Demystifying Private Market Valuations: Stripe
What we can tell about Stripe’s valuation from its top customers and its publicly traded peers
Stripe is one of the most highly valued private startups yet to IPO. In March 2021, the company raised a Series H financing that valued the company at $95 billion! There were reports in June of that year that Stripe shares sold on the secondary market at an implied valuation of $152 billion! It ranks second only to Bytedance (the developer of Tik Tok) as the largest venture-backed startups in the world. It is the largest private fintech.
But something curious has happened in recent months. In July 2022, Stripe announced it had reduced its internal valuation to $74 billion. And earlier this month, the company reduced its valuation once again to $63 billion — now 33% lower than the company’s record-breaking $95 billion Series H valuation.
What is happening here?
In this post, with the help of Argenys Morban, we will unpack a few key topics to help provide some clarity into Stripe’s latest valuation announcement.
- A quick overview of Stripe’s business model.
- A detailed bottoms-up estimate of Stripe’s 2022E revenue (using a Growth Endurance model).
- How companies most like Stripe are valued in the public markets.
1. Stripe’s Business Model
Stripe is best known for being a developer-first platform, famously delivering its payments processing infrastructure to businesses with just 7 lines of code. Stripe has since invested heavily in R&D, expanding well beyond payments processing into areas such as Treasury, Fraud & Risk Management, Card Issuance, and Lending.
But at its core, Stripe is a Payment Facilitator, or PayFac (which btw are amazing, as I discussed in an earlier post). It provides online merchants of all sizes the technology to accept digital payments. In exchange for processing payments on behalf of the merchant, Stripe generates revenue by taking a small percentage of each payment.
GMV > Gross Revenue > Net Revenue
In 2021, Stripe processed $640 billion in payments volume. Payments volume is often referred to as Gross Merchandise Value, or GMV, because it represents the gross value of services or goods sold by the merchant. So, if I were to order $25 worth of food on DoorDash, then Stripe would process my $25 payment and count it as $25 of GMV.
Stripe’s gross revenue is a fraction of its GMV. Stripe’s standard fee structure is 2.9% + $0.30 — in other words, 2.9% of each dollar processed plus $0.30 for each transaction. This fee structure (which is likely discounted for its larger customers) generates most of Stripe’s gross revenue. Stripe then pays a large portion of this gross revenue to the card networks, banks, and acquirer processors, leaving it with its net revenue.
In 2021, Stripe generated Gross Revenue of $12 billion and Net Revenue of $2.5 billion — implying a net take-rate of roughly 39 bps.
For more detail on each of these parties, check out my earlier post on the payments value chain.
2. Estimating Stripe’s 2022E Revenue
Because Stripe is not a public company, its financials are largely a mystery so we have to be a little creative with how we estimate Stripe’s forward revenue.
First, let’s cover the concept of Growth Endurance, which can help to provide a framework for thinking about growth rates.
Growth Endurance
First introduced by well-known SaaS VC, Bessemer Venture Partners, in its substack post from June 6, 2022, Growth Endurance is a measure of:
“the retention of growth that cloud companies experience from one year to the next. Mathematically, it is current year growth rate divided by last year’s growth rate.”
Said differently, it is how much growth we can expect from a company, relative to its prior year’s growth. For example, a company with Growth Endurance of 100% is expected to grow just as fast this year as it did last year.
What Bessemer highlighted in its substack post was that, as of June 2022, the universe of publicly traded cloud companies was expected to exhibit, on average, Growth Endurance of 50%, which was meaningfully lower than the historical average of 80%. Bessemer demonstrated this insight using the following regression analysis, where the blue dotted line is indicative of 100% Growth Endurance and the orange dotted line is a regression of the cloud companies’ past and future growth rates.
Insight: The slope of the line, of 0.5, indicates a Growth Endurance of 50% — a signal that publicly traded cloud companies are expected to grow half as fast as they did in 2021.
So, what does this mean for Stripe?
If Stripe’s revenue were highly correlated to the publicly traded cloud companies in Bessemer’s analysis, then it might suggest that Stripe could experience a drop in its own growth rate. Given Stripe’s growth of 56% in 2021 (from net revenue of $1.6 billion in 2020 to $2.5 billion in 2021), applying a Growth Endurance of 50% would suggest that Stripe’s growth could drop to 28% in 2022.
