Sky-high startup valuations can be misleading

Sky-high startup valuations can be misleading

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Billion-dollar tech startups are everywhere, but there's always room for undervalued, low-debt tech firms too.

Unicorns aren't as rare as they used to be. They're appearing as emojis, and in Silicon Valley, where unicorn refers to startups with a valuation of $1 billion or more, they're popping up like weeds. According to the Wall Street Journal, 124 startups currently qualify as unicorns.

But $1 billion is no longer enough for many of these companies—in fact, 55 startups, or 44 percent of all the unicorns, have a valuation of $2 billion or more. And there's Uber, which currently holds the title of the world's most valuable startup. Over the summer, roughly five years after its founding, Uber reached a $50 billion valuation. Uber is the second startup to log such an achievement; it took Facebook (FB) seven years to hit that milestone back in 2011.

The prevalance of these sky-high valuations has many wondering if these startups are actually worth that much money. After all, as Fortune notes, Facebook paid $19 million for Whatsapp in 2014 even though the messaging service had only generated $10.2 million in revenue the prior year.

Uber, the most valuable startup in the world, has yet to make its first profit. Early in the summer, the ride-hailing app reported $470 million in operating losses on revenue of $415 million. Part of those losses stem from Uber's aggressive spending as it focuses on expanding its business, particularly in China, which accounts for 30 percent of the startup's trips. To finance its expansion, Uber sought to sell between $1 and 1.2 billion in convertible bonds back in June. 

There's also a big difference between valuations on the private market versus the public market. Box (BOX) was valued at $2.4 billion before its IPO; currently, nearly nine months after its IPO, Box's market cap is around $1.55 billion.

Keeping valuations in mind, below is a list of tech stocks with a market cap of $1 billion or more, low debt/equity ratio of 0.1 or less and a PEG ratio equal to or less than 1. This means these stocks are undervalued and aren't aggressively using debt to finance their growth, which may also minimize their exposure to risk.

Do you think these billion-dollar tech stocks are undervalued? 

Click on the interactive chart to view data over time. 

 1. IPG Photonics Corporation (IPGP, Earnings, Analysts, Financials): Manufactures fiber lasers and amplifiers for use in a range of markets, such as materials processing, advanced technologies, telecommunications, and medical applications. Market cap at $3.96B, most recent closing price at $73.12.

IPG has a PEG of 0.72. Its debt/equity ratio stands at 0.02.


2. Kyocera Corp. (KYO, Earnings, Analysts, Financials): Develops, produces, and distributes ceramic, semiconductor, and electronic products for the information and communications markets, and environment and energy markets worldwide. Market cap at $18.11B, most recent closing price at $49.13.

Kyocera has a PEG of 0.67. Its debt/equity ratio stands at 0.01.


3. Methode Electronics Inc. (MEI, Earnings, Analysts, Financials): Designs and manufactures electro-mechanical devices worldwide. Market cap at $1.29B, most recent closing price at $32.59.

Methode Electronics has a PEG of 0.83. Its debt/equity ratio stands at 0.


4. Qualys Inc. (QLYS, Earnings, Analysts, Financials): Provides cloud security and compliance solutions in the United States and internationally. Market cap at $1.20B, most recent closing price at $33.53.

Qualys has a PEG of 0.87. Its debt/equity ratio stands at 0.


5. Tessera Technologies Inc. (TSRA, Earnings, Analysts, Financials): Develops and licenses miniaturization technologies for chip-scale, multichip, and wafer-level packaging, which enables companies to produce chips for digital audio players, digital cameras, personal computers, personal digital assistants, video game consoles, and mobile phones. Market cap at $1.79B, most recent closing price at $33.52.

Tessera has a PEG of 0.45. Its debt/equity ratio stands at 0.


(Monthly return data sourced from Zacks Investment Research. All other data sourced from FINVIZ.)

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