There is a fundamental disconnect between consumer marketplace valuations in the public and private markets. Last week, I wrote about the public-private valuation discrepancy for consumer internet companies broadly speaking. This week, I wanted to take a closer look at consumer marketplace businesses in particular - let's look at 6 key metrics to see what makes these businesses tick.
In the following chart I plotted enterprise value for my index of consumer marketplaces. Note that in the private markets we are used to looking at equity value. Enterprise value is equity value minus net cash, so the equity value here would actually be a bit higher in most cases.
What quickly becomes apparent is that many of these companies aren't worth as much as most people perceive them to be. Outside of eBay, now worth $28B post PayPal spin-out, the only $10B heavyweight is TripAdvisor. In the private markets, multi-billion dollar valuations are now the norm, yet monster businesses such as LendingClub, Zillow and Just-Eat are worth a reasonable $4-5B. Shockingly, interesting companies such as HomeAway, GrubHub and Yelp would rank pretty low on WSJ's list of billion dollar companies. Rounding out the rear are Etsy, Shutterstock, TrueCar, Angie's List and Care.com, companies that have recently fallen out of favor with public investors.
Looking at enterprise value alone doesn't tell you very much. The next logical step is to look at valuation multiples, namely EV / 2016 revenue. You won't see any 10x multiples here - the median is actually just 3.6x. So what's going on here? Are these businesses not as exciting as their private market peers? Is there less potential upside? Let's drill down further to try and answer these questions.
Valuation multiples alone don't tell the whole story since they don't take into account growth rates. Below, I tabulated the revenue growth rates for each company going back as far as 2007 where available. eBay and HomeAway have been growing at a steady 10-20% annually in recent years. TripAdvisor, Just-Eat, GrubHub, Shutterstock, Yelp and Etsy have all been growing at a healthy 25-50% growth rate. Angie's List and Care.com have significantly decelerated while Zillow has done the opposite. Zillow has actually accelerated to over 100% growth this year though much of that is due to their giant acquisition of Trulia. LendingClub is also very impressive, growing 100-200% over the past few years though now slowing a bit as the business matures. In aggregate, while most of these marketplaces are still growing at a healthy clip off of a big revenue base, growth has decelerated over time which is totally understandable. This is one of the reasons why multiples have compressed in recent years and you no longer see 10x+ revenue multiples.
NTM Revenue Multiples Over Time
So how have multiples changed over time? The below chart shows EV / NTM revenue multiples going back 3 years. As you can see, there was a time when many businesses earned a 10x+ forward revenue multiple. Zillow, Yelp, TripAdvisor and a few others hit the mark 1-2 years ago. Multiples have clearly come down since then due to a combination of slowing growth and general tech multiple corrections in the market. Businesses don't just get 10x multiples because they are exciting companies in big markets, they get that multiple because investors are paying forward for high growth. Over time, companies effectively grow into their multiples which generally contract to reflect updated investor sentiment (which can rapidly change).
It's worth touching on EBITDA margins to round things out. EBITDA margins for traditional two-sided marketplaces tend to be really good. The median is 20% with best-in-class marketplaces generating upwards of 25-35% EBITDA margin. These are cash generating machines that are able to use their profits to continue fueling growth. This profitability is particular impressive when compared to high cash burn private consumer start-ups.
Time to IPO
It's also worth pointing out that many of the above companies took a long time to go public. The median time to IPO is 9 years. Angie's List, Just-Eat and TripAdvisor (spin-out) all took over 10 years to hit the public markets! Additionally, most of these companies went public as soon as they could justify it, thus they weren't even all that big at IPO in terms of market cap. I remember working on Zillow's IPO in my investment banking days - they raised $70M of proceeds with only a $600M valuation or so, a mid-sized private round by today's standards!
I'm a huge fan of many marketplace businesses in the private sphere. Many of these businesses certainly deserve a premium valuation and I expect some of them to be successful public companies in time. However, looking at the above data is very sobering. What I see are large scale, profitable and fast growing marketplace businesses in exciting markets that are worth shockingly little relative to private comps. I'm both excited and scared to see how things will shake out.