Humans are excitable beings.
We’re a bit like magpies in our fixation on new, shiny things. And IPOs with all their ribbon-cutting, confetti-throwing glory tend to conjure up a similar level of enthusiasm.
But frankly, they don’t always deserve our investment. When a company IPOs, its share price is especially volatile as the market reacts and tries to correct for mispriced shares. That can make investments in IPOs particularly risky, and sometimes, you’re better off waiting for those shares to course correct first.
Though that doesn’t stop us from wondering when successful or promising large companies will come to market.
Monzo’s is a highly anticipated IPO. Partly due to its large valuation (which we’ll come onto shortly), partly due to the firm dropping hints at when it could go public.
The firm was founded in 2015 as a digital-first UK bank with aspirations of challenging the industry’s status quo. Its app-only digital business model is innovative in the big picture of banking, but Monzo isn’t the first of its kind.
The firm was started by former employees of Starling Bank, one of Monzo’s biggest competitors. And Monzo’s managed to capture a fair bit of Starling’s market since its inception.
By the end of 2021, Starling had 3.7m UK app downloads while Monzo had 6.6m.
While neither digital bank has made a foray into Europe, Starling has a bit of an upper hand on Monzo if either ever decides to try.
Starling was the first digital bank to gain membership into the Single Euro Payments Area, meaning it can offer personal Euro accounts in the UK. Theoretically, this could lend it a helping hand if it eventually tried to enter the European market.
But Monzo doesn’t seem too concerned with geographical expansion for now. It’s focused on growing its UK customer base first before any large scale expansion.
Though, that’s not to say Monzo hasn’t tried to dip its toe in the waters across the pond.
In early 2021, Monzo’s CEO TS Anil told Wired the company would go public by 2023. In that same breath, he emphasised Monzo’s first goal was to launch in America.
But in a change of direction (and perhaps a realisation of the true size of the task) last October, Monzo withdrew its US banking license application. Instead, it’s choosing to build up its UK offering through existing partners.
So while you might see news of Monzo America over the next year, it’s taking a different route than in the UK.
Still, ever since it drew that line in the sand, speculation has ramped up that Monzo has IPO plans up its sleeve.
And while the firm may stay true to its word and ultimately seek public funding in 2022, the wider investment landscape might not be ideal.
As a UK firm, Monzo could choose the London Stock Exchange (LSE) as its listing market of choice. If so, Rishi Sunak would surely be thrilled to hear it. He’s been heavily pushing to transform the UK’s listing market into one that’s much friendlier towards tech companies and startups. Sunak wants to encourage these companies to come to market much earlier in their lives.
But for all his efforts, London’s IPO market just had its worst first quarter for funds raised in 13 years.
There are plenty of factors at play behind this year’s bleak figure, from worries over Russia’s invasion of Ukraine to the UK’s cost of living squeeze.
While that’s not to say the remainder of the year will be equally quiet, it’s not an ideal backdrop for a firm to raise funds in the public market.
If the market doesn’t seem likely to conjure up much investor interest, a firm isn’t as likely to IPO. The timing of an IPO will depend on the firm’s perceived likelihood of garnering the investment it wants.
The investment a company hopes to get will largely depend on its business case and how underwriters perceive its potential for growth.
In 2021, Monzo gained 5m new customers while growing customer deposits by 124% to £3.1bn. While that could be a great indicator of how the firm can scale, it seems to be struggling in generating revenue from those customers.
Excluding non-recurring costs, Monzo’s loss widened by 1% to £129.6m. Hiring was a major factor, accounting for 52.4% of its total expenses.
Monzo’s also struggled to grow net interest income, which is interest earned on the cash it holds at central banks. This decreased by 8.6% to £24.4m, with the firm pointing the finger at the year’s record-low UK interest rate.
Theoretically then, if the Bank of England (BoE) continues to raise rates this year as many speculate it will, Monzo could benefit.
Though, net interest income isn’t the firm’s crown jewel. Monzo makes the bulk of its revenue through fees and commission charges, which grew by 43.9% to £42.3m in 2021.
When Monzo customers use their cards abroad, the firm benefits from charging a premium on the exchange rate. International spending was relatively dull in 2021 with lockdowns, costly testing and passenger locator form faffs making travel a little less appealing than usual.
But Monzo’s Anil insists the tides will turn and they’ll be able to grow that revenue stream in the years to come.
He says the firm is on course to become “profitable on an ongoing basis in 2022”. But that’s no guarantee, and will depend on Monzo making more revenue from existing customers to ultimately boost its top line.
Since Monzo’s not yet profitable, the firm could decide to push out its IPO until that changes.
While lack of profitability isn’t uncommon among companies in growth mode, profits sure can make for a prettier press release and prospectus.
*Starling reports this figure for a 16 month period. Sources: Monzo, Starling, Revolut.
In fairness, Monzo’s not the only challenger bank without profit to report. While its after-tax loss is significantly larger than Starling’s, it’s still slimmer than Revolut’s. Though, Starling is likely a much closer competitor than Revolut.
That’s because Revolut’s cast a much wider net compared to its UK-only competitors. Revolut’s services are available in the US, EEA and Switzerland. So it has a much larger customer base. Though size isn’t everything, and even with nearly seven times Starling’s clients, Revolut’s customer deposits are still 26.7% lower.
What’s clear is that, although these firms might appear to bear many similarities, their business models vary.
For now, Monzo seems much more focused on growing customer deposits as opposed to its lending division. Meanwhile, loans appear to be a much more important revenue stream for Starling.
Understanding Monzo’s business model can be a useful tool for interpreting its valuation. After all, a company’s valuation should offer investors information about how a business runs today and what to expect for its future. It’s one of the best ways to predict the return you could earn on an investment.
