Rather than just shouting "bubble" why not take an analytical approach to this by comparing them to other consumer SaaS companies.
Last year DropBox made $240m from from 2m paying customers (out of 50m users). So about $120/customer. DropBox's valuation is around $5-$10bn, around 20-40x revenue. Which given their growth rate seems a reasonable revenue multiplier.
Over the same period Evernote made $18m from 750k paying customers (out of 20m users). So about $24/customer. A $1bn valuation would give a multiplier of 50x.
LinkedIn is currently trading at 45x revenue - a figure that's been relatively stable for a while.
So arguably 50x is high but not ridiculously so, if Evernote manages to double their customer base over the next couple of years (or their revenue per customer) which isn't unfeasible, it'll look cheap at that price.
(Given Evernote costs $45/year that presumably means most of their customers signed up relatively late in the year resulting in the average revenue per customer being $24/year, so even if they only managed to keep their current customers they'd make 34m this year bringing their multiplier down to 30x)
50x is ridiculous, just not on a relative basis in among the peer group. Many retail companies trade at less than 1 (Walmart trades at .5, the S&P trades at around 1.5)
Even larger tech companies like GOOG, MSFT, and ORCL trade at 3-4. So, looking at it analytically, the P/S of the average recent IPO is very high, and Evernote's valuation is extremely high, even compared to them.
Yes, growth is a factor... but there are only 7 billion people on Earth. Most of them aren't going to pay for Evernote - heck, most of them don't have a yearly income large enough to pay for Evernote.
The valuations are getting to the point where they only make sense if Earth had many, many more people on it. Or if you are no longer looking at the fundamentals and are only betting that there's a "greater fool" who will come along after you and take the shares off your hands for more than what you paid for them.
I would guess "greater fool" is in operation, and not any belief in value or growth.
I agree with your statement on valuations, however I think there's also another factor at play here
>The valuations are getting to the point where they only make sense if Earth had many, many more people on it.
The fact is, it is still very hard to gauge how much a company will succeed by.
Take the example of Friendster etc and Facebook; when Facebook started, Friendster etc were the dominant players; however, now, we all know who's the dominant player in social. At one point, they may even have had the same valuation.
My point being, if two companies in the same market are getting $1 billion valuations right now, it doesn't necessarily mean that people think the market is worth $2 billion down the track; some people are hoping one will win over the other.
Indeed, if Evernote develops some killer features and dominates it's space, it'll be a steal for $1 billion
Walmart's P/S is low because their operating margins are so low, and Walmart's P/E is actually almost the same as Google's, because valuation is a function of cash flow, not sales.
What kind of addressable market do you see for Evernote, and what sort of margins do you see them making over the long term? I just don't see an online note taking app being so difficult to reproduce, so I don't know if they have pricing power to generate the cash necessary to support a $1B valuation. Particular after you consider execution risk, and then leaving room for this round of investors to make an attractive return.
Most SaaS IPOs in recent years have been at 10x - but almost none of them were consumer SaaS so it's hard to say how the markets will treat them.
It's not unusual that later stage companies will trade at lower multiples, and as companies become more mature their multiple drops. A good way of looking at it is in terms of future revenues, what's the chance of company doubling their revenue in the next couple of years ?
For Walmart it's almost negligible, for Google it's small but not completely out of the realms of possibility but for Evernote and DropBox it's actually quite high. They're the leading products in immature markets.
Valuations are usually based off of earnings, not revenues. Using revenues doesn't make much sense, unless you don't care about actually making money. You know, like Groupon. If you're spending 2 dollars to earn 1, who cares what your revenues are? Only in the land of bubbles does it make sense.
Based on this math, Apple should be worth nearly 10 trillion dollars.
Not really. Valuations are base upon the expectation of future cash flows. That boils down to two things- how fast will those cash flows grow, and how much risk is their in those cash flows.
I don't have the energy to figure out the growth rate implied by a 50X multiple on sales, but I can assure you it is astronomical - unreasonably so.
But this doesn't mean that a company can't be worth more than its cash flows would indicate. Suppose the existence of a company (lets call it Instagram) threatens lots of cash flow of another company (for arguments' sake, call it Facebook). How much is Instagram worth to Facebook?
Instead of using Instagrams cash flow to value the company (easy! zero!). You have to use the incremental (and negative) cashflows of Facebook due to Instagram's existence. If Facebook stands to lose, a few hundred million a year to competition, suddenly, Instagram is very valuable indeed, but only to a small, small number of entities - Facebook, and probably Google.
In the end, it's all a speculative judgement call. But don't fall into the trap of evaluating small startups based on their own cash flow.
