Website Valuations : How do you value websites?

We have all been there, wanting to know the exact nuances of website valuations. There are a number of ways people have tried to interpret data analytics of a website and some have associated the same with its valuations. Industry experts have long debated that studying traffic and  google analytics, they can arrive at a fair value. Not many agree with this logic, pointing out that traffic can be bought at Fiverr and other freelance websites for as low as $5. So for someone who is new to all this, how does he go about valuing websites?

We can, of course, go into detail about how to value traffic and all that, but, to be honest, there are  many loopholes in the theory.Anyone with a little bit of experience in traffic exchange programs can exploit the system.

There are of course websites that once you submit the domain name, come up with the valuations in a second. And then most of us yawn, dig our nose and pass them over within that very second. Sometimes it can make you wonder, what’s the accuracy rate of such pages?. How they come up with these valuations in a second. Why can’t we get the same hosting speed from our provider, among others?

Like most of you have guessed there are no discounted cash flows in this industry, nor are there any assets to value. It is simply based on how much the buyer is willing to pay up. We  for no reason whatsoever decided to look for valuation multiples or  if there were any.

Readers who are new to this domain, the market for buying and selling websites is gaining considerable traction and people are becoming keener to invest in such online assets. For those who don’t know, Flippa is the biggest marketplace to buy/sell websites. The act often referred to as flipping involves buying a website cheap, doing some SEO(search engine optimization) work for attracting traffic and then selling it once again for a profit.

Coming back, we searched Flippa for the recently concluded deals which have more than $900 in earnings.

Website valuations: Flippa study

Website Valuations

We went to Flippa and looked at the recently concluded deals in the website sections of the page. Our minimum threshold was $900 in verified profit. We wanted the sample to be truly random, so went ahead with the last 10 concluded sales. Here is what we found.

The most interesting thing to note here is, The PE ratio calculated is MONTHLY.In stocks its yearly earnings. In the case of stocks, most cases with growing companies 12 PE (yearly earnings) is often considered cheap. Here interestingly the average PE comes to about 12(monthly). So for people who don’t understand what we are talking about, Consider this, The average time to make back your money if you had bought a website in today’s market would be roughly around a year, ceteris paribus. While if you are buying the S&P 500 stock index, It would be roughly 21 and half year.

Off course, we haven’t factored in the 3-5% dividend of the index or touched upon the underlying risks of both assets. It wouldn’t be fair at this point to do so, may be a separate post someday.

The things we believe affects Website valuations

  • The sites which have consistent earnings, over a longer stretch. Preferably from AdSense go for higher multiples. Seems fair, since google trusts the website, it is good enough validation for many.

  • The number of years, the backlinks etc do command a premium to a year old site with no backlinks.

  • Trustworthy sellers. Yes, the sellers who have 100% feedback tend to sell their wares for more compared to a new seller. The level of trust is extremely important when you are dealing with digital assets.

  • A good domain name and Niche topics add significant value. Since it becomes easier to rank on google.

The recent surge in Chinese demand has definitely pushed the website valuations to a high. But as an asset class, it still remains terribly undervalued. The reader might note that most of the deals are around the 10k 20k range. We believe the market needs more liquidity and more investor interest going forward.

To be continued….