M&A group say tech valuations are absurd
With Google set to announce its latest quarterly earnings later today, Magister Advisors comment on the valuations currently circulating in the tech and social media sectors…
Google’s latest reported full year revenues were ten times those of Facebook yet Google trades at a forward PE of 13.1 and Facebook trades at a forward PE of 54.9 (based on analysts’ consensus). The result is industry stalwarts like Google are valued as failures while smaller next generation companies are trading on “faith multiples”
Markets are giving huge premiums to next generation internet and technology companies, while industry ‘gorillas’ with gold standard business models and proven track records are being valued as relative failures, according to analysis by Magister Advisors, M&A advisors to the technology industry. Google’s quarterly earnings, which will be announced later today, are expected to underline the differential starkly. Google generates ten times the revenues generated by Facebook and yet its PE is a quarter of Facebook’s.
These inflated price/earnings ratios apply to many largely-unproven next generation players which commonly trade at multiples many times higher than industry stalwarts Apple and Microsoft. LinkedIn has a PE ratio of 711, for instance, whilst proven businesses such as Apple and Microsoft have PE ratios of 14.5 and 11 respectively. Other gravity-defying PE ratios include Electronic Arts at 54 and Rackspace at 73.
To put the overrating in context, if Apple, a business with enormous brand value and a world-class track record of execution, received the same valuation as a business like Facebook or LinkedIn, it would be valued at many trillions of dollars.
Victor Basta, managing director of Magister Advisors said: “Achievement is being punished. Google and Facebook are businesses that are currently highly dependent on advertising revenues and yet this fundamental similarity does not flow through to valuations. If Google traded at Facebook’s PE, it would be worth close to $750 billion. If Facebook traded at Google’s PE, it would be worth around $13 billion. Furthermore, Facebook’s growth is not more than twice that of Google’s which means a multiple that is four times that of Google’s is completely irrational.”
He added: “Clearly unproven future value is worth more than achievement. LinkedIn and Facebook are incredibly important next-generation internet businesses, but it is absurd to believe they are worth several times, or even several hundred times more than companies that already dominate their sectors.”
“Soon companies like Facebook will reach their own level of ‘saturation’ and this should already be priced in. We may be connected to every cousin or sales executive on the planet, but short of hiring someone or showing them a picture of our mother’s 80th birthday, we quickly run out of enough commercial meat to justify these premiums. Also, while Apple and Microsoft have challenges to keep growing as quickly as the internet majors, Facebook for example faces its own growth challenge as it runs into the ‘wall’ of privacy concerns, and tries to extract pennies from mobile subscribers.”
“The technology industry has always over-valued the next big thing, and some of this ‘irrational exuberance’ is perhaps understandable. But where is the value for decades of performance? It is only in the technology industry that a bird in the bush is worth far more than a bird in the hand.”
* Magister Advisors is a leading M&A advisory firm to the technology industry with offices in London and Silicon Valley.