Currently enterprise software companies have been trading at around three times revenues, with premiums for particularly good firms up to about five times revenues, less for firms that are not showing much market progress. There have been several examples of this type of deal recently. Enterprise software CEOs could be forgiven for a casting an envious eye at the internet software market. On the UK market AIM a company called Blinkx, which offers the ability to search video clips (using technology from Autonomy) recently raised money, with its first day trading giving a valuation of GBP 180 million. Any guesses to the revenues or profitability of this company? Revenues of GBP 60 million perhaps, maybe as low as GBP 40 million? Nope. Revenues are expected to be just over GBP 2 million in 2007. Profits? “Profitability is not expected until 2010″.
How about the teenage scribblers who presumably can explain this kind of valuation? According to an analyst at Dresdner Kleinwort: “It is hard to value because we don’t know what it is going to focus on. There’s no proven management history, and few historical numbers to play with”.
Does this kind of language ring any bells? Does anyone recall a time in the far distant past when companies could not be valued using “old fashioned” methods like price/sales or price/earnings, since the internet was a new business model? Maybe you were wiser than me, but I admit to to buying some shares in basket cases like Commerce One at the height of the bubble, believing the previous generation of teenage scribblers that the internet “changed everything” and old fuddy duddies who fretted about irrational exuberance just “didn’t get it”.
Those who cannot remember the past are doomed to repeat it. For the latest lesson we don;t have to think back to the South Sea Bubble or the Amsterdam Tulip fiasco. We just have to cast our minds back six years or so. I for one will not be investing in Blinkx.
Footnote. After writing this I found a thoughtful blog on the same subject.