What's Skype really worth?

[1]Skype's valuation has been a hot topic since eBay CEO John Donahoe announced in mid-April that the ubiquitous VoIP, IM and video chat company would be spun off in an IPO [2] in 2010. Skype cofounders Niklas Zennstrom and Janus Friis reportedly raised around $1 billion in private equity [3] they hoped eBay would match with its own debt or financing in a deal for the company, but eBay said this valuation was well below what it thinks Skype is worth.

Speculation on Skype's worth intensified this week following Donahoe's comments [4] at a Barcelona trade event that an analyst consensus valuation [5] for Skype of about $2 billion was a low-ball price for a property with such positive growth indicators. EBay bought Skype for $2.6 billion in 2005, a price that later increased to $3.4 billion after performance bonuses. However, eBay has had to write off $1.4 billion of the value of the deal, as expected synergies between Skype and its core auction business never materialized.

So if eBay considers the current consensus valuation of $2 billion for Skype to be low, but carries the company at a $1.7 billion valuation on its books, the question remains, what is the company really worth?

Skype posted revenues of $153.2 million in the first quarter, putting it on pace for yearly revenues in excess of $600 million. The company has said it expects to generate more than $1 billion annually by 2011, and eBay executives said the gross profit margin [6] for the company will be about 18 percent to 20 percent long term. Skype also has a user base of 443.2 million, but only generates about $1.30 per user annually.

Based on Skype's current user base, its average revenue per user, and its projected gross margins, analysts argue that a $2 billion IPO is in line with estimated net earnings of $200 million for 2011. But if Skype can show serious growth in other aspects of its business, and increased revenues per user, it could be worth much more than that.

IP communications analyst Jon Arnold said a Skype IPO could be wildly successful, if the Street's appetite for risk increases before the planned date. He said Skype's gigantic user base and growth pattern, coupled with forays into the enterprise market he said high-level staff at Skype view as priorities, could accelerate revenue growth above current projections.

But Arnold also said that the court battle between eBay and Skype's cofounders over the ownership of the Joltid peer-to-peer software that is the basis of Skype could ultimately drive the company back to Zennstrom and Friis. If the court finds that Zennstrom and Friis still own the rights to Joltid, private buyers will likely shy away from making offers for Skype and an IPO might be disappointing.

Arnold said several companies could make interesting buyers for Skype if eBay decides to try to get a private deal done instead of offering Skype in an IPO. Arnold mentioned Apple as a particularly interesting potential acquirer, as well as cablecos or telcos that want to drastically expand their user bases and can accept the challenge of integrating Skype into their operations. Arnold still thinks, however, that an IPO remains the most likely fate for Skype.

- Pete [7]