Online Marketplace Multiples Approach All-Time Highs, but There’s More to the Story
The pandemic-driven boom in e-Commerce and record-setting online holiday purchases have sparked a surge in investor interest in internet retail marketplaces. As brick & mortar retail struggles to stay afloat while consumers stay home, online retail is reaping the benefits. This article highlights the 30 publicly traded, US-based online retail & direct marketing marketplaces with more than $200 million in LTM revenue (shown below).
As we’ve seen during one of hottest seasons of IPOs since the dot-com bubble, companies like DoorDash and Wish are taking advantage of favorable market conditions to go public and provide liquidity for existing investors. It’s no surprise that valuations (especially in tech) are reaching all-time highs.
Interestingly enough, however, median Enterprise Value/LTM Revenue multiples are currently at 2.14x and have not yet reached their peak of 2.49x seen in Q2 2018.
On an EV/EBITDA basis, valuations have easily reached all-time highs with a median of 29.63x LTM EBITDA — compared to only 11.95x in Q4 2019.
This data suggests a few things regarding how investors are currently valuing these companies.
Investors are placing more emphasis on top-line growth than profitability. Valuations are growing faster than revenue (multiples are rising), and significantly faster than EBITDA. To highlight this point even further, consider that five companies currently in the top quartile by EV/Revenue are in the bottom 7 of our list by EBITDA margins.
DoorDash, Wish, Chewy, The RealReal, and Stitch Fix are trading at 20.71x (not a typo), 5.98x, 5.67x, 5.13x, and 5.09x revenue; yet each have negative EBITDA margins, with -7.1%, -10.3%, -1.8%, -40.3%, and -2.5%, respectively.
I’ll also note that most of the companies in this list, with the exception of Amazon, Booking Holdings, and Expedia, have little-to-no-debt. Since most of our companies run a marketplace business model, they are relatively asset-light; and due to their comparatively young ages, many have low EBITDA margins. These are qualities that lenders tend to avoid.
The pandemic catapulted many e-Commerce darlings forward. The average company’s revenue in our list grew 8%, while the median only grew 2.5%, implying that a few disproportionately large winners led the way.
For example, Etsy, Wayfair, and Overstock top our list by LTM revenue growth (having grown 84.2%, 51.1%, and 45.1%, respectively). Looking at EV/Revenue for these companies, Etsy is trading at 17.46x (2nd only to DoorDash), a sign that investors expect the platform’s pandemic-driven popularity to continue its rapid growth.
However, home furnishing and household product online retailers tell a different story. Wayfair and Overstock only trade at 1.99x and 0.73x revenue, respectively. Even more interesting is that the pandemic actually drove these two companies to EBITDA-positivity for the first time. The key question becomes: Will they be able to sustain this profitability after the pandemic?
The accelerated shift to remote work has forced many people to spend more time at home and spend more money on furniture and household products. Regardless of your view, the distributed workforce is here to stay (at least partially), and this reality may be enough to entice many consumers to make purchases that improve both comfort and quality of life at home. If you agree, Wayfair (Ticker: W) and Overstock (Ticker: OSTK) may be worth exploring further.
The pandemic exposed some marketplace duds, yet travel company valuations remain intact. RumbleON, Expedia, Booking Holdings, and Groupon were our major pandemic losers by revenue growth (-42.9%, -40.9%, -40.4%, and -29.9%, respectively). Despite the more obvious drops in revenue by Expedia and Booking Holdings due to the halt in global travel, their EV/Revenue multiples (10.4x and 3.63x) remain above the median of 2.14x and easily at all-time highs for both. This imbalance is due to their LTM Revenue numbers being abnormally low, and it may provide an indication that investors expect a post-COVID travel boom to return revenue to normal levels.
RumbleOn and Groupon, however, only trade at 0.24x and 0.52x revenue, respectively, as investors expect them to face considerable headwinds coming out of the pandemic.
Diving deeper, the gap between the top quartile and bottom quartile on an EV/Revenue basis has widened over the past nine months. The top quartile trades at 4.96x revenue, while the bottom quartile only trades at 0.83x revenue. Nine months ago, these figures were 2.56x and 0.37x, respectively.
The same goes for EBITDA multiples, with the gap between the top and bottom quartiles growing from a difference of 30.71x back in Q1 2020 to 57.45x now.
While valuations have generally been trending upward, we can see that the top quartile of winners have benefitted disproportionately from this wave of positive sentiment.
Do trends accelerated by COVID justify the increasingly positive sentiment towards online retail marketplaces? Even with this positive sentiment, can valuations remain this high, or are we smelling dot-com-esque warnings of a bubble?
In any case, many of the trends we are experiencing are here to stay. Of those trends, consumer adoption of e-Commerce and the use of online retail marketplaces to reduce friction in everyday consumer transactions are two that I would be afraid to bet against. Marc Andreessen couldn’t have put it better: “Software is eating the world.” Top that off with a low-interest rate environment and plenty of capital available (especially in private markets), and who knows — we might just be experiencing the beginning of, dare I say it, ~a new normal~.
