Is Beats Worth More Than $3.2 Billion?

Make no mistake: If Apple does buy the Beats Electronics headphone empire for $3.2 billion, it will be a huge windfall for two music industry veterans—co-founders Dr. Dre and Jimmy Iovine—who until recently had little expertise in hardware, manufacturing, and supply chains. But since they’ve already sold almost half the company at a much lower price, could their triumphant haul be even bigger?

Their ear-goggle empire, to put it quite simply, generates a lot of sales—somewhere around $1.3 billion a year, according to Carlyle Group, which bought a little less than half the company for $500 million in September. At that time, some observers—including a certain Bloomberg Businessweek scribe—pointed out that the private equity firm seemed to be getting a shockingly good deal. That view seems to be confirmed now. If Apple has really bid $3.2 billion, the sum would be more in line with Beats’ worth, given the headlock the company has on the market for high-end headphones (and leaving aside the company’s new streaming service).

But if Dr. Dre and company want to play hardball, they can make a reasonable case for even more. A $3.2 billion bid equates to somewhere around three times the Beats sales figure quoted by Carlyle—a popular way of estimating what a company might be worth. Apple, by contrast, is trading at 2.8 times its annual revenue right now. It’s easy to find tech companies trading for less (see: BlackBerry), but quite a few hardware makers are in the same range. Hewlett-Packard trades at 3.3 times its trailing year of revenue. SanDisk, the storage giant, is valued at 3.1 times sales. And Garmin, famous for its handheld GPS units, trades at a revenue multiple of 4.3.

None of those companies has grown as quickly as Beats. The headphone maker increased sales fivefold from 2010 to 2012, according to the Wall Street Journal. To be sure, Dre’s baby isn’t a scrappy startup anymore and shouldn’t expect that trend line to stay so steep. But if the company’s streaming-music service takes off, $3.2 billion might seem kind of cheap—the M&A equivalent of those little white buds Apple throws in with an iPhone.