DISCLAIMER: I am not a certified financial analyst. I am not a certified stock broker. I am not a website broker. I am not a certified financial planner. This post contains some investment information as well as my opinions about website valuations. The information in this article are my opinions only and not meant to be advice.
Why are non-website businesses valued so much higher for the same net income?
That has never sat well with me. It makes little sense.
Okay, websites can be risky, but do they seriously warrant the ridiculously low valuation compared to other businesses?
I discuss this here and give my opinion.
How is the value of a website calculated?
In a nutshell, like any business, a website’s value is based on net income. More specifically, the value is a multiple of the net income.
These days, websites are valued 10 to 50 times net monthly income.
It’s a huge range. Older websites with consistently a rising net income with search engine traffic fetch a higher multiple. Newer sites with a lower net income fetch a lower multiple.
A 50 multiple of monthly income, currently is not something you can count on.
My question is: why shouldn’t you expect a 50 multiple or higher?
I may be biased since I own a batch of niche sites with consistent cash flow. Their perceived value to me is higher than a buyer’s perceived value. I get that.
But my inquiry into the current multiples used for a website valuation goes beyond that. Specifically, when compared to other businesses that generate a positive cash flow, niche websites fetch a ridiculously low multiple.
Price to Earnings Ratio (P/E)
The P/E ratio is a common metric used for assessing whether stock in a company is a good deal. It’s a multiple metric. Here’s a simple example.
If a publicly traded company earned $1 million in the last 12 months and its share price is 20, it has a P/E of 20. The P/E ratio is calculated by the stock price/earnings per share (EPS). There are different EPS figures used, but that’s it in a nutshell. We don’t need more detail for this discussion.
Taking our publicly traded company with a P/E of 20, that’s a whopping 240 monthly multiple. In other words, the company is valued at 240 times net monthly income.
Compare that to websites which are lucky to command anything above a 35 monthly multiple.
And no, a P/E of 20 is not an inflated example. Many companies maintain a 20 P/E. Some maintain higher ratios; some a bit lower. Few, if any unless it’s a distressed company, have P/E ratios as low as website valuations.
In today’s climate, websites are valued with a 1 to 4.5 P/E.
Compared to publicly traded companies (and likely private companies), website’s P/E ratio is absurdly low.
After all, a website that generates consistent profits is no different than any other business that generates profits.
Why are websites valued so much lower than other businesses?
I don’t have the answer, but I can hazard a guess: Risk.
For buyers, websites are perceived as risky investments. I agree, there is risk to them. The following are risks all websites face:
Loss of traffic: Most websites are dependent on 3rd party platforms for traffic such as Google, Pinterest, Facebook and YouTube. Those traffic sources can disappear any day which can dramatically reduce a website’s value. This is a real risk.
Low barriers to entry: Anyone can start a website with little cash. You don’t need a degree. You don’t need $100,000. You just need access to a computer. Therefore, competition is a constant risk.
Loss of revenue streams: If a website earns from display ads and/or affiliate commissions, these revenue sources can disappear overnight. Google AdSense can ban the account. Amazon can kick an affiliate out. Affiliate commissions can be reduced (this has happened to me). Like traffic, many niche sites are dependent on 3rd parties for monetization. This is a real risk.
No tangible assets: Plenty of corporations own real estate. This has intrinsic value independent of the company’s cash flow. Websites do not own real estate and therefore there are no tangible assets independent of the revenue stream.
Some website-based businesses do have a high P/E
Facebook and Google have P/E ratios in the 20 range. It goes up and down a bit, but these are digital companies.
Of course, they are the traffic sources and own real estate, so their risk is lower than niche sites.
Do these risks warrant such low valuations compared to other businesses?
I think not, but then at the end of the day, stuff, including businesses are only worth what people are willing to pay.
My opinion doesn’t matter EXCEPT for the suggestion that if you believe websites are undervalued right now, they offer an exceptional opportunity. Not only can you generate a monthly income that will have some value, but if multiples grow over the next few years, that will quickly increase the value of your websites.
All businesses have risk
Remember Blockbuster? Blackberry? Sears?
There were seemingly invincible corporations that have gone bankrupt or suffered financially. Ironically, website-based businesses bankrupted Sears. Amazon and other leading online retailers have contributed to the demise of many brick and mortar businesses.
Will website valuations increase?
This is not based on a wish. It’s based on two considerations:
1. High ROI
I think the multiples used for valuing websites will increase in the future.
The potential ROI from investing in investments can be insanely high. I’ll give you an example from a website I purchased.
3 years ago I paid $10,000 USD for a website that earned $200 per month. Actually, the net monthly income was $0 because server costs were $200 per month. I paid a premium because the site had excellent authority, traffic, content, inbound links and was 8 years old at the time.
When I bought it I had no plan for it. I just knew it was a good site to buy. It was solid in every respect.
Fast forward 3 years (5 months ago) and I finally knew what to do with it. I started adding content daily. It now earns over $1,000 USD per month after only 5 months of work on it. At a 30 month multiple, it’s worth $30,000. That’s an amazing ROI for 3 years. I cringe to think how much it would be worth if I knew what to do with it when I bought it. I have huge plans for this site and expect it will be worth far more in 12 months.
2. Low Inventory
I scan websites for sale at Flippa, Empire Flippers and other brokers regularly just to see if there are any deals to be had. Usually, I’m surprised at the lack of decent content/niche sites available for sale.
There are plenty of e-commerce sites for sale, but few quality content sites monetized with ads and/or affiliate offers
That means these content sites are getting snatched up.
Investors are discovering that well-run websites can deliver a very good return on investment, especially at today’s website valuation multiples.
Seriously, what other industries can you buy a solid cash-generating business with a P/E of 3? It’s hard to find, if not impossible.
What else does this mean?
This also means people who have a successful track record growing websites may have huge opportunities to earn good salaries in organizations that invest in websites. These investment organizations will need people to manage and grow the websites that they invest in. It COULD be a big industry.
Finally, this means that this line of work is very, very exciting for anyone who enjoys it because while it’s fun and lucrative now, it could be even more lucrative in the future.
Should you hold off selling websites right now?
That’s a decision that involves a lot more than is discussed here. There are many factors you must consider when deciding whether to sell a website. I discuss whether to sell or not here.
DISCLAIMER: Just in case you missed the first disclaimer, the information in this post is just information. It’s my opinion. It is NOT advice. I’m merely speculating about the nature of website valuations with an optimism that only a website owner could have.