Is Stripe Worth $55 Billion? Really?

February 20, 2023 | Premium Service | Looking at the constituents of our FinTech Surveillance list, the top performers in the past year include a combination of old and new, but virtually none of the high-flying names from the 2020-2021 period. What a difference a year makes. But a battle ranges between hungry buyers and reluctant sellers in the world of private fintech capital finance. In particular, should budding private fintechs trade at a premium to the public comps? And what about the selective disclosure of financial data?

Source: Bloomberg

The top performers in our group include legacy payments platform Fiserve (FISV), Latin American e-commerce platform Mercado Libre (MELI), cross-border money transfer service Wise plc (WISE) and Envestnet (ENV), the provider of wealth management software and services in the United States and internationally. The rest of the group have only begun to enjoy any lift from the rally in equities since Q4 2022.

Here's the question: If public comps like Block Inc (SQ) are down by two thirds vs last year, what is a cash eating private fintech like Stripe worth? Beneath this high-level distinction about public vs private discounts, however, there are additional layers and nuances for understanding valuations among emerging financial technology companies.

Although there are some significant differences between the players, the headline is that QT is crushing the aspirational stocks and forcing many to take shelter in a bank license. Among the more important points for readers of The Institutional Risk Analyst to consider, however, is whether being a bank is good or bad for forward fintech valuations. Check out the chart of MELI vs SQ below.

Source: Google Finance

The changing tenor of the high-yield debt markets have contributed to the sharp reversals suffered by once high-flyers like Affirm (AFRM) and Upstart (UPST). AFRM continues its strange journey of value destruction, reporting a $359 million operating loss on just shy of $400 million in revenue. The $300 million in stock-based compensation and warrant expense at AFRM is a big part of the problem. The chart below comes from the AFRM Q2 2023 earnings report since, in keeping with the outlier profile of the firm, the company reports on a June 30 fiscal year.

Clearly the market does not seem to like the AFRM story at present, but the insiders don’t seem to care about the ugly optics. Perhaps there are so few fintech opportunities in the market today that such behavior makes sense? Funding expenses and credit loss provisions at AFRM have doubled year-over-year on modestly higher revenue. AFRM likes to present its financials net of credit provisions, as though this canard will make us feel better about deteriorating trends in the credit markets. Marvelous.

A number of the firms in our group have become depositories over the past several years, leading one veteran fintech manager to opine last week that the banks in the group are no longer attractive. “Once a FinTech becomes a bank, it has essentially surrendered the possibility of a tech multiple,” the veteran manager told The IRA.

True enough. Fintechs morphing into banks can be seen as an expensive act of surrender, but many PE managers look forward hopefully to an eventual IPO by Irish-American payments provider Stripe, Inc. Is either AFRM or Stripe a good bet to survive the next year in nonbank finance? We'll see. With sectors from commercial mortgage backed securities (CMBS) to HY debt going into hiding, where do investors look for exposure to new technology in finance?

Stripe Valuation Sinks

Goldman Sachs (GS) and JPMorgan (JPM) are reported to be leading a new capital raise by Stripe on a $55 billion valuation, in part to cover the cost of expiring stock options for employees. The sharp increase of interest rates has cut off the IPO hopes of firms like Stripe and left employees with big tax bills on stock awards.

“In the case of payments group Stripe,” reports FT, “[restricted stock units] worth millions of dollars will start expiring from 2024 and risk being forfeited unless the company buys them out, changes the terms of the awards or launches an IPO.” The Stripe CSUITE, which operates from offices in South San Francisco, is shown below.

During the hyperbolic days of the 2020-21 period, Stripe apparently raised money at valuations near or above $100 billion, thus the $55 billion headline being used in marketing materials is a significant concession and perhaps not the last.

Q: If Stripe does a down round at half of the previous 2021 valuation, what happens on the next round?

GS is said to be working to orchestrate the raise for Stripe, which is apparently unprofitable and is expected to need multiple future funding rounds, according to Bloomberg. Somehow, having GS fronting for this transactions does not give us a warm feeling inside. The choice of banker says a great deal about the issuer.

While Stripe does not disclose financial information, it has reportedly raised $2 billion in almost two dozen funding rounds since the company’s inception in 2011. Stripe was also an active venture investor in other startups, but we suspect that there will be fewer such flutters in the future.

Stripe volume was reported to be north of $800 billion in 2022, but there is no public confirmation of the firm’s revenue or profitability -- unless you have special access to the company. Given the sharp decline in revenue across the fintech space, no surprise that industry publications say that Stripe burned through hundreds of millions in cash in 2022.

Bloomberg (2/16/23) reports that Stripe lost $80 million in 2022, but CEO Patrick Collison is guiding investors and the media to a $200 million profit in 2023. Really? Selective disclosure of material financial information ring a bell?

Stripe currently employs around 3,500 worldwide, but this figure varies depending on the media source. If we use the fintech premium average cost per full time employee (FTE) (~$240k) in line with SQ and GS, you’re looking at a billion annually in direct personnel costs alone.

Like many tech firms, Stripe was frantically hiring in 2020-2021, but that process ended in November when co-founder Patrick Collison laid off 14% of the company’s staff. Again, reports of the scale of the pre-Christmas slaughter at Stripe vary.

Of note, Stripe apparently engages “in SMB lending,” an activity like that of AFRM and UPST with a very different funding and risk profile to merely facilitating payments. We can’t wait to see some financials for this company. If Stripe is dumb enough to compete with ABS customers, they deserve the same fate.

More, should Stripe in fact require several rounds of additional funding to get from unprofitability to profits and stability, that is a worry. The focus of recent fintech entrants to ensuring the profitability and convenience of insiders, makes these firms less attractive as investments. In the present financing environment, Stripe would be lucky to get a deal done at $55 billion. But let us not be too harsh just yet.

On the one hand, Stripe is the plat de jour among early-stage funds. These funds need a “next thing” in payments to go into the portfolio and Stripe fits the bill. Stripe figures in breathless descriptions of the industry opportunity that include SQ, Visa (V) and PayPal (PYPL). Yes, the barriers to entry in payments, especially owning and operating your own rails, are high. So is the level of competition from nonbanks such as Stripe, newly minted banks such as SQ and PYPL, and legacy moneycenter banking firms.

Many of the newbies in fintech like SQ, for example, are still trying to grow into true profitability and stability. None have a significant bank deposit base or the sort of low funding costs that true retail deposit funding provides to managers and shareholders. Notice that Stripe just announced a new scheme to partner with WPP (WPP) to “to develop new commerce and payments solutions on behalf of joint clients.” Really? Whenever we see operators of new businesses spending happy time with public relations firms, we take that as a sign of weakness and coming instability.

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