Is GitHub Really Worth $7.5 Billion?

by Trefis Team
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Microsoft recently completed the acquisition of GitHub – a popular platform for software developers to collaborate and share code – valuing it at $7.5 billion. GitHub provides services such as project spaces, forums and code libraries free of cost to its users. For a subscription fee, the company offers premium services such as cloud hosting options and the ability to keep the code private. The company offers a host of enterprise services to organizations, with enhanced security features and flexible deployment options. Over half of Fortune 50 companies use GitHub and it now boasts of 31 million developers on its platform and 2.1 million organizations using its services. Given its popularity, strong user base and “open” nature, GitHub is known as the “Facebook of software development,” and these features also made it an attractive target for Microsoft. In our interactive dashboard on Breaking Down GitHub’s Valuation  we analyze if GitHub’s $7.5 billion valuation is justified.

Revenues, User Base Have Been Growing Rapidly In The Past Two Years

 

 

 

 

 

 

 

 

 

GitHub’s revenues have grown by nearly 50% year on year for the past two years, as the number of paid subscriptions increase. Half of the company’s revenues in 2017 were from enterprise users, and it now has 2.1 million organizations on its platform. This growth has been phenomenal, though the potential of its future growth (as a standalone company) has been questioned. IDC estimates that in 2017 there were around 21 million professional software developers. GitHub already has 31 million developers on its platform – which implies that a decent portion are likely non-paying students, and future growth of users on its platform could be relatively limited. Revenue growth is likely to be driven primarily by the growth in number of organizations using GitHub – the number of which has grown by 40% in the last year.

GitHub’s estimated revenues for 2018 stand at $300 million. Based on these estimates, the company’s revenue multiple for a valuation of $7.5 billion is 25x. This seems fairly high, as the company’s future growth may slow down, given its rapid expansion in the past few years and the number of users already on its platform. Our comparative analysis of revenue multiples of companies across industries shows that social media companies such as Pinterest have been valued at multiples of around 25X, while players in other spaces such as Lyft and Eventbrite command multiples of 10x and 9x, respectively. Software As A Service (SaaS) companies such as Shopify and Appfolio also command revenue multiples of less than 20, and GitHub also delivers most of its revenue-generating services in a SaaS model. Comparative analysis shows that GitHub’s revenue multiple is higher than most of its peers.

Strategic Considerations Contributing To High Valuation

Microsoft has several strategic considerations in its valuation and acquisition of GitHub. GitHub will give Microsoft access to millions of developers – with whom the latter can build relationships and potentially guide them towards its own developer environment. Microsoft is increasing its focus on serving software developers via cloud services, and GitHub is a natural acquisition to move in this direction. Microsoft is also a big open source contributor and supporter, and with this acquisition it can empower developers with newer tools and bring its tools and services to new audiences. Microsoft generates more than $100 billion in revenues annually, and a $7.5 billion acquisition is not financially material for the company. With that said, GitHub is a smart addition to Microsoft’s portfolio to further its relationship with developers and could potentially allow it to better compete with Amazon’s cloud services.

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