Without a proper valuation, it’s tough to know whether the share price you’re buying in at is a good or accurate price.
When a company’s still private, its valuation usually comes from when it’s seeking funding from private equity (PE) and venture capital (VC).
Source: Monzo, Starling, Revolut and Crunchbase.
Of these digital banks’ valuations, Revolut clearly boasts the biggest valuation of the bunch.
But as we’ve seen, it’s not an apples to apples comparison, and Monzo and Starling are a closer set of competitors. When comparing the two, Monzo has more than doubled Starling’s funding rounds and its valuation as well.
While private valuations can provide useful insights, they won’t necessarily be used to price shares if a firm goes to market. That’s because a private firm’s valuation comes from raising money through PE and VC, and the people behind these valuations have a massive influence over what that number looks like.
When a company goes public, it wants to get the highest valuation possible. That way it can raise more money while selling less of its stock.
The investment banks that underwrite the process also benefit from their clients garnering a big valuation. The bigger the IPO, the bigger profit these banks walk away with. Case in point, JPMorgan and Goldman Sachs made record-high revenues during 2021’s IPO boom.
It’s a big reason why, when companies IPO, the share price doesn’t always indicate the value you’ll get.
That’s why recently IPO’d firms tend to have massively fluctuating share prices. After an IPO, the market reacts rapidly to any new information and the newly available stock tends to move around a lot.
How a company’s share price performs on its first day, week and month could vary greatly. So giving yourself additional time to assess an investment before you jump in might be a wiser way to determine the best strategy for meeting your personal financial goals.
Let’s say you decide you want to invest in Monzo after a careful assessment of the firm’s investment case alongside your own investing goals. Even though Monzo is still a private firm (meaning its shares aren’t available on a public stock exchange) you still might be able to invest.
For instance, you might be able to buy shares off early investors and employees who are looking to sell their shares in turn.
Not all companies offer this option. And usually, when these shares are placed for sale, they’re exclusively for qualified investors (typically professional or experienced individuals). There’s generally also a minimum investment requirement of $10,000 to $100,000.
So not all investors will be able to access a firm’s shares this way.
If Monzo eventually sets its IPO date, retail investors can potentially subscribe to the offering before it happens. If that happens, you can theoretically invest for the same price and at the same time as institutional investors in the primary market.
As we touched upon earlier, Monzo’s share price if it IPOs will be determined by its underwriter. They’ll also decide how many shares the firm should issue. The underwriter tries to figure all this out based on demand from investors who’ve expressed interest in a firm’s IPO.
These investors would have access to the firm’s prospectus, which includes financial statements, details about which stock market exchange it would list on, and the likely opening price for its shares.
While not all privately traded companies share their financial statements, Monzo’s investor relations page does. That means prospective investors can already check that out if they’re curious about the firm’s business model.
Sometimes, a third-party firm provides retail investors access to invest right at a firm’s IPO date. But not all firms would choose to partner with this type of agency. If they don’t, you may have to wait until the company’s shares hit the secondary market.
Once shares are on the secondary market, you’re technically buying them post-IPO. But there can be a big benefit to this, you have a lot more information about the firm and how the market’s reacted to its IPO price.
If Monzo eventually IPOs, you could then buy and sell its shares in the same way as with other publicly traded firms.
Given it’s a UK firm, Monzo might decide to list on the LSE. But as a tech company, it might be lured to the NASDAQ in the US. The American stock exchange is where plenty of the biggest tech companies are listed.
While 94% of European tech firms list on European or UK exchanges, the remaining 6% which choose the US are generally higher-valued firms.
According to Atomico, the average market capitalisation for a European tech firm is $1.6bn when it lists domestically. When European tech firms choose to list in the US, that average shoots up to $5.7bn.
Since 2000, nearly 25% of Europe’s tech unicorns (start-ups with valuations of $1bn or higher, which would include Monzo) chose to list in the US instead.
There are several reasons a firm might choose the Land of the Star-Spangled Banner.
The US has a larger base of investors, which can mean greater liquidity and lower share price volatility. The American stock exchanges can also provide greater global visibility, given they partner with media outlets for IPO announcements and investor days.
So it’s no guarantee Monzo will list in its home market. But even if Monzo lists in the US, you would still be able to invest from the UK.
If you decided to buy Monzo stock (once it’s IPO’d), the process would be similar to buying other US shares. First, you’d want to choose the best brokerage platform for your investing habits and account needs. Once you open your account with your broker of choice, you’d then fill out a W-8BEN form.
That’s a tax document confirming you aren’t a US tax resident, which usually reduces the amount of US dividend tax you have to pay. With Freetrade, you can do this in-app.
After that, you’d be able to buy and sell US shares, including Monzo if it IPOs.
Until Monzo submits its prospectus and announces it’s ready to float, we can’t be sure if or when Monzo will go public.
While it has tossed out some hints here and there, nothing’s set in stone yet. But if the firm IPOs, remember that a private company going public doesn’t automatically make it a sound investment.
Even though there are stringent criteria a firm needs to follow if it wants to IPO, publicly traded shares don’t signal a company is fully vetted. There’s a lot to consider when you make an investment. And debatably, even more so when you’re considering a firm that’s new to the market.
Frankly, when companies do IPO, there’s no reason to rush.
Sometimes, it’s just a good old fashioned case of ‘first the worst, second the best’. It’s best to take your time and fully understand the investment you’re making before you risk it all and shell out your hard-earned cash.
Walking away with a prize (even if it’s not the best of the lot) is a lot better than walking away with a loss.
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