Unless you’ve got your hands on a crystal ball, it’s hard to know when a company will announce an initial public offering (IPO).
Sure, CEOs will hint at “going public in the near future” during interviews here and there. But until a prospectus is issued, a lot is just hearsay.
Nevertheless, the market loves to speculate on when private companies will go public. And the humming and hawing aren’t only based on a company’s performance and age. When firms that are in fashion list on the market, a lot of investors try to get a scoop from the pie. For the private companies watching from the sidelines, it’s sometimes too tempting to not get involved themselves.
And while last year was the biggest ever for IPOs, 2022 has been fairly dry so far. Dealogic reported 21 firms garnered $2.3bn from IPOs by mid-February. By that point last year, 59 firms had raised over 10 times that - a lofty $24.8bn.
This month has also started with a two-week dry spell for IPOs in the US. Not a single company hit the stock exchange in a lull not seen since 2009.
It’s been a slow start to the year, to say the least. Omicron, looming interest rate rises and Russia’s invasion of Ukraine have fostered stormy seas for any firms which may have been considering a 2022 IPO.
Still, a hushed first quarter doesn’t guarantee an equally quiet rest of the year.
It’s important to highlight that this is not a suggestion or recommendation that you buy or sell any of the securities or IPOs mentioned. IPOs aren’t an immediate sign to buy, so make sure you’ve researched the company and read its prospectus before you decide to invest. And if you’re wondering if IPOs are a good investment for you, we’ve got a guide for that.
Remember that everyone has their own goals and unique financial circumstances. These, along with your tolerance for investment risk and time horizon, should inform the mix of assets in your portfolio.
Our guides on investing in the stock market might be able to help make that blend a bit clearer for you and our article on how to invest in stocks is a great starter for first-time investors. And if you are still unsure of how to pick investments speak to a qualified investment advisor.
Stripe is America’s highest-valued private company. And that title is a major reason the company’s received rampant speculation over when it will IPO.
Generally, a company’s size can be a decent indicator of whether it’s ripe and ready to go public. For starters, many stock exchanges have rules determining a firm’s minimum market value for listing.
Larger companies are also more likely to have the resources needed (both administrative and financial) to undergo an IPO.
These companies might have a level of market awareness that smaller firms don’t. So if they go public, they might already have a pool of prospective investors. Size isn't everything though. And increasingly, firms are staying private for longer.
Often, leaked information ends up being the best hint a company will soon go public. Whether or not these claims are to be believed is anyone’s guess. But last July when Reuters reported Stripe hired a legal adviser in preparation to float, headlines insisted it would soon list.
Aside from those whispers, Stripe hasn’t made an official comment about its decision to IPO, let alone indicated any timeline of intent to do so.
Stripe is a payment processor used by businesses to accept customer payments made with credit or debit cards. It has a software arm, which companies use for online payments. It also has a point-of-sale division, which sells card readers for in-person payments. Then there’s its range of ancillary business units like billing, invoicing and tax automation services.
When the pandemic began, digital transformations were kicked into overdrive. Changes that would have taken two years pre-pandemic were instead taking firms two months. That meant businesses that hadn’t yet dipped their toe in the online pond were now trying to dive in, fast.
Stripe was a huge winner from the race. The firm gained over 300,000 new clients throughout Covid. With its rising popularity came a lot more eyeballs on the firm, and investors were eager for a bite of the firm’s perceived success.
But the thing about a private company is it’s hard to know exactly what that success looks like.
A company’s valuation, in theory, gives an investor information about how the business runs today and what to expect for its future. It’s one of the best tools for predicting the return you might earn on an investment. Without a proper valuation, it’s hard to know whether the share price you’re buying a firm at is a good price.
A private company’s valuation is usually determined when it’s seeking funding. According to Stripe’s most recent round of funding, its valuation is $95.6bn.
According to Tech.co, businesses usually raise around £20m in their Series C. Stripe raised a whopping 6,900% more than that, nearly $1.8bn (£1.4bn) in its own round.
Many private companies consider going for an IPO after their Series C. Stripe being several letters beyond that has only amplified the gossip its IPO must be around the corner.
