Why the $2MM AdAge Valuation is Bunk

 - Jan 7, 2009
References: trendhunter
As a Chartered Financial Analyst and founder of a 7 million monthly view site, I have reasonable insight into how one would value a site like Huffington Post. Accordingly, it makes me dizzy when I read the internet buzz from an AdAge article that suggests Huffington Post could be worth just $2,000,000. I understand that the author was being illustrative and attempting to shock, but in this article, I will provide insight as to why the $2,000,000 valuation published by AdAge is astray. Obviously I have a vested interest in the valuations of mega blogs, so I will provide you with my logic and you can make your own decisions.
Disconnects with the AdAge Valuation
Disconnect 1: Unrealistic Revenue Approximation - The AdAge article references that, "the site collected just $302,000 in ad revenue, according to an estimate from TNS Media Intelligence." This doesn’t ‘sense check’ for those who know the revenue numbers in online publishing. Quantcast directly measures HuffPosts traffic to be 150 million monthly views. Using Google Ads alone, a site like Huffington Post could be paid $1,800,000 from Google (assuming $1 cpm if only google ad units were used). But Huffington Post doesn’t earn the majority of money from Google. Instead it has more lucrative ad contracts. A typical mega site (50+ million monthly page views) can earn gross ad revenue of $5 ($10 CPM in the glory days)… This would suggest 2008 gross revenue of $750k per month, $9 million per year. Assuming collection of $300k would be ridiculous.

Disconnect 2: Salon.com is a Poor Comparable - The AdAge Valuation also references the sad story that is Salon.com. I believe the operating models are not comparable. Salon, a darling dot com from the days when profit didn’t matter, is now losing a million bucks a quarter (on $2mm in revenue) thanks to the large cost of paying a team of professional writers. Huffington Post does not follow the same model, and thus, is not comparable. I wouldn’t want to invest in a company that loses $4 million a year… But with publicly traded valuation of $700k, I think it would be worth buying Salon.com for the domain and existing content, and then flowing all of the traffic to TrendHunter.com.  What a great idea.

Disconnect 3: Failing to Dive Deeper into the Venture Capital Logic - Venture capitalists are opportunistic, but not dumb. There’s a reason Huffington Post was able to raise another $25,000,000 (Read: TechCrunch) in financing in November. Rafat Ali assumed the valuation to be in the $100 million ballpark (Read: PaidContent)
How Much is Huffington Post Worth in 2009?
Method 1: Bottoms Up Analysis
This isn’t going to get you to a solid solution with all of the missing numbers, but these calculations at least give you an approximation of their revenue:

Step 1: Cash in the Bank = Minimum $25 million - For starters, Huffington Post just raised $25 million… Yes, that is an investment, but it also represents cash on the balance sheet. That cash puts Huffington Post ahead of the $2 million valuation by $23 million (assuming they don’t have debt). However, since this is newly raised financing, lets assume it never happened.

Step 2: Estimating 2009 Traffic - Quantcast reveals that traffic during the election reached nearly 350 million monthly page views.  Since then, traffic has lowered to around 160 million monthly views. I’m betting Huffington Post can find a way to grow using $25 million of venture capital. Even if they don’t, they would at least flat line with 150 million monthly views and come close to 2 billion views in 2009. 

Step 3: Estimating 2009 CPM - The advertising market is collapsing, but interestingly online revenue is less effected.  The NY Times recently reported a 20% drop in revenue, but online revenue fell only 4%. Times of crisis may cause companies to reduce their ad budgets, but online gets protected because it is measurable. During past recessions, direct marketing has always been more protected. Huffington Post’s size allows them to sell a greater proportion of their inventory. For example, with more than 20 million monthly views, they get to be a Google premium partner and negotiate a bigger cut of the pie. 

Huffington Post has a heavily optimized layout with at least 4 paid placements per page. They have ads from Google, premium banners, AdBlade, and probably even some ads I don’t even know about.... ;) In a good market, these factors would push Huffington Post close to $10 CPM gross. For 2009, we could even cut that in half (which I think is conservative). That would give us a $5 CPM.

Step 4: Calculate Revenue - If we focus just on ad revenue, we’d end up somewhere around $10 million for 2009. No doubt Arianna Huffington has more tricks up her sleeve. (2 billion page impressions x $5 CPM = $10,000,000)

Step 5-6: Approximate Costs and a Apply a Multiple - We know that earlier last year Huffington Post reported that it had become profitable. If we assume conservatively that Huffington Post was headed for a $10 million revenue year, that would give us $10 million in costs. When the site’s traffic tripled during the election, monthly profit on paper no doubt took off. So we could assume that income is at least somewhat stable. However, you can bet the venture capitalists had all the numbers. That’s what led them to the suggested $100 million valuation. Without the full data we can’t get to a P/E based valuation here, but that’s okay because people typically don’t use P/E multiples for dot com valuations (pity). At very least, this approach gives you an overview of their stability.
Method 2: Proxy Based Valuation
The reality is that most dot com properties get valued based on proxies, like the number of monthly page views, viewers, members, etc. For the valuation to matter, the site has to be a large going concern, so you can’t take the valuations of a big blog and apply the ratios to your 1,000,000 page view a month site… You need to be really big to really matter.

In the past, sites like Tree Hugger, Ars Technica, Weblogs Inc and others have been purchased providing us with general insight that big media companies are (were?) willing to pay something close to $0.5 - $2 per monthly page view. Tree Hugger, for example, was right up at $2 per monthly page view, driven by the fact that The Discovery Channel desperately wanted to buy the site. Without a desperate buyer, you can’t count on such a wonderful valuation. However, if we assume a conservative number of $0.5, we would end up with a valuation of at least $75 million. 

Regardless, a site that earns $10 in revenue collects more than $300k in ad money per year, and they are worth more than $2 million.
You can assume what you want about the change in valuations for 2009.  However, I would leave you with the following points:

1) A mega-blog like Huffington Post WILL continue to earn at least $5 CPM in revenue

2) $5 CPM in Revenue would generate Huffington Post $10 million in revenue next year

3) Huffington Post does not have a similar model to sites like Salon.com… They don’t pay that much for their content.

4) If your company raised $25 million in November, your company is going to find a way to grow!