The multiplier on this valuation is out of control. The 50x figure completely disregard the fact that Evernote is in a more competitive field than DropBox is. it also fails to account for the lesser brand value of Evernote and, dismisses international expansion as a key Indicator for the valuation. In my opinion, Evernote deserves a lower multiple than Dropbox.
If we assume a bubble is an implicit, crazy multiplicator of evaluations, then it makes sense that if we are in a bubble companies are still relatively comparable. So this does not provide much info about the fact we are inside the bubble or not.
50X revenue is perhaps a definition of ridiculous. They cannot grow this fast for long enough to make that rational. This is greater fool/strategic acquistion territory.
"The market's meteoric rise is typically justified in the popular culture by some superficially plausible "new era" theory that validates the abandonment of traditional valuation metrics."
Across the market the P/S is 1.28 according to this and it looks like the healthcare/internet industry is tops at round 4-5. Even a 'moderate' 20x is insane and not good for our industry from a holistic perspective.
If evernote doubles it revenue every year for the next four years, it would still be trading at 3 times revenue, a number that might be realistic going concern assuming they have very high profit margins.
So valuing them at 50x revenue now is saying all returns will come from outperforming 100% annual growth... color me sceptical.
We're in a bubble folks, plain and simple. The fact is no one knows how to price these things. These valuations are betting that being essentially a first mover in a new market that has endless possibilities is worth many billions. Eventually people will get tired of waiting for these expected profits to roll in and the crash will soon follow.
I'm fine with calling instagram type stuff a bubble, but evernote actually makes money. they sell a product and people buy it. quite a few people actually. I don't have the exact numbers, but i'd like to before calling this absurd.
I don't think we're in a bubble, I think we don't have enough investment vehicles for rich people and so the lack of supply has driven up prices. Imagine you have $10M, how do you get your > 10% annual return now that the ponzi schemes have been rolled up? Not a lot of choices.
I think this is the exact definition of a bubble. The phenomenon of runaway demand by a 'new class' of investors/investments has always been the hallmark of bubbles. 1920s a real national stock market with almost instant communication, now 'anyone' could trade stocks. This created a demand for stocks, so a demand for companies that listed as stocks. The 1960s, aka the go-go years. This bubble was around the conglomerate instrument. Some conglomerates did well, so everyone wanted to invest in the 'new' thing conglomerates. 1980s. Junk Bonds, or high-yield debt as we call it now. New financial instrument initially does well, demand soars. 1990s, internet companies. Recognition that the internet is going to change the world, everyone wants to own a stock in internet companies, a ton of crappy IPOs. 2000s, market conditions ripe for housing bubble. late 2000s, stat-arb blows up ( for unrelated to stat-arb reasons ) due to over-reliance on new financial vehicles. 2010s, being an 'angel' is easier than ever, and who wants to miss out on the next google/facebook.
Make no mistake, there is a bubble in early stage companies/financing. What is driving it is the same. runaway demand. This particular bubble is different than the last, because the primary implication of the last has not yet been absorbed. The regulatory structure for raising capitol and 'exiting' has not caught up to a simple reality. New technology displaces old technology faster than regulated exits can be executed. Just look at Groupon. Why do I, as a business, list with groupon, when I can just as easily list with 600 competitors who might be more specialized/niche?
"I think we don't have enough investment vehicles for rich people and so the lack of supply has driven up prices"
I think there's a strong correlation between the end of the recent Housing Bubble, and the start/ramp-up of all these $Billion tech companies.
I think you're right that rich people need to put their money somewhere, whether that makes this surge in tech valuations a bubble, I'm not sure, I sincerely hope not; but I am fearfull of when the "rich money" starts looking for greener pastures...
If memory serves, the only reason the Housing Bubble happened in the first place was because of the end of the "web 1.0" tech bubble.
Most of the venture funds are actually investing the money of pension funds and university endowments, not "rich people". "Rich people" - meaning recent tech multi-millionaires are driving an increase in angel investing, but they are not who's driving these 50x revenue multiples for later stage companies. If were to give anyone credit for these multiples, it would be Facebook. They've definitely inflated the value of companies that went out before them (Zynga, Linkedin, Groupon, Pandora) and have helped push up valuations of Dropbox and others. When $100bn is your ceiling for a "private" company value, psychologically it allows for much more aggressive private valuations. And it's likely that Facebook private valuation is an extreme outlier, not a "new normal", which will lead to a boatload of companies that have their highest valuation ever before they go public.
