I had decided not to post anything this week since I suspect most of my readers are busy enjoying the last few days of summer. What convinced me to write was an excellent point brought up Tuesday by Earth2Tech editor Katie Fehrenbacher. In her post, Katie showed some concern over the fact that Facebook’s $33B private market valuation today is about the same as the market size of grid scale energy storage, projected by Pike Research to be $35B by 2020.
While I’d love to see more grid scale storage deployed over the next decade, I’m slightly less worried than Katie. The reason is that the above comparison isn’t really apples-to-apples. Simply put, market “value” is not market “size.” The former is what a company is inherently worth, while the latter is the aggregate revenue of all players in the market in a given year.
Here’s how they’re different.
Facebook has a private enterprise value (EV) of $33B, but its revenue (R) is around $1.1B, by some estimates. In finance speak, its trailing revenue multiple is 33x. If for each dollar of revenue it leaves behind c dollars of cash (where c<1), then the multiple can be written as:
EV / R = c / (r – g) ;
where r is something called the cost of capital (a proxy for the riskiness of Facebook’s cash flows) and g is Facebook’s annual growth rate in perpetuity. (A lower r signifies a lower risk profile, but r is bounded at the bottom by the so-called risk-free rate, typically set by U.S. treasury bonds. More on this formula here.)
How can $1 of Facebook revenue be “worth” $33 today? Looking at the formula, the simple answer is that the $1 of revenue (1) is mostly cash, (2) has very little risk associated with it, or (3) will grow into much more than $1 next year and the year after. In reality, it’s probably a combination of all three of these.
So, if we want to compare Facebook’s $33B valuation to something, we should compare it to the market value, not market size of energy storage in 2020. What’s a good revenue multiple for a grid scale energy storage company? It’s hard to say, since the market is so nascent and there are no pure, public comparables of sufficient size. Here are a bunch of candidates I’ve compiled, with some suggestions from John Peterson of AltEnergy Stocks:
In this case, I’d argue the mean is more illustrative than the median, since the latter has been unfairly biased by large conglomerates like Panasonic, which has other slow growth, low margin businesses. On the other hand, Beacon Power is clearly an anomaly caused by low revenues. A123 Systems is probably the most accurate benchmark since it has some exposure to grid scale storage, but it also has a large enough revenues to give it a meaningful multiple.
If we take A123’s 4x revenue multiple and apply it to Pike Research’s $35B market size for grid scale storage, we get an aggregate enterprise value of $140B in 2020. That’s closer to Google’s market value today than Facebook’s.
Maybe Katie would still think that’s too small, but it makes me feel a little better. She’s absolutely right that grid scale storage won’t be nearly as fast and pervasive as the internet, but I still think there’s enough value to go around.