When 2022 blindsided markets, some investors were hopeful that the Stripe IPO will help reverse the trend. But the payments software company decided to play it safe. And pushed decisions back to 2023.
According to reports by The Wall Street Journal, the Stripe IPO might not happen as the company is evaluating the merits of allowing employees to sell their shares within the next 12 months. The WSJ report citing unnamed sources mentioned that the company is not in need of capital, which is why it is considering a direct listing over a public offering by Stripe.
In its previous round of funding, the Stripe valuation stood at $95 billion. Recent reports indicate that the current valuation of Stripe might be between $55 to $60 billion. The Information noted that six months ago, its valuation stood at $74 billion.
So, why is the Stripe valuation being cut down? Will a Stripe IPO help the company with its growth plans or does it already have enough resources to go ahead with a direct listing?
In this article, we explore the length and breadth of the Stripe IPO and why a promising fintech is looking beyond a public offering.
The Stripe IPO: Will They? Won’t They?
The payment processing service helps businesses securely and efficiently process transactions.
Some experts are of the opinion that the Stripe IPO will not take place now or ever. Stripe is supposedly exploring direct listing options as it has employees and investors who would like to cash in on the company’s growth story.
The Stripe Valuation Cuts
In its last funding round in 2021, Stripe was valued at $95 billion. Investors like Sequoia and Fidelity were optimistic about the fintech company’s growth prospects even amidst market headwinds.
In 2021, Stripe’s revenue stood at $12 billion, as the market grappled with uncertainty and mounting inflation costs.
But a recent internal evaluation has shaved off nearly $35 billion off its valuation. The internal valuation is also known as 409A. It is meant to help employees by lowering the cost of their shares in the company.
The internal valuation is a standard practice that is regulated by the Internal Revenue Service (IRS) that companies are expected to do annually. But in recent times, some companies have started conducting them multiple times a year. For example, Instacart has slashed its valuation around four times since last year. The Instacart IPO was expected to take place in 2022, but has now been pushed back until further notice.
Downsizing a valuation is not cheap. Fresh 409As might cost anywhere between $1,000 to $20,000 depending on a company’s maturity. The Stripe valuation comes at a time when investors were hopeful the company would list in 2023.
As highly valued players saw their prices fall below IPO listings since the last year, Stripe appears to be adopting a more cautious approach that will benefit the company and its employees.
Stripe’s public offering
According to Enlyft, at least 263,722 companies use Stripe. San Francisco-based Stripe saw its business soar during the pandemic as social distancing measures were put into place.
The company has offered employees very little options to liquidate their shares over the course of 12 years, with each sale requiring explicit approval from the board. Employees who own Stripe shares would’ve made a greater profit if the Stripe IPO happened two years ago, when the growth forecast was better. Secondary market investors reportedly offered bids that implied a Stripe valuation of $225 billion.
Currently, the payments software firm has told employees that they are mulling over the Stripe IPO or might allow them to sell the stock. According to people familiar with the matter, the company has also approached investors like Berkshire Hathaway to raise around $2 billion in cash at a valuation of $55 to $60 billion. The money would be used to cover a tax bill that is associated with employee stock units.
Both these problems would not have existed if the Stripe IPO had taken place earlier. The company is leaning towards a direct listing, as per industry experts.
Despite optimistic market expectations, Stripe did lay off around 14% of its workforce in November 2022.
“We were much too optimistic about the internet economy’s near-term growth in 2022 and 2023 and underestimated both the likelihood and impact of a broader slowdown,” co-founders Patrick and John Collison said in November. “We grew operating costs too quickly. Buoyed by the success we’re seeing in some of our new product areas, we allowed coordination costs to grow and operational inefficiencies to seep in.”
Furthermore, shares of Stripe’s competitors like PayPal are also down, worrying potential investors. But not all is lost. On January 23, the company revealed that it will be assisting Amazon with its payments in the US, Europe, and Canada. The press release stated, “Stripe will be used across Amazon’s business units, including Prime, Audible, Kindle, Amazon Pay, Buy With Prime and More.”
The company has hired JP Morgan Chase & Co and Goldman Sachs Group Inc to explore liquidity options in the current economic climate.
For now, interested parties will have to wait quite a while for some concrete news about the Stripe IPO. Until the company decides how it wants to play the listing, investors can also keep their eyes on the Stripe valuation and ensuing changes.