When I heard about the instagram acquisition I did wonder if Facebook partly made that purchase with that timing and an insane valuation in order to ramp the value of their own IPO shortly afterward. This is not sustainable, and it's going to make it very difficult for startups to get funding in a few years when it all goes sour. But the best insurance, as ever, is to try to build a great company, not try to build something that some VC will want to buy with borrowed money.
I was going to comment about the feedback loop of unionized public sector workers underpaying for retirement benefits and then realized that thought was too scary to think about. :-)
Well Groupon had a pretty obscene private valuation as well. To your point though, aren't pension funds and endowments only taking a small portion, and putting it there for the same reason? Higher potential returns at increased risk? And those return demands are being driven by future payout expectations contrasted with existing returns? Whether you're a multi-millionare or a multi-billion dollar pension fun, getting 1.6% on your money isn't going to cut it.
I completely agree with you. The problem is the market hasn't found an adequate discount rate for startup success in the social network / web 2.0 reality. Nobody knows how much Evernote is worth because its business model is so Swiss generis. Evernote wants to establish itself as a knowledge repository and, in doing so, is competing with nearly every single company in the tech field: Google, Microsoft, Facebook, Bento, IBM, CMSs, Doc managers, Yammer, Apple, on and on and on.
Could Evernote beat them all or raise to a market share that warrants a 1 billion valuation. Absolutely. They can and they have. the product is fascinating: easy, fast, ever present, cloud integrated and intuitive.
However, can Evernote sustain this position for half a decade? Absolutely not. Here's why:
- the goal Evernote is chasing is to ambitious and is being chased by bigger dogs
- in this field integration with OS is key. Microsoft and Apple clearly have the upper hand
- viral he network effect of Evernote's biz model is not strong enough to keep people using the platform. The churn rate is very big. If you start using Apple notes is very hard to switch, for example.
I've been following this company for a while, and as much as I respect their execution I simply think this number is a reflection of current market conditions, nothing more. Hence cast my vote for a bubble.
spot on. as usual asset pricing fails on longer time horizons. add an unrealistic assumption on how long those companies will stay on the upswing (eg. acquiring new users) and you end up with ridiculous valuations.
matter of fact, looking at the ever faster changing nature of the internet, a lot of businesses will become obsolete and hence just extrapolating current earnings exponentially into the future is a stupid and risky bet.
Undeniably. Now the question to me though is how a pre-IPO valuation bubble pops. Obviously lots of venture investors lose a lot of cash if these companies can't exit; but that cash wasn't in the public markets anyway and shouldn't cause a ripple, right? Who is bearing the risk here? What money will flee where when it becomes clear that Groupon and Evernote are losses and that Facebook is going to break even at best with their IPO?
All this VC money comes from pension funds, university endowments, and other large institutional investors that are looking for a return on investment that is higher than regular public equities.
When the crash comes, pensions and endowments will stop seeing tech venture funds as a safe investment so they'll shift their money elsewhere, leaving VC firms without money to invest.
Exactly, so it really doesn't "pop" then, except in the sense of drying up access to cash in our own little community. That doesn't sound so bad. Remember YC was founded in an environment of limited venture funds and those early startups seem to have done quite well on the whole.
One piece of data for Evernote skeptics - the founder has said that they have a very slow monetization, in that people convert more and pay more the longer they've been a user. So the longer people use it, the more ways they find to use it, the more data they put into it, the more valuable it becomes to their process and they outgrow the free plans. Older customers pay because Evernote has become more valuable to them. So rapid growth in free users over the last couple years has a demonstrated (not hypothetical) path to payoff over time.
I find this product to be really weak. I've been disappointed with all of the clients (do I seriously have to hit an "edit" button to make any change?) and can't think of any use case that couldn't be handled far more elegantly with my go-to tools - Google Docs, Workflowy and Dropbox. I've lost audionotes and changes to notes in the iPhone app. Worse, they seem focused on fluff (wallpapers, ancillary apps) when the core product feels unpolished. I just tried their web client and simple things like undo/redo are glaringly buggy.
The charm, at the moment, is that they're one of the few one stop shops for files and note management that has a passable mobile client. It's something glaringly simple that a lot of people want (especially the %90 of the population intimidated at the idea of integrating a few services). If Google Docs ever get serious about their mobile client and/or if Dropbox cater more to this kind of crowd (I think a simple note editor on the web and their mobile clients would be well used), I expect Evernote to be in trouble.
I'm convinced that valuations calculated by multiplying shares x 'the last price someone payed for one share' is completely useless.
A better valuation would be the sum of the equity that has been sold (for actual money) - liabilities + cash on hand + discounted future earnings at some reasonable growth rate (this can be industry specific).
