Sunday, March 27, 2011

How to value Skype at $3.5bn and LinkedIn at $7bn

We compare Google's valuation to Skype's and LinkedIn's. For Google, we look at market expectations, for Skype and LinkedIn we use the IPO-filings information. Our valuation metric is a variation of the PEG ratio, i.e. we compare price to some form of earnings (gross result and result after product development/R&D).

First Google. We see that the ratio of price (EV) to earnings (gross) to growth is around 0.33, while price (EV) to earnings (after R&D) to growth is 0.40.

Now, we look at Skype. To arrive at a similar valuation and assuming a value of USD 6 billion, you can see that we need to put in some very solid revenue growth (26%) and a limited product development cost rise (36%). If we use growth rates that appear to be more plausible, valuation needs to be brought down to USD 3.5 bn in order to match Google's valuation.

Finally LinkedIn. We look at two scenarios: in the first, we assume that growth will fall off from the extremely high 2010 levels. We then see that we need a USD 7 bn valuation to match Google's valuation. Alternatively, we assume a USD 2.4 bn valuation (which is what currently states) and play with the growth rates to match Google's valuation. What becomes apparent is that growth can be allowed to drop much further from the 2010 levels.

  • Skype: a USD 6 billion valuation appears to be a bit high; USD 3.5 bn seems to be more appropriate, based on the assumptions above.
  • LinkedIn: a USD 2.4 bn valuation seems to be quite low; the company could be aiming for something in the order of USD 7 billion, again: if the assumptions above hold.

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