CNBC’s Disruptor 50 came out on June 16. The number one disruptor was the San Francisco-based digital payments platform, Stripe, up 12 spots from 2019. If you already follow Square (NYSE:SQ), you’re probably familiar with the not-so-new startup. Currently, a private company with plenty of financial backing, if you got the chance to invest in Stripe, should you make a bet?
Here are my two cents on both sides of the argument.
It’s a Fintech Destined for Greatness
Since Stripe was launched in 2010, founders Patrick and John Collison have secured $1.6 billion in funding for its global growth. That funding values the decade-old company at $36 billion. Of course, it doesn’t mean very much if those investors can’t exit their investments.
So, either Visa (NYSE:V) or Mastercard (NYSE:MA) buys it, or it goes public. It’s a little too big for equity crowdfunding.
Like PayPal (NASDAQ:PYPL), Stripe charges a swipe fee of 2.9% plus 30 cents per transaction. It’s a volume business. Naturally, as Square has done, Stripe created Stripe Capital last September, so that it could lend money to its small business customers. The loans get repaid through a percentage of the small business’ daily sales.
Given the novel coronavirus has dealt a significant blow to small businesses everywhere, survival capital is in substantial demand. Further, businesses of all kinds and sizes have moved online to avoid becoming irrelevant in a post-Covid-19 world. If you’re not accepting payments online, you’re ready for the scrap heap.
Here’s what John Collison had to say about its software in April, after closing $600 million in new funding:
“People who never dreamt of using the internet to see the doctor or buy groceries are now doing so out of necessity. And businesses that deferred moving online or had no reason to operate online have made the leap practically overnight,” Collison said in a press release. “We believe now is not the time to pull back, but to invest even more heavily in Stripe’s platform.”
The move to e-commerce in recent years has made Stripe the most valuable private fintech company in the U.S. Covid-19 has only cemented its valuation. The only problem is the Collison brothers don’t appear to be in any hurry to take the company public.
“Stripe is not done and we have no plans to go public. We’re still heavily invested in growing the business, investing in international expansion. It still feels like a startup, new products being created all the time. There’s still a ton left to do. We’re quite early in the trajectory of how we will be pretty meaningfully changing how the online economy works,” John Collison stated in a February 2019 interview.
Despite all the prognosticators calling for Stripe’s impending initial public offering, the company is taking its time to get things right before offering stock to the public. And why not? It’s got a Who’s Who of venture capital investors. However, if you’re really desperate, you can get a piece of the action pre-IPO through EquityZen or Forge Global.
Stripe’s Valuation Is High
When Stripe announced its $600 million in new funding in April, it reminded investors that it had $2 billion in cash on its balance sheet to continue to invest in its platform. That’s a valuation of 18 times its cash on hand.
By comparison, Square is valued at 14 times its trailing 12-month cash of $3.43 billion while PayPal’s price-to-cash multiple is 20-times cash on the balance sheet.
Now, I have no idea what Stripe’s revenues are, but I do know that Square and PayPal’s revenues in the trailing 12 months were $18.3 billion and $5.1 billion, respectively. Since the two trade between 10- and 11-times sales, if Stripe’s valuation were similar, it would have revenues in the neighborhood of $3 billion to $4 billion.
The big difference between Stripe and Square is that Square generates free cash flow; Stripe likely doesn’t. Other than that, the two fintechs are relatively similar.
Should You Invest in Stripe?
While I’m a big fan of Square, I did say in mid-May that it might be time to take profits, because the company was sure to see poor quarterly results over the remainder of 2020. Since then, the stock’s value has increased by more than 39% to over $100.
With Covid-19 looking as if it’s ready to inflict some more pain on the nation, I wouldn’t be surprised if Square fell back into the $80s over the summer, but once bitten, twice shy. If you can hold for three to five years, Square’s a buy even at $100.
As for Stripe, I believe the same caveat applies. If you can hold for at least three to five years, I would invest in Stripe, whether through a future IPO or one of the secondary markets mentioned earlier.
As fintechs go, Stripe lives up to its billing.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
Investing through equity and real estate crowdfunding or asset tokenization requires a high degree of risk tolerance. Despite what individual companies may promise, there’s always the chance of losing a portion, or the entirety, of your investment. These risks include:
1) Greater chance of failure
2) Risk of fraudulent activity
3) Lack of liquidity
4) Economic downturns
5) Dearth of investor education
Read more: Private Investing Risks
