Tumblr says Google is worth $4.2 trillion

Barron’s story about Yahoo’s acquisition of tumblr fuels fears

and reservations about Silicon Valley valuations, especially

compared to ones that are grounded in reality.

To be clear, this is not meant as a knock against Barron’s reporting.

It’s outstanding, as usual.

What’s disturbing is the $1.1 billion price Yahoo paid for tumblr,

a company that received more than $125 million in venture funding

but has only produced $13 million in revenue, Barron’s reported.

The metric used for valuating Yahoo’s price for tumblr is about 84.62

times the micro-blogging website’s annual revenue. 

While tumblr may bring a unique advantage to Yahoo, what hasn’t

been made clear in any of the reporting is whether tumblr’s

technology is so proprietary it can’t be duplicated.

Tumblr, then, in many ways, is a glimpse of how venture capitalists

value website start-ups; but this euphoria or, if you prefer, valuations

far beyond reality, cannot last.

At some point, Silicon Valley industry directors and executives will

sober up, realizing Wall Street values these start-ups for far less than

the venture capitalists searching for the next greatest fool to pay

a price that's far beyond reasonable for the company they’ve invested

in and helped build.

The tumblr acquisition shows that venture capitalists, their investors

and the start-up’s employees are the winners.  The shareholders

of the acquiring company, based on what happened to Yahoo’s

stock last week, are the losers. 

If the metrics for valuating tumblr are used with Yahoo or with the

Silicon Valley’s standard-bearer of the health of the technology

industry, Google, then these two companies are worth far more,

at least by venture capitalist standards, than Wall Street says.

For example, Yahoo, during 2012, produced about $4.9 billion

in revenue; its market capitalization is about $30 billion, which is

just over six times the company’s annual revenue, a metric far

less than what it paid for tumblr.

But if tumblr’s recent value – based on the price for which it was

just purchased – is applied to Yahoo, then Yahoo should be worth

about $422 billion. 

For that matter, Google, which produced about $50 billion in 2012,

should be worth about $4.2 trillion and yet the search engine’s market

capitalization is but a humble $290 billion, just under six times

annual revenue.

Facebook, the most recent Silicon Valley player to go public,

produced $5 billion in revenue in 2012 and has a market

capitalization of $60 billion, or 12 times revenue; applying the

tumblr valuation, the social media website should be worth $422 billion.

Based on the reality of Wall Street – around six times annual

revenue – Yahoo shouldn’t have bid more than $80 million for tumblr.

How long venture capitalists can secure the kind of valuations that

tumblr just received is hard to say.  How long Silicon Valley executives

want to be the fools of venture capitalists is also difficult to predict.

But anyone who’s ever followed valuations and traditional 

economics knows prices cannot remain this high forever.  At some

point, the rubber meets the road.