There has been quite a bit recently written about the emerging bubble in the venture eco-system. Certainly we are in the early stages of it by looking at valuations. Now that companies like LinkedIn are public and companies like Zynga are ready to go, the “quant” types are able to write up DCF type valuation measures.
For example, here’s a very well thought out article that explains that Linked In is overvalued by approximately 2-3x. Article is here, and below is an excerpt.
“But LinkedIn’s ratio [price/sales] of 30 is far above those levels, suggesting that by this measure, LinkedIn is substantially overvalued. At a price-to-sales ratio of 15, LinkedIn shares would be trading at $44 — about where the underwriters priced them. Give it a more generous ratio of 20, and shares still would be just $58.”
“The bottom line is this: Is LinkedIn overvalued at Friday’s $99.60 a share? Probably. Are many investors ignoring valuations because of faith in a social networking revolution and LinkedIn’s disruptive potential? Yes. Have the doubters been silenced? No.”
Now let’s compare this to a company I know well: InterTrust. It was the first IPO of my life and it was discussed back in this retrospective in Forbes in 2001.
“On last year’s Market Value list, 59 companies had valuations over $5 billion but revenues under $100 million. The most egregious example: InterTrust Technologies, which boasted a capitalization of $6.9 billion but had only $2 million in sales.”
So let’s compare. LinkedIn is perhaps overvalued by 3x with a price/sales ratio of 30 vs what it should be at 10. InterTrust in 2000 had a price/sales ratio of 3450! It was perhaps one of the most overvalued of all of the Nasdaq stocks.
You could argue that the 90s bubble was one of the longest and most sustained in history. Fine, so instead of waiting until we price/sales of 3000 again, 300 will probably suffice. That means LinkedIn needs to be 10x more overvalued until we are anywhere near the end of this one!