# What would \$100 Billion Valuation for @Evernote Look Like?

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.

I agree.

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)

1. Every customer generates \$45 a year, meaning 444 million paying customers (13 times current user numbers and 31 times current paying subscribers)
2. 50% paying customers, meaning  888 million users
3. 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.

# Wages, Revenue and Profit – Something NYTimes Should Understand

How cool is to work in Apple retail stores? I do not know but for some it does feel very very cool. Even feels like lifetime achievement for some as evidenced by them bursting into tears when they get the job offer. So writes The New York Times on its exposé piece on wages for Apple Retail Store employees. And what is the pay off for getting the priced position? How about \$11.91 a hour.

The article laments at length about the low pages paid for Apple store employees despite the high revenue per store. In an telling infographic, Times compares the salaries as percentage of sales per square feet for Apple store and three other retail brands.  As it turns out Apple store employees make the least as percentage of sales per square feet, even less than Tiffany and Costco employees.

Worldwide, its stores sold \$16 billion in merchandise.

But most of Apple’s employees enjoyed little of that wealth.

Unfortunately, Times got it backwards with respect to ratios and does not understand the concept of revenues, costs and profits.

The ratio of wages to sales is irrelevant. Every business, including NYTimes, will pay no more than the value added by any single employee. This is the upper bound,  the number gets pushed down due to supply and other externalities.  In case of Apple it appears some would even pay for the privilege of wearing the blue shirt.

Comparing that to sales misses the basic economic labor laws of supply and demand. If any, the Times should compare the ratio of sales per square feet generated to employee wages (the inverse ratio), which is a measure of the multiplier effect. Apple’s brand equity, marketing excellence, its products, its efficient supply-chain, operational efficiency and fan base allow it to achieve very high multiple compared to other retailers. That is a laudable feat.

On the question of sharing the wealth (profit) created, NYTimes likely needs basic lesson in factors of production and value creation.  Or even the simplest accounting statement would do,

Profits = Revenue  – Costs of production (including wages)

Profit is what is left when a business pays off costs of production including wages. Once the wages are paid, workers get no further claim on the profit which belongs only to the shareholders of the company.

What is next? Is NYTimes going to write a piece on why Apple charges \$499 for a device that costs less than half to make?