by: Screener.co September 6, 2011 | includes: ARMH, AWAY, BIDU, LNKD, MELI, OPEN, RENN, SINA, VMW, YOKU
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In articles on May 2 and July 1, I looked at the high-flying tech companies that had market caps above $1 billion and enterprise values of more than 10 times revenue. By using our Equity Research Platform and re-running the screen below, we can look at the companies that still trade at that level and look at what happened to those companies no longer on the list.
Field op Criteria
Exchange Country = "USA"
Exchange Traded On != "Over The Counter"
Current EV/Revenue >= 10
Market capitalization > 1,000,000,000
Sector = "Technology"
This screen returns 14 results as of Sept. 5. The company trading at the highest multiple is VirtnetX, an IP holding company that has minimal revenue in the most recent fiscal year. Its astronomical EV/EBITDA ratio of 23,154x reflects that the company is being valued on the theoretical value of its IP and not its recent financial performance. We will further limit the scope to software/Internet/semiconductor companies. That leaves 10 companies:
Renren Inc (RENN)
Baidu.com, Inc. (BIDU)
Youku.com (YOKU)
Linkedin Corporation (LNKD)
HomeAway, Inc. (AWAY)
ARM Holdings plc (ARMH)
SINA Corporation (SINA)
MercadoLibre, Inc. (MELI)
OpenTable (OPEN)
VMware, Inc. (VWM)
Also notable are the companies that were on previous lists but have since fallen off: Salesforce (CRM) and Pandora Media (P), both of which are down significantly from their 52-week highs. Pandora is at $12.07/share, down from a high of $26.00/share and from its close on July 1 of $20.04. Investors who bought stock the day we warned about its high valuation have lost nearly 40% of their investment. Salesforce closed at $149.39/share on July 1 and is now at $123.61/share, representing a decline of 17.3%, more than the Dow, S&P 500, and Nasdaq over the same period. Even though Salesforce and Pandora are no longer trading at EV/Revenue multiples of greater than 10x, they are still trading at multiples of 8.5x and 9.0x, respectively. Despite declining in value, both still trade at lofty valuations relative to their financial performances.
New to the list is Renren, a Chinese social networking company that went public on May 4 and has been called the "Chinese Facebook." It has a market capitalization of $2.8 billion, an EV/Revenue ratio of 41.9x, and an EV/EBITDA ratio of 229.8x. It recently traded at $7.15/share, down from a high of a whopping $24.00/share. Yet again, despite a steep decline in value, it is still trading at a high multiple of its operating performance.
Previously we remarked that the valuation of Baidu seemed high relative to its financial performance when compared to Google (GOOG). Baidu's valuation has held up relative to the broader market, declining only slightly from $143.35/share on July 2 to $140.45/share. Baidu has a market capitalization of $49.0 billion. It is valued at an EV/Revenue ratio of 28.7x and an EV/EBITDA ratio of 50.8x. Its TTM P/E ratio is 63.8x. Its net tangible assets represent only 3.5% of its market capitalization. With such a small balance sheet relative to its market cap and such a high valuation relative to its revenue and EBITDA, Baidu looks significantly overvalued.
We were incredulous in May at YOKU being valued at an EV/Revenue ratio of 100x. Since then, the company's share price has dropped from $58.88/share to $23.12/share, but the company's valuation has not come down to earth. It has a market capitalization of $2.6 billion and is valued at an EV/Revenue ratio of 21.5x and an EV/EBITDA ratio of 938.2x. The company's net tangible assets represent only 25.1% of its market capitalization. YOKU suffered a precipitous decline in price but trades at a still-lofty valuation.
LinkedIn, the professional social network, traded at $94.54/share on July 1 and is now trading at $80.27/share. Nevertheless, LinkedIn continues to trade at a high valuation. The company has a market capitalization of $7.7 billion and is valued at an EV/Revenue ratio of 20.5x and an EV/EBITDA ratio of 143.0x. Its TTM P/E ratio is 1,144.8x and its net tangible assets represent only 5.1% of its market capitalization.
HomeAway, the vacation rental listing service roll-up, is actually trading at a higher price than on July 1, up to $40.56/share from $38.42/share. It has a market capitalization of $3.3 billion, an EV/Revenue ratio of 18.2x, and an EV/EBITDA ratio of 104.6x. It not only has negative net tangible assets, it even has a negative book value of over $2/share. I cannot explain -- let alone justify -- such a high price for HomeAway.
ARM Holdings, a semiconductor company, traded at $28.60/share on July 1 and recently closed at $26.79/share. It has a market capitalization of $12.0 billion, is valued at an EV/Revenue ratio of 15.9x, and trades at an EV/EBITDA ratio of 59.2x. Its TTM P/E ratio is 81.1x and its net tangible assets represent only 5.8% of its market capitalization.
SINA, the Chinese Internet media company with a subsidiary dubbed the Chinese Twitter, traded at $120.00/share on July 1 and recently closed at $101.21/share. SINA has a market capitalization of $6.7 billion, is valued at an EV/Revenue ratio of 13.4x, and has an EV/EBITDA ratio of 76.1x. Its net tangible assets represent only 19.4% of its market capitalization.
MercadoLibre, the Latin American e-commerce company, traded at $88.00/share on July 1 and recently closed at $67.80/share. It has a market capitalization of $3.0 billion, is valued at an EV/Revenue ratio of 11.5x, and has an EV/EBITDA ratio of 33.0x. Its TTM P/E ratio is 47.1x and its net tangible assets represent only 4.4% of its market capitalization.
OpenTable, the online reservations service, traded at $82.56/share on July 1 and closed at $57.52/share. It has a market capitalization of $1.4 billion, is valued at an EV/Revenue ratio of 10.5x, and has an EV/EBITDA ratio of 35.7x. Its TTM P/E ratio is 72.3x and its net tangible assets represent only 4.7% of its market capitalization.
VMWare, the leader in virtualization technology, traded at $99.90/share on July 1 and closed at $88.08/share. It has a market capitalization of $37.2 billion, is valued at an EV/Revenue ratio of 10.2x, and has an EV/EBITDA ratio of 44.8x. Its TTM P/E ratio is 68.7x and its Net Tangible Assets represent only 5.3% of its market capitalization.
Companies trading at lofty valuations tend not to be great investment opportunities. Even though the broader market indexes are also down over this period, the long-term risk of investing in companies trading at high multiples of revenue and EBITDA, and at valuations representing a high multiple of net tangible assets, is substantial.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.