10x, 100x, and 10,000x: Multiples in Web2 and Web3
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March 4th, 2022

Price-to-sales is a financial metric describing how much value the market places on each dollar of a company’s revenue. Analysts often use a low P/S ratio relative to peers to identify undervalued equities. NYU research tabulated average public company P/S ratios by industry in Web2:

Web2 revenue multiples. Source: NYU research
Web2 revenue multiples. Source: NYU research

Multiples in private markets are far higher than the public multiples with 100x ARR becoming the meme of software investing in 2021. But 100x isn’t the high water mark: competitive deals frequently traded at 500 or even 1000x revenue. These multiples bake in stratospheric growth expectations. The record amount of VC dry powder is certainly a factor as well.

Now let’s talk about revenue multiples in crypto. A protocol’s revenue is the sum of all fees paid by its users. Price-to-sales in crypto is protocol revenue divided by fully diluted market cap.

L1s trade at exospheric valuations relative to protocol revenue - often as high as 10,000x. They may as well be in space. Like Web2, multiples tend to fall as the protocol matures - as usage catches up to hype. Ethereum traded at 7,000x in 2017 and now trades at 34x - nearly identical to MongoDB, a web2 database, which trades at 32x revenues.

Solana traded around 4,000x last summer and has fallen to 1,000x. Like public and private equities, implicit in high L1 valuations are an expectation of future growth. As the business matures and revenue growth slows, we may see L1 multiples asymptote to their web2 peers.

Here are current revenue multiples for popular smart contract platforms:

Source: TokenTerminal
Source: TokenTerminal

In an efficient market, an investor must decide if a dollar invested generates a better outcome in an L1, a public equity or other investment.The rational investor would expect an L1 trading at 1,200x to grow 100 times faster than a software company trading at 12x.

How will L1s grow into these valuations? These businesses will need to foster substantial growth in usage. But that’s probably not enough. They’ll need to increase prices over time. Today, L1s are engaged in winning as much market share as possible at the revenue. At some point, Popular blockchains will eventually need to exercise pricing power.

L1s are more expensive than other categories for three reasons.

  1. Retail investors are far more likely to ape into an L1 than a DeFi application because L1s are better known brands.
  2. L1s are in the middle of a scalability war. Each wants to boast the lowest fees, to attract more developers, to build applications which will generate revenue. Depressed transaction fees mute revenue.
  3. Regulatory uncertainty prevents many protocols from paying a share of fees to token holders to avoid being classified as a security. Token holders can’t benefit from dividends the way a public equity shareholder would, which means the token is less valuable relative to a share in an identical business.

Okay… so is everything in crypto this expensive?

Nope, L1s are among the most expensive. DeFi applications typically trade at multiples in the 10-100x range, which is reasonable compared to public equities given the significantly faster growth of the crypto industry compared to traditional finance.

Source: TokenTerminal, Messari
Source: TokenTerminal, Messari

Crypto gaming trades in the low to mid hundreds and is significantly more expensive than its web2 counterparts. Unlike L1s, crypto gaming multiples have trended upward over last year.

Source: TokenTerminal, Messari, Yahoo Finance
Source: TokenTerminal, Messari, Yahoo Finance

Is it fair to compare crypto multiples to public equities? From an individual investor’s point of view, the question remains which is the better place to put a dollar. The answer isn’t straightforward because tokens capture a fraction of GMV of an ecosystem rather than a single company within it. Also, the revenue models of many crypto companies are nascent, even non-existent, which pushes multiples to infinity.

Few crypto companies have prioritized revenue. Instead these businesses have rightly prioritized usage and engagement, pushing the revenue imperative later in the company’s evolution. Ethereum multiples illustrate trends in crypto multiples well. Over time, they should normalize to some ratio with equities. **

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