Technology: Companies

The most-overlooked metrics for valuing Internet companies

Jon Steinberg
Source: Jon Steinberg

My preferred way of determining if public Internet companies are cheap or expensive on a relative basis is to look at two key ratios: enterprise value / forward-year revenue and price/earnings-to-growth ratio, or PEG, (using forward-year earnings).

The ratios are used by professional investors in lieu of the more traditional price-to-earnings ratio featured on consumer financial sites. They also solve two important issues:

1) Some recent IPOs include companies that are not profitable, making P/E comparison impossible. Therefore, as a first pass, looking at revenue allows you to comp a company like Twitter against its peers. Twitter EV/FY '14 revenue is 21x, and its next closest peer, Yelp, was at 13x. Facebook and LinkedIn trade at an EV/FY '14 of roughly 10x. (Yahoo Finance has EV on its Key Statistics tab and FY revenues on Analyst Estimates.)

You need to poke around most finance sites to find enterprise value and forward-year estimates; I'm not sure why these ratios are not more front and center. Having P/E prominently located sort of reminds me of how they still teach Latin but not computer programming in grade school. Time to change the curriculum.

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Also, it's essential to look at forward estimates of revenue. The market is a forward looking mechanism and evaluates stocks on quarters and full financial calendar years, not historics or forward 12 months.

2) All earnings are not equal. These are high-growth stocks, and the earnings growth is an important factor in comping peers. PEG Ratio on forward-year earnings adjusts a P/E ratio for growth. If a company trades at a high P/E ratio but is growing really fast, PEG ratio equalizes it and portrays it as less expensive to its slower growing peers.

Growth is very valuable, and PEG adds it to the analysis. Again, you need to make sure to use forward year.

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For example, the forward estimated PEGs using Evercore's Nov. 18 estimates for earnings and growth rates are: 1.2x for Facebook and 2x for LinkedIn. These ratios move around a bit with the stock prices.

Even adjusting for LinkedIn's 79 percent four-year growth rate to Facebook's 41 percent rate, Facebook is "cheaper." Evercore's Google PEG is 1.2x. Its growth rate is only 19 percent, but it's very profitable.

These measures can take a little time to cobble together, or you can subscribe to a service like Ycharts that calculates them.

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I'm curious to hear what multiples and measures you find effective. Please comment here or hit me on Twitter @jonsteinberg.

I think the age of simple P/Es is over, and these more modern ratios used by the pros should more widely and prominently be discussed on finance Websites and by non-professional investors.

—By Jon Steinberg

Jon Steinberg is the president & chief operating officer of BuzzFeed and is responsible for all business management, company operations, finance, and social advertising operations. Follow him on Twitter @jonsteinberg.