Earlier today, after Ask.com relaunched, I said there’s a good chance that Barry Diller unloads Ask.com, and the repositioning we saw today was a step towards that. This begs the question:
What is Ask.com Worth: $3.15B
Don Dodge recently wrote and broke down what 1% of market share is worth: $1-3B. At the very high range, in Google’s case, its’ 5o+% market share represents about $150B in market cap. The basic math means for each share of market, Google commands $3B. Dodge - who works out of MSFT’s Emerging Team - concluded that at the very least, 1% market share was $1B in market cap.
Dodge’s observations were very interesting, but I thought the low end for second tier players was less. In fact, for anyone other than the market leader, the market paid a far less glorious premium.
After all, Yahoo! is worth $38B in all but it commands a search share of 27%. The rest of Yahoo! cannot simply be worth $11B, can it?
This would in fact imply that Yahoo! - with 27% market share - generates $27B out of its $38B market cap due to search, the display business, the email accounts, Flickr, Del.icio.us, the relationships with the Top 200 advertisers in the world in the display business, all of that, that’s less than $11B.
See that post here.
Incidentally, $11B is roughly $1B more than IAC’s total market cap, right now sitting at $9.95B. IAC also carries $2B in cash and $1.27B in debt, so its enterprise value is $9.2B.
IAC’s total revenues were $6.42B in all of 2006.
In March 2005, IAC bought Ask Jeeves for $1.85B. According to this article, in Q1 2005, it generated $95M in revenues, so assume it did just less than $400M in all of 2005 (For the full year, Ask Jeeves currently anticipates revenues of approximately $380 to $395 million). That implied a sale at roughly 4-5 times forward revenues.
In 2006, according to its annual report, IAC’s “Media and Advertising” revenue (Ask.com) generated $544M in revenues, or 13% of total.
In comparison, Google generated $10B in revenues, Yahoo! did $6B. Google is a pureplay search company while Yahoo! is not.
According to Yahoo! Finance, Google trades today at 13 times revenue and 44 times earnings.
Ask’s parent IAC trades at 1.56 times revenues and 52 times earnings.
It is obvious to say that the market does not project the same value onto all of IAC’s revenue streams. So let’s separate the Ask.com contribution - the $544M in 2006 revenues - and project a fair P/S multiple.
But what would be a fair P/S?
Let’s connect the dots, at the high end of the spectrum, Google’s 50% market share commands a market cap of $150B, so $3B/1% share.
Then Yahoo!, the number 2, commands much less than $3B, and as my numbers demonstrated, far less than $1B, for $1B would imply that all of YHOO’s non-search business is only worth $11B.
So let’s say that the market gives Yahoo! $750M for every 1% of market share in search, which times 27% market share = $20B. This is the most we can project to Yahoo!’s search business, as it implies the non-search units are a $17B business.
With MSFT, whom we projected a value of $28B for its MSN.com/Live.com business here, its 11% market share probably commands $600M for every 1%, or $6.6B. This is plausible because the MSN network is enormous and I’m just not sure how much value the market places on its search. So if $6.6B/$28B is on the search - or 23% - this makes sense.
What is Ask.com Worth?
Method 1: P/S
Next up, at number 4, is Ask.com. Like we said, IAC is in all worth $10B. And Ask.com only generates $544M for IAC. So presume that IAC’s 1.56 P/S is irrelevant in this analysis, if Google commands a 13 times P/S multiple, what realistic P/S could Ask.com command?
I’d say about 50% of that. So 7 times P/S of $544 = $3.8B. Could Ask.com be worth $3.8B out of IAC’s total market cap of $10B, or 38%. Sure, I buy that.
Method 2: P/Market Share
But let’s extend Dodge’s analysis and my commentary on it.
If we said:
- Google gets $3B for 1% of market share;
- Yahoo! gets $750M for 1% of market share;
- MSN gets $600M for 1% of market share;
- Then, let’s suggest that Ask.com gets $500M for 1% of market share, this means that 5% x $500M = $2.5B
Historical Prices?
Of course, IAC bought Ask.com in Q1 2005 - two years ago - for $1.85B.
At a $2.5B valuation today, this means a 35% return in 2 years;
At a $3.85B valuation today, this means a 105% return in 2 years.
The average between the two is $3.15B, which imply a 70% return in two years. Of course, IAC has invested quite a bit of time, money and energy on Ask.com, so the net is less… but either way, when you consider that since April 2005, Google’s market share has grown at the expense of Ask.com’s, maybe that valuation makes sense.
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