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The difference might seem slight, but, in practice, a technology business can trade for as much as 10 times its revenue. A tech-enabled business probably won’t. Why? Because technology companies enjoy stronger-than-average gross margins. A simpler way of thinking about the point is to say that technology companies have higher quality revenue than other companies. The fact is part of why they are sought after by investors looking to bet on companies that may deliver huge valuation gains. (Why not bet on the companies that get to keep more of their revenue?)

To illustrate the point that gross margins (a key revenue quality metric) can shift how a market views a stock, let’s examine a group of formerly-private, recently-public companies and compare their gross margins to their revenue multiples. It will be fun!

We’re looking for a loose connection between the two numbers; that’s to say that we expect that higher gross margins, in general, to lead to higher revenue multiples. Of course, we’re obviating things like revenue growth rates, and varying operating leverage. But we said a loose connection between the two, so let’s hit up the data.

Today we’re leaning on some data from , who can provide quarterly gross margin metrics, and who have done the work of calculating trailing price/sales multiples. Click on each companies’ name for its Crunchbase profile if you need more information. Ready? Let’s go:

• : Gross margin of 84.9 percent, trailing price/sales of 13.6 ()
• : Gross margin of 80.9 percent, trailing price/sales of 39.8
• : Gross margin of 78.5 percent, trailing price/sales of 23.5
• : Gross margin of 70.8 percent, trailing price/sales of 25.7Ìý
• : Gross margin of 64.9 percent, trailing price/sales of 4.6 ()
• : Gross margin of 63.5 percent, trailing price/sales of 7.7
• : Gross margin of 59.6 percent, trailing price/sales of 16.2
• : Gross margin of 55.0 percent, trailing price/sales of 10.6Ìý
• : Gross margin of 45.0 percent, trailing price/sales of 4.0
• : Gross margin of 27.3 percent, trailing price/sales of 3.2
• : Gross margin of 23.6 percent, trailing price/sales of 2.8

You can see a general trend there, as we expected. As we intimated earlier, there is a lot more going on in the above than merely gross margins impacting multiples, but it’s impossible to understand the latter without the former.

Notably, you can also see the tech-iness of the companies rise as you go from the bottom of our list to the top. At the bottom, a unicorn selling pet supplies using ecommerce. That’s a tech-enabled business, and a good one, investors think. At the top, PagerDuty provides a SaaS service to developers. That’s pretty techy.

As the 2019 IPO cycle — currently utterly moribund — picks back up at some point, the above math will be at play. Be smart, check the gross margins of any business as soon as you can. The easiest way to differentiate between a tech company, and a tech-enabled company, is to check and see how much it can charge above its cost of revenue.

Illustration: .

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Here are some things that are true: A goodly number of tech companies are going public this year. Many of them were valued at $1 billion or more while private. The IPOs have often been long-awaited. And, the companies in question are often quite unprofitable.

This creates a rolling conundrum, where hype meets quite a lot of reality. IPO, for example, was going to be a big deal regardless of what its numbers showed. They did, however, show a huge amount of red ink and slowing growth. So, the conundrum came into play. Unicorns have been long-awaited, but what happens when that which you have waited for still loses money?

The answer, of course, is that the unicorns still go public, but are just worth less than they wanted. Or much less, in the case of Uber.

Notably, even with the situation being roughly what we’ve described, the unicorn IPO run is bringing companies so large to market that their public debuts are skewing the stats on unprofitable offerings. According to a this morning, the number of unprofitable companies that are also part of the 25 largest IPOs during the current cycle is staggering:

Now think about 2019, and Uber.

Uber and and posted huge, unprofitable debuts, so we can put those into the 2019 column. I wonder if we’ll see a higher, final tally from this year’s IPO crop when it comes to the percentage of the largest IPOs that feature unprofitable companies, but the trend is very clear. More, large, profit-free public offerings.

Not that we didn’t see this coming. It’s just that today news dropped that is slowing at the same time that the current American president is firing off tariffs like a cure-all from the 1800s. So are these unicorns getting out now because it’s time, or because it soon won’t be?

Regardless, here’s what’s coming up in IPO-land. I’m excited.

Illustration: .