But, what if we dug a little deeper? What if we analyzed a sample of Stripe’s actual customers to find a Growth Endurance estimate that would better represent Stripe’s actual growth? After all, given Stripe’s revenue model, which generates revenue only when its customers generate GMV, Stripe can therefore grow only as fast as its customers grow.
So that’s what we did.
A Bottoms-Up Analysis of Stripe’s Top Customers
Let’s take the example of DoorDash once again. Based on DoorDash’s 10-K, we know that DoorDash “primarily rely on a third-party payment processor, Stripe, to process payments made to merchants and Dashers.”
DoorDash grew GMV by 70% in 2021 to $42 billion. So, we assume that Stripe processed a majority of the $42 billion of payments for DoorDash in 2021. If we look at Wall Street analyst estimates, the consensus estimate for DoorDash is to generate GMV of roughly $56 billion in 2022, which would imply 34% growth from 2021 — this implies a Growth Endurance of 48% for DoorDash.
Based on public disclosures, news articles, and Stripe’s website, we gathered a list of 15 of Stripe’s more well-known customers. As with the DoorDash example above, we gathered financial information and Wall Street estimates for each of the 15 customers and made certain assumptions in order to estimate each company’s contribution to Stripe’s GMV in 2020, 2021, and 2022. We then built a regression chart (similar to Bessemer’s), with 2020–2021 GMV growth on the x-axis and 2021–2022 GMV growth on the y-axis. The resulting regression analysis exhibits a decent correlation (with an r-squared of 0.49) and, more importantly, the slope of the line indicates an average Growth Endurance of 28%.
Conclusion: If Stripe were to exhibit a 28% Growth Endurance in 2022 (represented by the sample set of 15 customers), then Stripe’s revenue growth rate could decline from 56% to 16% — and Stripe’s revenue would grow from $2.5 billion in 2021 to $2.9 billion in 2022.
3. Valuation of Public Payments Companies
The public comp set — or the publicly traded companies most like Stripe — includes the likes of Adyen and PayPal. Their Enterprise Values (or EV) are typically expressed as a multiple of net sales, or EV/Sales. As of January 27, 2023, these companies were valued at an average multiple of 10.2x 2022E Net Sales. At 28x, Adyen boasts the highest multiple in the group and is the only company with a multiple higher than the average.
Conclusion: Assuming Stripe hits $2.9 billion of Net Sales in 2022, Stripe’s recent re-valuation of $63 billion implies a 21x multiple of 2022E Net Sales, bringing its valuation back into the relevant range of its peer group. Stripe’s Series H valuation of $95 billion was completed during the bull market run in 2021 and it appears that the company’s recent 409A valuations acknowledge the broader (and fintech) market’s valuation reset over the past 12 months.
With Stripe’s public listing now anticipated in the next 12 months, its valuation will likely be a hotly debated topic. The market eagerly awaits any additional insight into Stripe’s 2022 financials, but if a public listing is imminent, we may all have to wait until an S-1 is filed. In the meantime, if you’re interested in letting me know your thoughts, just message me!
Note: Assumptions based on imperfect information
The analyses presented above are only estimates and are predicated on several assumptions, not to mention publicly available (but far from perfect) information. In order to be complete, it’s only fair to list some of these assumptions, which, if incorrect, could materially change the outcome of these analyses.
- In recent years, Stripe has invested heavily in software-oriented products, the revenue from which may outpace the growth of its core payments business. To the extent software-oriented revenue is net new and not captured by the Growth Endurance estimate, our analysis would underestimate Stripe’s 2022E revenue.
- The sample set of 15 customers collectively account for an estimated 32% of Stripe’s total GMV of $640 billion in 2021. So, the Growth Endurance estimated by our sample set may over- or under-represent the true Growth Endurance Stripe will achieve in 2022.
- Stripe may process a higher or lower percentage share of each customer’s GMV from one year to the next. To the extent this percentage increased or decreased in 2022, our Growth Endurance estimate may under- or over-estimate Stripe’s growth in 2022, respectively.
- Stripe exhibits stronger net take-rates than some of its competitors and a simple comparison of valuation multiples may not take this, or other important factors, into account.
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Disclaimer: The views expressed here do not necessarily reflect those of my employer.
