It is no secret that most VCs aren't huge fans of ecommerce businesses. While there are many reasons to dislike ecommerce, more specifically retail commerce, there are many positives as well which I've written about previously. Don't believe me? Just take a look the public markets and you'll find a plethora of valuable ecommerce brands. Still, regardless of whether you like ecommerce or not, one simple truth remains - ecommerce companies do not get valued highly in the public markets. Let's look at a few key metrics to see why that is.
I created my own index of public ecommerce companies below. Defining an ecommerce company is not always cut and dry so I was fairly liberal in my definition. Amazon, JD.com, Zalando, Ocado, Wayfair and others are certainly ecommerce companies in the purest sense in that they sell products online. Fitbit and GoPro are a bit different since they sell a lot through offline retail channels but I still included them in my ecommerce definition. Etsy is more of a marketplace but they are so important in the arts and crafts retail segment that I felt compelled to include them as well. Others like Coupons.com and RetailMeNot don't sell physical goods but they are tightly integrated into the ecommerce ecosystem via physical and digital coupons.
Looking at enterprise value, it's clear that Amazon takes up most of the mindshare. This is a major reason why investors are hesitant to back online retailers - Amazon has proven to be a ruthless competitor across categories. JD.com, an electronic retailer in China, is also quite large at $36B of enterprise value. Fitbit, Zalando, GoPro, Ocado and Wayfair are worth a fair bit but the market values quickly fizzle beyond that. Zulily would have made the list but they were acquired by QVC for $2.4B (see my post).
The next logical step after absolute valuation is to look at valuation multiples. A simple revenue multiple shows that ecommerce companies do not command premium valuations. Compared to 3-5x forward revenue multiples for marketplace businesses, ecommerce companies tend to center around 1.5x. Etsy trades at 3.8x forward revenue, but as I mentioned before they skew more towards a marketplace. Fitbit is the bellweather right now given their torrid growth rate and healthy margins but it's possible that their multiple may quickly compress just as GoPro's did. Looking lower down the list, the revenue multiples get downright ugly for companies that cannot maintain healthy growth rates while keeping margins afloat, i.e. Blue Nile, Groupon and Overstock.com.
NTM Revenue Multiples Over Time
Sure, revenue multiples paint a pretty grim picture for ecommerce valuations, but have they always been that way? Looking at a forward revenue multiple chart over time can help answer that question. As you can see from the below, most ecommerce companies center around the 1.0-2.0x forward revenue multiple band. Companies such as Etsy, GoPro, Fitbit and Groupon have all had their time in the sun but they all seem to converge to the mean as their growth slows, flaws in the business become exposed, margins compress, or any number of other reasons.
Ultimately a business will be valued on the present value of its future cash flows and EBITDA is a quick proxy for profit potential. RetailMeNot and Coupons are quite profitable but their market opportunities did not really pan out for them and thus their growth rates have flatlined and their absolute valuations remain small. GoPro and Fitbit, two companies that came out of the IPO gates with rich valuations, boast terrific product margins which translate to healthy EBITDA margins. As you get more into the pure play ecommerce realm with companies such as 1-800-Flowers, Ocado, Zalando, Blue Nile and JD.com, the real concern becomes whether these companies can hold onto any small profit margins that they might have as they continue growing their business. This very question has plagued Amazon for its entire history (though investors have now gotten over it given their newfound love for AWS). The fact is that getting customers to come back to your online ecommerce brand is tough and can get tougher as you scale. Over time, unless you are Amazon, more and more traffic becomes reliant on paid customer acquisition rather than organic traffic which makes it difficult to maintain high levels of profitability.
The bottom line seems to be that businesses that more closely reflect traditional pure play ecommerce models do not fare well in the public markets. This is largely due to Amazon sucking the air out of the room or hyper-competition in general, as well as shaky long-term profitability prospects. Investors do seem willing to "pay forward" for hyper-growth businesses like Fitbit, GoPro and Groupon as they sort out how big the market opportunities really are for these companies, but when these businesses hiccup or stall they harshly revert to the mean.
We are still in the early days of ecommerce given that most commerce is still offline and so I am optimistic that many exciting businesses will continue to be built. Companies such as Wish, HelloFresh, Blue Apron, Honest Company, Warby Parker, Gilt, JustFab and Razer are all on WSJ's Billion Dollar Unicorn list and may be next in line to go public. We shall see how they perform.