But so far, it seems pretty happy to continue on the private investment train. It’s raised $2.2bn from 39 institutional investors over the course of 10 equity funding rounds since 2010. It’s now the third-highest venture capital (VC) backed company in the world.
Though something important to remember here is Stripe’s valuation when raising money from private equity and venture capital won’t necessarily be the valuation used to price its shares if it goes to market.
Still, it's useful getting a sense of some of the methods used to value a private company. One popular way is to compare certain metrics of the privately-held company in question to a similar publicly-traded company.
Stripe is often compared to PayPal and Block (formerly known as Square). While they’re all payment processors, each firm has its own niche and additional revenue streams. Stripe’s investors would have probably taken stock of the revenue at each of those firms.
PayPal has plenty of other sales channels which seem to have provided a larger overall base of revenue and shelter from the post-pandemic dip happening with Block. Stripe seems to carry more similarities with Square’s leaner business model, which could indicate the firm is also in for a similar turn in demand.
But the success or failure of one competitor is no promise of what’s to come for another.
Other valuation methods include discounted cash flow (DCF) analysis, which is also known as a company’s intrinsic value. In the words of good ol’ W Buffett, it’s the “present-value estimate of the cash that can be taken out of a business during its remaining life”.
But that’s of course an estimate, not a precise figure. And two people looking at the same facts can come up with two very different numbers.
That’s why a valuation isn’t set in stone, and it’s never a promise of the value you could get as an investor.
Deliveroo was valued at $6.8bn in January of 2021. That month, the food delivery firm raised $180m in its Series H funding round. A few months later, Deliveroo floated on the London Stock Exchange (LSE) at a valuation of £7.6bn (around $10.5bn as of March 31 2021).
That’s a large jump in valuation over just a few months. It goes to show the different factors involved in each type of valuation, as well as the role of the auditor or underwriter in the process.
And the people behind the valuation can have a major influence on what that number looks like.
When a company wants to go public, it’s looking to get the highest valuation possible. After all, that means it can raise more money by selling less of its stock.
The investment banks underwriting this process also benefit from a larger valuation. These firms walk away with more profit the bigger the firm’s IPO is. JPMorgan and Goldman Sachs made record-high revenues during the 2021 IPO boom.
Enter: a clear conflict of interest.
Share price won’t always indicate the value you’re getting (or not) from the business underneath. And the odds of that discrepancy can be a lot greater when investing in an IPO.
The massive fluctuations in share prices during the short period post-IPO shows the market reacting to try and correct for mispriced shares. Volatility in excess of 10% in both directions is likely much more to do with a firm being incorrectly valued as opposed to its performance actually changing that drastically.
2022 began with huge valuation shifts for many of the biggest names in tech. Largely, the market looked to be correcting vastly overinflated share prices.
When tech companies witnessed flabbergasting sales growth during lockdowns, the market seemed to act as if the trend would never end. But assumptions that such growth was sustainable were shortsighted.
It’s not easy to predict growth at the best of times, but it’s particularly challenging for young tech companies. Especially for those only a few years old, who can hardly separate ‘normal’ sales performance from pandemic-related, one-off successes.
So, as the market tried to find a balance, it’s taken a slice off many of these companies’ projections. Since the start of the year, the world’s 10 biggest tech companies have lost $2tr in value.
But what does the wider sentiment shift for tech companies mean for Stripe? Well, if it were to go public today, it could be walking onto a slightly less welcoming stage. Investors might be more sceptical about what’s ahead for the firm.
Notably so since its business model depends on growth in digital transactions. And it turns out, a permanent shift from brick-and-mortar to e-commerce may have been somewhat overstated. The British Retail Consortium (BRC) reported 40.8% of non-food retail sales were online this February. Last year, that figure was a much loftier 65.4%.
Of course, that was a period when rampant lockdowns made online shopping a necessity. And the overall environment also explains how Stripe reportedly mustered 2020 revenue growth of 70% up to $7.4bn.
Naturally, Stripe’s customers would have seen an influx of shoppers making online payments. Accordingly, its transaction fees and commission charges would have skyrocketed.
While it’s highly believable the firm would have pulled in substantial growth throughout 2020, it’s important to note that in the words of the Wall Street Journal, that figure is according to “people with knowledge of the company’s finances”.
