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Bond yields are a little fucked up right now (thanks, credit crunch), but they provide a way to figure out an investment's valuation. Let's assume the 1-year g

Bond yields are a little fucked up right now (thanks, credit crunch), but they provide a way to figure out an investment's valuation. Let's assume the 1-year government bond yield is at 5% (it's not, but it simplifies the math, so bear with me). As a gross oversimplification, that means that a $20 investment today will produce a risk-free return of 5% ($1) at the end of a year. The converse is also true: if a risk-free investment produces $1 in revenues over the course of a year, then the investment should be valued at $20. So, if your website was risk-free, it'd be valued at ~20x your yearly earnings (after-tax net profit). Of course, it's not risk-free, so that will discount the price. On the flip-side, it has potential for growth, so that will increase the price. For comparison, other tech companies trade at: Microsoft: 23x earnings Yahoo: 46x earnings Apple: 47x earnings Google: 53x earnings Salesforce: 688x earnings Facebook: 500-1000x earnings (http://blogs.reuters.com/mediafile/2007/10/25/keep-an-eye-on-facebook-4/ http://blogs.reuters.com/mediafile/2007/10/25/keep-an-eye-on...) 1000x earnings is what Yahoo was valued at in 2000. That's probably a max on what you can ask for :). Given your growth potential, I'd say 20x earnings is probably a min. Good luck!

socmoth 19y ago
could your elaborate on the following paragraph? i'm not sure how something is worth 20 dollars because of 1 dollar yearly revenue. what assumptions are you making? Let's assume the 1-year government bond yield is at 5% (it's not, but it simplifies the math, so bear with me). As a gross oversimplification, that means that a $20 investment today will produce a risk-free return of 5% ($1) at the end of a year. The converse is also true: if a risk-free investment produces $1 in revenues over the course of a year, then the investment should be valued at $20.
- brianr 19y ago
  That calculation assumes that the risk-free rate is 5%, and that you will get $1 per year forever (i.e., considering the company to be an annuity that pays $1 per year forever). A more general formula is: Value = (Annual revenue) / (interest rate - growth rate) The interest rate here is the interest rate that takes into account how risky your business is--the rate you'd be able to borrow at, the "cost of capital". Let's say you could get a loan (secured only by the assets of the business) at 15% interest, and that you expect to grow by 5% per year. Then per $1 of annual revenue: Value = $1 / (.15 - .05) = $1 / (.1) = $10

socmoth 19y ago

could your elaborate on the following paragraph? i'm not sure how something is worth 20 dollars because of 1 dollar yearly revenue. what assumptions are you making? Let's assume the 1-year government bond yield is at 5% (it's not, but it simplifies the math, so bear with me). As a gross oversimplification, that means that a $20 investment today will produce a risk-free return of 5% ($1) at the end of a year. The converse is also true: if a risk-free investment produces $1 in revenues over the course of a year, then the investment should be valued at $20.

brianr 19y ago
That calculation assumes that the risk-free rate is 5%, and that you will get $1 per year forever (i.e., considering the company to be an annuity that pays $1 per year forever). A more general formula is: Value = (Annual revenue) / (interest rate - growth rate) The interest rate here is the interest rate that takes into account how risky your business is--the rate you'd be able to borrow at, the "cost of capital". Let's say you could get a loan (secured only by the assets of the business) at 15% interest, and that you expect to grow by 5% per year. Then per $1 of annual revenue: Value = $1 / (.15 - .05) = $1 / (.1) = $10