IOW, what would a single entity be willing to spend in cash to acquire the company today.
I don't see how saying Evernote is a "one billion dollar" company has any merit at all.
The main advantage is that it's very easy to measure and it sums up the demonstrated beliefs of a lot of participants. Anybody actually trying to buy the company will do a much more complicated calculation than the one you describe.
For what it's worth, when acquisitions happen it's almost always above the shares x price number, so I think it's reasonable to call Evernote a $1bn company if the shares x price number works out that way.
Unless a company is failing, acquisitions should also increase the worth of the company if cash is put in and it's not a pure stock swap.
So it's not strange that valuations go up after an acquisition, and in my formulation, they would also go up as well, and for the same reason.
On the one hand, you're right: if everyone is using misleading valuation calculations, then they're all relatively misleading by the same amount.
That still doesn't make these numbers remotely helpful. Here's a thought experiment:
Company X sells $10K in equity at a $1 billion valuation, with no revenue. Wow, good for them.
Company Y sells $15K in equity at a $1.5 billion valuation with no revenue, and promptly acquires Company X for $1.1 billion in cash and stock.
Well color me impressed! That's an amazing exit for Company X! Incredible. Bravo. /sarc
It's both easy and cheap to be a paper billionaire when valuations are calculated as shares x 'last price of an individual share'. Anyone can sell their company for $1.1 billion dollars with minimal actual capital changing hands, or value created.
FWIW, the real problem isn't the valuation numbers per se, it's when people start talking about "losses". Evernote's stock drops, and somehow they "lost" $600 million in "value". Uh, no, they didn't. They never had that value to begin with, and didn't even lose it.
If you think about it, that makes sense. How can a stock sale worth, say, $1000 change the value of the company being sold by $100 million? That doesn't make any sense.
With my formulation, selling a single share at a lower price wouldn't move a company's market cap by hundreds of millions of dollars, ever, unless that share somehow was sold at a loss of hundreds of millions of dollars (that's one pricey share!). Instead, it would decrease only be the amount that was lost on that particular share, which is generally minimal in stock sales.
My approach is much more stable, and would prevent all of these idiotic headlines about "market drops" that we keep hearing about (and market increases, for that matter). It's just more honest all the way around, and furthermore, it's easy to calculate. You can always track each share's individual purchase history, and trivially calculate the value of the company based on that (and the other factors I mentioned), in real time.
It would also prevent the quarterly gaming that goes on, since recent stock sales would not be a major driver for increased (or decreased) valuation. Instead, you'd have to actually improve the company's fundamentals, and as investors and shareholders, isn't that what we really want anyway?
Real investors understand these things. Financial journalists understand these things as well, but it's not in their interests to make the financial news less interesting. You may have a solution in search of a problem.
I'm not convinced you have a solution, though. Share price quotes are only of publicly traded shares, so there's no per-share history available. Indeed, I don't think there's a way to distinguish individual shares, in the same way there's no way to distinguish individual dollars in your bank account. And I don't think historic price is more meaningful than last share. Consider Facebook: Zuckerberg bought his shares for $0. Does he really think that's what they're worth? Does anybody?
What we do know is that he won't sell them at current market prices. When investors hold shares like that, it's because they believe they are worth as much or more than the current price. And that's the theory that a market cap valuation is based on: if nobody is selling at the current price in a liquid market, then all the holders apparently think their shares are worth more than what they can sell them for. Ergo, the company price is shares * last price.
A lot of comments here from people that have never used Evernote and don't really understand it's value proposition to its users. I pay $45 a year for the service. It was a no brainer when I converted from free to paying about 18 months ago and it still is. If you're going to make incredibly insightful comments like, "we're in a bubble folks, plain and simple" please try to back it up with some analysis. At least try to give us some indication that you've given this some thought.
It's tempting to compare Evernote to companies like Ducati (apparently recently bought by Audi for $1.1b). But remember Evernote sells software with higher margins. It is still in its growth phase, it's total addressable market includes a large percentage of the global population, and its revenue comes from recurring annual customer purchases.
Personally I think it holds more value than Dropbox, but I guess we'll have to wait and see.
With some effort I think I understood why Zuck paid 1 billion on Instagram (IMO Instagram had a huge potential to be the next big social network, so I think Mark noticed it too and bought before it became too big), but I fail to understand how it is possible to Evernote to value the same. This seems to be a bad smell to me.
You could make a pretty good case that Evernote is the single most important productivity app of the smartphone era. At the bare minimum, you'd have to grant that it has the potential to be.
