Simon’s Blog

Photo sharing, and photo widget, companies are a fascinating category of business… but how do you go about valuing them? These businesses have potentially huge user bases, but the services they offer are mostly free. So revenues that come directly from users are pretty low. Instead the lion’s share of revenues from these type of businesses comes from advertising.

But there’s a challenge - serving images, and especially video over the Net, is very heavy on bandwidth; and bandwidth is expensive. So, profits can sometimes be rather elusive for these type of companies.

Take Photobucket as an example. It has 38 million registered users, and is growing by 80,000 new users each day. By any measure, this falls into the category of massively popular. But still the company can’t turn a profit. They do have reasonable revenues though. Interestingly, Techcrunch just published Photobucket’s historical revenues, and the projected revenues for 2007. In 2005, the revenues were $4.35M; in 2006, $9.34M; and projected 2007 revenues are $32M. So, we have some good information to work with here…

Given those number then, what is Photobucket worth?

First, remember that the company doesn’t make any money. So, it means that acquirers have to see their own route to big profitability; or they have to see the company as a strategically important asset. If you were to value the company solely on revenues, then the rule of thumb for an “exciting” opportunity would be around 7X revenues. So, at the end of 2007, that would make Photobucket worth $225M, if you believe their projections. If you don’t, all bets are off.

Now, on this basis, if you’d acquired Photobucket at the end of 2006, you would have paid $65M for the company; and at the end of 2005 you’d have paid $30M. With rapidly growing companies, as you can see, the longer you wait to buy, the more expensive the company is going to get… especially if they’re breaking even. Why is the break-even issue so important here? Well, it’s critical because it means that no (significant) new rounds of financing are required to take the company forward. That means investors will only see their rate of return increase if they hang on.

The point is: if the Photobucket investors just do nothing, and wait till the end of 2008, the company could be worth around $500M (and perhaps more) with, perhaps, relatively little risk involved in waiting.

So, because of all this (and assuming the public projections are realistic), I don’t think anyone could buy Photobucket today for $200M - simply because it would be so easy for people in Photobucket to hang on for another year. My guess, then, is that the Photbucket investors and other shareholders would certainly sell the company today for $400M (a $100M discount for selling in 2007, rather than 2008), and probably a good bit less than that. Lehman Brothers - the bank that Photobucket has just hired to sell the company - agrees with my valuation, saying that they think the value of Photbucket is $300M-$400M. However, this price depends critically on 2007 revenues. If, in due diligence, it emerges that revenues are not growing in line with projections, the value of the company will tumble.

However, that’s probably the price if there’s just one buyer interested. The ideal scenario in such sales is that there are multiple buyers interested. And that changes the rules for the valuation. It becomes not so much a matter of, “What is the minimum price the acquirer has to pay to get the shareholders to sell?”… and more a matter of, “What is the maximum that the company is worth to the acquirer?”

For example, let’s say you believe that you - as the acquirer - can directly monetize Photobucket twice as well ($60M 2007 revenues) as the current management have been able to do, and in short-order e.g. simply by changing how the advertising is done, and/or by plugging the advertising into your own much more lucrative ad system. That means, you would be taking the business from a rapidly growing break-even business, to a rapidly growing profitable business, with 2007 profits of $30M. In such a scenario, if pushed into it by a bidding war, I’d say that someone might be prepared to pay north of $600M - maybe even up to a $1B. However, it’s worth saying that it’s quite difficult to get a bidding war going for this type of company - there aren’t that many acquirers out there that need to make this type of acquisition.

So, congratulations ahead of time to everyone at Photobucket! You guys have done a really awesome job!

Oh - and why am I so interested in this area? I’d love to be able to tell you, but then I’d have to kill you … oops, that’s not really an appropriate comment for the blogosphere this week… I’m afraid you’ll have to just wait and see…