How Much Further Will Internet Stocks Fall?

The stock market has been getting walloped over the past few weeks, and the Internet sector has not escaped unscathed.  This of course has far reaching implications for private market valuations and for what consumer startups can ultimately be worth.  Three months ago, I created my own index of Internet companies and analyzed valuation and margins.  Let's see how that very index has performed over the past three months (data as of Tuesday, 1/26).    

As you can see, it has been a bloodbath across categories.  While some companies were spared, many were extremely hard hit.  In social, Facebook and LinkedIn held up, but Twitter was demolished and is now worth only $11B.  

With regards to marketplaces, Yelp, Just-Eat, Shutterstock, Zillow, GrubHub, LendingClub and Etsy are all down, with the latter few down as much as 25-50%!  It's a bit shocking to see LendingClub being worth a modest $3B, and large scale businesses such as GrubHub and Yelp only being worth $1.6B.  If Etsy were a private company again, it wouldn't even be a unicorn!  Some of the smaller marketplaces such as Care.com, TrueCar and Angie's List have held up, but to be fair those companies have been beaten down by the markets for a long time and Angie's List only spiked up after an acquisition offer from IAC.  TripAdvisor and eBay were the only other companies spared.  

On the ecommerce front, Wayfair, Shutterfly, Amazon, ASOS and Zalando remain intact, but JD.com, Groupon, Coupons, Fitbit and GoPro were hit hard.  Fitbit and GoPro saw the biggest declines, 56% and 64%, respectively.   Fitbit and GoPro were once pushing the $10B valuation mark, but Fitbit is now worth a modest $3.7B and GoPro just a paltry $1.4B.  

The digital media and gaming sector has actually held up the best out of any sector.  Netflix is down but it's up 56% in the past year.  Other than that, it's really just IAC and Pandora that are down significantly.  Gaming companies in particular have buoyed this segment, with solid performance from Activision, EA and Take-Two.  

Last but not least, online travel has also had a tough time.  Nothing crazy, but Sabre, Priceline and Expedia are all down 10-15%.  

Taking this same index, I also plotted 2016 revenue multiples.  The dark bar for each category is where the revenue multiple was about three months ago, and the lighter bar is where the multiple sits today.

Keep in mind that if a stock declines in value, all else being the same, it's multiple will decrease.  However, if revenue projections also decrease, then this will increase the valuation multiple.  As you can see in the above, multiples are retreating across the board.

In social, it's really amazing to see Facebook continue to push the 10x+ revenue multiple.  Naturally, Twitter was impacted the most and is now worth just 3x forward revenue.   In marketplace-land, remarkably Just-Eat is the only richly traded company, which also means that no US marketplace surpasses its valuation.  LendingClub did at one point, but it's multiple has since been cut in half.  The multiples for other companies have compressed across the board, ranging from 3-6x for scale, growing marketplaces, and 1-2x for flailing marketplaces.  In digital media and travel, relative valuations have been affected commensurately with changes in market cap.

If you ask public market investors about their holdings in the past year, they will say that the best performing funds had to be invested in some combination of the four horsemen of tech - Apple, Google, Facebook, Amazon (though even Apple is now falling off).  Investors are taking the safe bets and focusing much more on large, proven, and oftentimes monopolistic businesses.  Most other companies have struggled.  Just how much further things will fall is anyone's guess.