Stripe – Valuation dressing

Opportunity or threat?

• Stripe has raised $600m at an eye-watering valuation of $95bn in a funding round that appears to have no purpose other than to provide a base from which to go public at an even more outrageous number.
• There is no doubt that Stripe is a good company as it has grown from nothing in 2010 to become one of the biggest payments processors in the world.
• The Irish government, Baillie Gifford, AXA, Allianz, Fidelity and Sequoia Capital are all investing presumably with the expectation that the company will soon go public offering the opportunity of a good return in a short period of time.
• The issue here is that the company does not need the money as the company’s CFO has admitted that the company is already very capital efficient and that this is an “opportunistic” fundraising.
• I suspect that the opportunity he is referring to is the opportunity to put a stake in the ground from which to launch an IPO at an even higher valuation.
• The payment processing industry has done very well out of the pandemic given the boom in e-commerce and valuations have responded accordingly.
• Square is on 8.4x 2021 EV / Revenue while Adyen is on 58.1x 2021 EV / Revenue with a 2021 PER of 138.1x.
• These are sort of the multiples that will allow Stripe to justify a valuation well above the $95bn that it has just raised money at when it comes to an IPO.
• The wider question is whether the online payments industry is really worth these multiples or if this is just another symptom of the wall of money that keeps on flowing into the market.
• As the Fed has forced interest rates to such low levels, bonds have become very unattractive for everybody because even without inflation increasing, one is still effectively paying to lend money to most governments around the world.
• Hence, the hunt for yield and rampant increases in the money supply from freshly printed currency has caused the stock market to be awash with cash which is underpinning the crazy valuations being paid for technology growth stocks.
• This is why the minute bonds fall and yields rise, the valuation of these overbought stocks starts to crack.
• Hence, this round is quite risky for Stripe especially as it does not need the money.
• By the time it comes to IPO, reality may have asserted itself and the market will have realised that payments processing does not deserve such high multiples meaning that a valuation at or above $95bn is no longer feasible.
• Going public and getting the exit that all of the current shareholders want would then involve losing money on anything that has just been put in.
• This will cause its shareholders to become restive and will also damage how the company is viewed by the market.
• This may end up being a threat rather than an opportunity.