The company has never issued an official set of earnings, meaning aside from headlines here and there, we only have a very tiny peephole into what’s happening behind Stripe’s doors.
Given Stripe is still privately held, its shares aren’t available on a public stock exchange. Though, technically there are sometimes ways to access shares of privately held companies before they IPO.
One way is through investment trusts. They can invest in privately held companies, and so offer investors access to private companies through a public stock exchange. For instance, Scottish Mortgage Investment Trust (SMT) has a holding in Stripe. As of February 28, the investment made up 1.5% of the Trust’s entire portfolio. It’s also invested in Ant Group, an Alibaba affiliate company and the biggest privately held company in the world. Though an investment in SMT is by no means just an investment in Stripe, so it’s important to look at the fund’s holdings and understand what you’re investing in before you buy or sell shares.
Another way could be by buying shares off early investors and employees who have sold their shares in turn. Not all companies offer this. And usually, when these shares are placed for sale, they’re only available to qualified investors. They also tend to include a minimum investment value between $10,000 to $100,000.
These pre-IPO marketplaces typically have a set of criteria for which investors are eligible too. So not all investors will be able to access a firm’s shares this way.
If Stripe eventually announces it will IPO, retail investors might be able to subscribe to the offering before it takes place. Theoretically, you could then invest for the same price and at the same time as institutional investors in the primary market.
That price would be determined by Stripe and an underwriter, who would decide the number of shares to issue and at what price. The underwriter would try to work out the demand for an IPO by finding investors who’ve expressed interest.
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 potential opening price for its shares.
Sometimes, a third-party firm provides retail investors access to invest at this stage. But not all companies IPOing will choose to partner with this type of agency. And if they don’t, as a retail investor, you may need to wait until the company’s shares hit the secondary market.
At this point, you would be buying shares after Stripe’s IPO. But a major benefit to investing post-IPO is you have a lot more information about the firm itself, as well as the market’s reaction to its IPO price.
As we saw earlier, when firms first go public, their share prices can be especially volatile. 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 to meet your personal financial goals.
If Stripe does IPO on a public stock exchange, you will be able to buy and sell shares on the secondary market in the same way you do with other publicly traded firms.
Given it’s an American firm, it would likely list on a stock market like the NASDAQ or NYSE. While the location of a company’s headquarters won’t dictate the country where it lists, the US tends to be a popular choice for IPOs. Last year was the country’s biggest for new IPOs.
Source: StockAnalysis annual IPO data.
The NASDAQ is often the exchange of choice for tech companies still in their infancy relative to many other public companies. It’s typically a cheaper option than the NYSE too, so companies still in growth mode could be extra appreciative of its cost-saving potential.
Regardless of the stock exchange chosen, if Stripe went public in the US, you’d still be able to invest from the UK.
The process for buying Stripe’s shares would be similar to that of buying other US shares.
You’d first choose the best brokerage platform for your investing habits and account needs. Once you open your account with your broker of choice, you would then need to fill out a W-8BEN form.
It’s a tax document confirming you aren’t a US tax resident, which can reduce the amount of US dividend tax you pay. With Freetrade, you can do this in-app. And after that, you’d be able to buy and sell US shares including Stripe, if it IPOs.
Until a company submits its prospectus and announces intent to float, you can’t be sure if or when it really will go public. But companies tend to throw out a hint here and there, just to keep us on our toes.
Our guide on IPOs to watch in 2022 highlights a few firms that could be worth a watchful eye over the coming months. And our IPO calendar highlights firms that have announced the date at which they’ll go public. It also includes the names of the companies which have recently hit the market.
But remember that a private company going public doesn’t necessarily mean it's a worthy investment. While there are rigorous rules and criteria required of firms that IPO, an IPO doesn’t mean that firm is fully vetted either.
And while IPOs can offer you an early access point to a company just getting started on the market, historically, their valuations drop in the months that follow.
You wouldn’t just stroll onto a used car lot and pick the shiniest, newest one of the bunch.
You’d want to take a car or two out for a whirl, and you’d surely have some questions to ask.
How old is the engine, did the old owner keep up with maintenance? Without knowing what you’re investing in, you risk investing in a lemon. So don’t rush the process. If you’re in it for the long haul, a good investment today should still be good tomorrow.
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