Tech

Shira Ovide is a Bloomberg Gadfly columnist covering technology. She previously was a reporter for the Wall Street Journal.

I'm going to wade into the debate over how to value companies that are technology-ish.

There are understandable questions about whether mattress startup Casper, home-delivered razor seller Dollar Shave Club or meal-kit company Blue Apron should be valued like their old-guard competitors (meaning cheap) or more like internet companies that are in the business of bytes rather than real-world merchandise.

That's probably the wrong question. A better one is whether the impressive sales growth of these not-quite-tech companies is sustainable or a mirage.

Fading
Blue Apron initially proposed selling its IPO shares at $17 each. It had to settle for $10.
Source: Blue Apron
Note: Figures for June 19 and June 28 are the high end of proposed stock prices.

Growth is the magical, valuation-plumping characteristic of any publicly traded company today. But not all growth is created equal. And unfortunately it's much harder to tell whether growth is sustainable than whether a mattress retailer meets the smell test to be a tech company.

Consider Blue Apron Holdings Inc. The company priced its initial public offering late Wednesday at $10 a share, valuing the company at about $2 billion including the value of employee stock options. That's roughly the same valuation it had two years ago when it was a relative pipsqueak. Ouch. As a ratio of stock value to revenue, Blue Apron is somewhere between a supermarket chain and an e-commerce company -- and way behind internet and cloud-software giants like Facebook or Salesforce. Ouch again.

Not a Great Neighborhood
Blue Apron at its IPO is valued somewhere between a high-end supermarket and an e-commerce company
Source: Bloomberg and Gadfly calculations from Blue Apron's financial disclosures

Investors decided Blue Apron's exploding growth -- its revenue excluding refunds and discounts in the last 12 months was $868 million, almost double a year earlier -- wasn't enough to justify the stock price the company wanted. Blue Apron's bankers had to sharply discount the IPO shares at the last minute. (They were up less than a dollar in early trading.)

Runaway growth isn't enough because there are questions about whether it can last. Blue Apron spent 21 cents on marketing for every dollar of net revenue in the last year. That's a lot. It must spend gobs of money because a significant share of people who sign up for Blue Apron quit every month. If Blue Apron stopped spending so much on mailers, podcast ads and free trials to lure new customers, would it still have its eye-popping growth rate? I doubt it.

No Free Lunch
Blue Apron spends a large share of its revenue on marketing to keep new customers signing up
Source: Blue Apron financial filings

The sustainable-growth question will come up again and again because there is a gaggle of richly valued, venture-backed private companies waiting to spread their wings in the public market. If Uber, the richest of all startups, stopped offering incentives to riders and drivers, would it be growing so quickly? That's more debatable, but the company is worth more than $60 billion, so there better be some real growth there. The cautionary tale is Groupon, which grew like a weed only as long as it spent tons on marketing. 

This is the question we have to ask all tech companies now. Prove to us that the growth rate will stick around. And if it can't, those not-quite-tech companies belong in the valuation sad sack pile with the grocery stores.

A version of this column originally appeared in Bloomberg's Fully Charged technology newsletter. You can sign up here.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Shira Ovide in New York at sovide@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net