For comparison, the single most important productivity app of the PC era was either Office in general, or just Word in particular. How much are those worth?
Bubble it is. I like Evernote, i like the model however these valuations are crazy... the good news is that it's not another Instagram. Gambling other peoples money always turns out bad. "it's different this time" they said...
Do you mean that Evernote should be valued at less than Instagram? I think the opposite is true.
Evernote has demonstrated that it can monetize its user base, and it has a strong lock-in effect (I store all my stuff there so it's not worth leaving to a competitor). I happily pay for Premium just like many others.
Instagram, on the other hand, has a fantastic free app, a giant user base...and no revenue.
'I'm willing to give up x% of my company. How much cash will you give me for it?'
In theory, that should be the same as saying 'my company is worth y% of what company Z is worth, so this is how much cash you need to pay in order to get x% of it', but in practice, you can't always make that conclusion based on how people behave.
It is difficult to find a black cat in a dark room, especially if there is no cat.
Many of the comments assume that a valuation, derived from stock price or venture financing, is rational.
It is not.
Yes, the value of the business is defined by future cash flow adjusted for time-value of money and risk. In case of new, unknown businesses/industries, without prior history, it is not possible to estimate the future cash flow and the associated risk.
Therefore, if we would look at this from investment angle, I would compare this to a gamble, or, taking into account human component, a poker tournament [from my financial perspective].
P.S.: of course in case of Dropbox and Evernote, which have revenue, it is possible to do some financial modeling, but this would not substitute future cash flow since risk/uncertainty is still an open question.
P.P.S.: in the past the best strategy was to follow the ride and get off the train before everybody else ..... :-)
I think the reason is that people saw the torrent of media attention that Instagram got. Every CEO is thinking now "If I can only get the number 1 billion somehow in a press release I will be on every newspaper and blog in the country." Quite predictably, Instagram got people greedy and spurned them to action.
If you go to a good securities lawyer and say "We need to get a round closed at one billion dollar valuation, but the investors need it to be effectively at a lower valuation because for them 1 billion is just ridiculous" the lawyer will figure out a way to do it. There are all kinds of tools that you can use to ensure that the investors still make money for exits under 1 billion even if the valuation is technically 1 billion.
Man, I've never heard of Evernote before but it sounds exactly like a service I was mentally designing (which I tentatively dubbed "thoughtbank"). If only I'd started executing a few years earlier I could be a billionaire!
Evernote has a popular app, I grant them that. But how does that translate to a $1 billion company? It's not like you can take the same users and sell them insurance or weight loss pills.
Hopefully now they can afford to extend their iOS client to includes handwriting input ala Notability (especially the Tablet PC-style input pane at the bottom).
I have Evernote installed on all my machines and use it regularly. If they started charging for it I'd probably pay $5/month for it.
Assuming 20M active users and a sky-high 10% conversion rate [+] at $5/month gives $120M/year in revenue, which would kind of justify a $1B valuation. That is, until something better comes along for storing text notes across devices...
[+] I understand their users are pretty f(r)anatic.
I'm thinking about paying for the premium version just for the rare cases when I'm out of cell range and need offline access on my phone. Evernote is so indispensable to me that even though it doesn't happen very often, it's super-frustrating when it does.
I guess I meant if they make their pricing more aggressive so users like myself also have to pay for it. Eg. you have to pay if you have more than 1 notebook or use it on more than 2 devices...
yep, that's all they are - a notepad app. People are overblowing Evernote's significance when they say it's in charge of our memory... When they come up with nanontechnology that can backup our entire brain in a flash drive, come back to me with $1 billion valuation.
Someone wake me up when we're talking about real money. Now the investors think that Evernote is only worth 3-10 times the valuation they bought in...or around $3,000,000,000.00 to $10,000,000,000.00
Last year DropBox made $240m from from 2m paying customers (out of 50m users). So about $120/customer. DropBox's valuation is around $5-$10bn, around 20-40x revenue. Which given their growth rate seems a reasonable revenue multiplier.
Over the same period Evernote made $18m from 750k paying customers (out of 20m users). So about $24/customer. A $1bn valuation would give a multiplier of 50x.
LinkedIn is currently trading at 45x revenue - a figure that's been relatively stable for a while.
So arguably 50x is high but not ridiculously so, if Evernote manages to double their customer base over the next couple of years (or their revenue per customer) which isn't unfeasible, it'll look cheap at that price.
(Given Evernote costs $45/year that presumably means most of their customers signed up relatively late in the year resulting in the average revenue per customer being $24/year, so even if they only managed to keep their current customers they'd make 34m this year bringing their multiplier down to 30x)