Telegram – The Paradox

Its greatest strength is also its greatest weakness.

• There is little doubt that Telegram has emerged from the background of the technology industry to drive publicity for an IPO but there are substantial hurdles to an IPO which may well see it retreat back into the shadows.
• Telegram is a security-focused chat app like WhatsApp founded in 2013 so that founder Pavel Durov and his brother could communicate securely when there were no other secure apps available.
• Durov appears to have a pretty poor relationship with the Russian state having denied it access to its users’ data twice and fleeing the country in 2014 but questions remain.
• For example, in 2020, Russia suddenly unbanned Telegram and now certain arms of the Russian state are actively using it.
• Telegram has grown from 500m users in 2021 to 900m users today and it looks like the company needs to raise money for further expansion with an IPO being the preferred route.
• There are two main hurdles to an IPO which are:
  • First, criminality which by most objective measures is rife on the platform.
  • This is because Telegram promises absolute security to its users which is precisely why criminals, terrorists and rogue states like to use it.
  • This immediately creates a big problem for both potential customers of Telegram and public investors.
  • Advertisers will not want to have their brands associated with criminal activities while public investors will not want to have to explain to their beneficiaries why they have financed criminality.
  • Consequently, it is clear that its greatest asset is its security but at the same time when it comes to going public, this is also its greatest weakness.
  • Second, numbers which simply do not add up.
  • In his interview with the FT (see here), Mr Durov says he has “hundreds of millions of dollars” in revenue and is “hoping to become profitable next year, if not this year”.
  • This means that he also has hundreds of millions of dollars in costs but the company only has 50 employees.
  • A company of this size with hundreds of millions of dollars in revenues should be generating substantial amounts of cash and so something is not quite right.
  • One possibility is that the gross margins are extremely low meaning that that it is in the provision of the service that the money is going.
  • This would mean that the company has no real ability to make money because the more revenues grow, the more would costs increase.
  • This is precisely the opposite of how many of its listed peers perform and consequently does not make sense.
  • Either the business model is fundamentally broken, or the revenue estimate given to the FT is not correct.
  • My best guess here is that the revenue number given is not as high as Mr Durov led the FT to believe.
• The company says that it is taking action against the objectionable content and actors on its platform, but it is not doing nearly enough if it wants to improve its current image.
• Furthermore, in this climate, any association with Russia be it fanciful or factual will be a huge hurdle to being listed on a Western stock exchange such as NYSE, Nasdaq or the LSE.
• Consequently, I suspect that an IPO is not the best route for Telegram to raise money for expansion and remaining private is a much better option.
• The valuations in the private market are just as good and often better than in the public market so I can’t see why Telegram should be disadvantaged by remaining private.
• Given the hurdles, I suspect that Telegram will remain private although there are several alternative exchanges whose relevance is gradually increasing that might work better for Telegram.