The Valuation of Skype

Last month (April 2009), eBay CEO John Donahoe announced that Skype, the ubiquitous VoIP, IM and video chat company was heading for an IPO in 2010. I have been reading rumours that the cofounders of Skype, Niklas Zennstrom and Janus Friis, have raised around $1 billion in private equity with the chance that eBay would match with its own financing in a deal for the cofounders to Skype.

Unfortunately for Zennstrom and Friis, their valuation is well below what Donahoe and eBay is claiming what Skype is worth.

Skype was purchased by eBay for about $3.4 billion after performance bonuses in 2005 and subsequently had to write off $1.4 billion of the value of the deal. Although eBay shows Skype with a value of $1.7 billion on its books, Skype is on a pace to exceed $600 million in revenue this year. Donahoe expects Skype to generate more than $1 billion annually by 2011 and achieve a gross profit margin between 18 percent and 20 percent over the long term.

So if eBay considers a valuation of $2 billion for Skype to be low, the question remains, what is Skype really worth?

Based on Skype's user base of 443 million, its current annual revenue of $1.83 per user, and its projected gross margins, it could be argued 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, monetize its new "Skype for SIP" offering and increased revenues per user, it could be worth far more than that.

Conversely, a legal battle over the ownership of the Joltid peer-to-peer platform, the basis of Skype network, between eBay and Skype's cofounders could ultimately direct the company back to Zennstrom and Friis. If a judge finds that Zennstrom and Friis retain the rights to Joltid, a Skype IPO might be disappointing.

Skype's actual valuation in today's economic climate remains to be seen but for the world's second largest carrier of long distance communication, this is becoming an interesting story.

* Skype and the Skype Logo are trademarks of Skype Limited.