: All things equal, subscription businesses (NFLX, SPOT, MTCH) trade at higher multiples than ads or e-commerce due to higher predictability of revenue.
- Profitability: Companies that prove profitability / unit economics in one segment/ geography get re-rated as Market gets confidence in their LT EBITDA profile.
Would love to discuss and learn!
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