In a recent article in Inc magazine, Evernote CEO, Mr. Phil Libin, wrote
“ there is a good chance that it will be worth $100 billion in a few years”
You likely want to ask what “good chance mean”.
Mr. Libin wrote this in the context of Evernote’s current one billion valuation and comparing it valuation of The New York Times. Mr. Libin’s makes a very valid point that such comparisons are point less and valuations are based on future expected value from a business’ growth.
Most public companies have relatively predictable levels of growth, so their valuations are heavily based on the current values of their businesses. In other words, few investors expect The New York Times‘s profits to grow tenfold in the next few years.
Such valuations on future growth are valid as long as they are computed by taking into account all possible future scenarios and not just the most optimistic outcomes. In many cases, and I don’t mean it is the case with Evernote, we not only overestimate the size of positive outcomes but also overestimate the chances of such outcomes. In such cases the valuations become segregated from reality.
Back to the $100 billion valuation for Evernote. What would it look like?
Let us say it gets the same revenue multiple of 5.51 (say 5 for ease of math) as Google. That would mean $20 billion in yearly revenue. Where would that come from?
From its current sources I estimate that Evernote makes $63 to $84 million a year from 34 million users (1.4 million paying subscribers). If the current business model is the only option that would mean one of following (or combination)
- Every customer generates $45 a year, meaning 444 million paying customers (13 times current user numbers and 31 times current paying subscribers)
- 50% paying customers, meaning 888 million users
- 100 million customers (not users), meaning $200 a year revenue per customer – that means either their subscription price goes up or they found other ways to monetize customer. $200 a year just from subscription does not make sense (NYTimes yearly subscription costs $195 and it did not find 100 million subscribers). Regarding other revenue sources even Google and Facebook have not found a way to get $200.
Even if Evernote does deals like Moleskine tie-up that generate $4-$6 million a year, that is a larger number of deals to get to $20 billion a year sales.
That leaves other sources of revenue that are not yet known from its current strategy. Which means one must consider higher uncertainty in such large outcomes given insufficient information.
Mr. Libin said, “there is a good chance”. Given what is known today and the uncertainties I am not sure what “good chance” means. But given the current valuation of $1 billion, investors seem to think the expected value of the valuation (considering all good and bad chances) is $1 billion. Or in other words, the numeric value of good chance is much less than 1%.
A question you must ask is,
Is there also ‘good chance’ of $200 million valuation? (See: Zynga)
Finally I am not going to run a complete scenario analysis here as I have done for other valuations before. That is left as a homework for you.