Operational Drivers of Business Valuations in the E-Commerce Sector: Focus on Public Companies That Assume Inventory Risk

Most companies in the e-commerce sector face a crucial decision when choosing between top line growth and profitability. Generally, as an industry matures, company valuations shift from a revenue driven valuation to an operating profitability driven valuation. Despite being a relatively young sector, the e-commerce sector has reached a certain maturity stage, with valuations in segment increasingly based on expected operating profitability. Furthermore, with the development of the sector, the valuation drivers (key operating performance indicators) shift from revenue growth to gross profitability or operating profitability. The article analyses through regression analysis the current revenue and operating profitability based valuation levels of ten publicly listed inventory risk bearing companies in the global e-commerce sector against several key operating performance indicators. The results of our research show that future expected revenue growth still represents the most important key operating performance indicator but valuations are increasingly driven by operating profitability and less by revenue. These findings are especially important to the numerous entrepreneurs in the e-commerce sector that are looking to sell their companies and which could face the challenge of having to implement a major strategic shift before starting a sales process and implicitly selling the company at a high business valuation.