Second Thoughts on Valuations

Good morning and hope you had a terrific weekend. I soaked up what might be the last wintry day we can expect in Northern California, doing the things that don’t feel as good when it’s 75 and sunny. Rested and thoroughly Netflixed out, I'm now ready to get into some numbers.

A market correction is still underway for public companies. The hot IPOs of 2021 are underperforming, and investors on the private side are rethinking some of their enthusiastic fundings from last year. Peloton losing steam on customer acquisition and Zoom not replicating the same growth trajectory are just two examples of pandemic darling companies that have investors wary of making new bets.

The Real Valuation
To see if a valuation might be off, an easy calculation is to compare revenue to the valuation ratio of a comparable company on the public exchange. For instance, Patreon last raised in April, 2021 at a $4BN valuation, tripling its value in just six months. Comparing it to a similar business model like Shopify, we can calculate the valuation to revenue ratio for a reasonable idea of its true valuation.

Shopify has a valuation of 19 times its annual revenue ($88BN valuation divided by $4.6BN in revenues = 19). Using PrivCo's financial data available for 2021, Patreon’s $171MM of annual revenue should equate to a $3.2BN valuation ($171MM x 19 = $3.2BN), a far cry or 25% shy of $4BN.
 

Who else might be off a few decimals? 

Curious to learn more about the private valuation corrections based on public comparables? Check out this article.