Last night both DoorDash and C3.ai priced their IPOs above their raised ranges. In simpler terms, both companies provided the market with a target price interval. Then they both raised it and each priced higher than that raised target.
The IPO market, even as December races along and winter begins to bite, is red-hot.
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But while the new, higher valuations and strong cash hauls from their respective IPOs are great news, they each have a higher bar to cross when they begin to trade later today and over the next few weeks as the market settles on their real value.
This morning, ahead of Airbnb’s pricing later this afternoon — the home-sharing unicorn will begin trading tomorrow morning, provided all goes according to plan — let’s chat about what the markets are implying about both DoorDash and C3.ai, and what each must accomplish in the coming few quarters if they want to not only defend their newly won valuations, but take them higher.
Let’s start by calculating new valuations and revenue multiples. This will be fun!
How to keep winning
Let’s kick off with DoorDash, the larger of the two IPOs.
After raising its IPO range from $75 to $85 per share, a price point that already appraised the company far above its final private valuation, DoorDash raised its range to $90 to $95 per share. Then it priced at $102.
The company has a nondiluted valuation of $32.4 billion at that price, a figure that rises as high as $38.4 billion if you include shares that currently exist as unexercised options and the like. For a company worth just $16 billion earlier this summer, its IPO price is a coup.
Given DoorDash’s huge consumer brand, the recent IPO climate, a possibly limited first-day float and the impact of a retail-investing boom, its shares may soar today.
But to defend its new valuation, pop or not, DoorDash has a steep road ahead of it. Investors have valued the firm as if it will not only defend its 2020 growth, but that it will continue to accrete new revenues even as the pandemic subsides as vaccines roll out in 2021.
Recall that COVID-19 took an already-growing DoorDash, accelerated its revenue growth and helped it drive operating leverage against its new scale. The company’s economics seem to improve with scale, a good thing, but one that might worry the more ursine amongst us if one expects consumers to order less food when it’s safer to go outside.
DoorDash is not the only COVID-accelerated company to receive a shiny, new, larger valuation during the pandemic. Robinhood and Instacart are further examples of the trend.
But after nearly tripling in size from Q4 2019 to Q3 2020 (from $298 million in revenue to $898 million), DoorDash has an outsized bloc of growth to digest in the coming quarters. At its nondiluted IPO valuation, it has a 9.2x revenue multiple to defend, using its Q3 revenue number as the basis for an annualized run rate. That expands to 10.9x if we employ its fully diluted valuation.
Those are 2017 SaaS multiples. And they underscore why the company cannot merely defend its 2020 revenues in 2021; it will need to provide year-over-year quarterly growth even in H2 2021 when it is competing against blowout results from this year. Investors appear to be pricing that in.
If its stock pops when it kicks off today, the pressure ratchets further.
Luckily DoorDash is rich as heck, selling $3.4 billion in stock during its debut. With that war chest, it has a fighting chance. Let’s see how it opens.
C3.ai
C3.ai priced its IPO at $42 per share, above its raised IPO range of $36-$38 per share that superseded its first guess of $31-$34 per share. The pricing was a big win for C3.ai in terms of fundraising, with the company selling 15.5 million shares worth a gross total of $651 million. (Microsoft and a Koch-affiliated investing group are also putting money into the company via concurrent placements.)
Previously, the single-largest funding round that the enterprise AI unicorn had raised was worth around $106 million; C3 has never been so rich.
And it’s good, because the company’s growth has slowed in recent quarters. The discrepancy between investor enthusiasm for C3.ai equity today and its recent performance tells us precisely what investors expect: a return to growth.
The company certainly can’t complain that it doesn’t have the money needed to meet that expectation. But given what it has done in the last few quarters — namely, chug along at around $41 million in top line — I am slightly bemused by the pricing’s implied near-term investor optimism.
Certainly, C3.ai will be able to staff up aggressively and invest along multiple fronts. It now has the cash. But how fast can it really deploy the monies to ignite top-line expansion?
Investors are valuing the company at $4.14 billion on a nondiluted basis. That’s a 25x revenue multiple, using its most recent quarter to set an annualized run rate. That’s not cheap! Again, the gap between recent performance and current pricing — even before a possible first-day pop — tells us what the market expects from C3.ai.
How much growth is priced in? Companies in the Bessemer Cloud Index that have market caps of $5 billion and greater — roughly C3’s cohort — trade for an average of 25.3x times their enterprise value. That’s around what C3.ai is at today, though we’re being loose with numbers. That same cohort has a mean growth rate of 46% and a median growth rate of 30%.
So at least that fast, we reckon. If you get aggressive and use a diluted share count against a first-day popped price, presuming that happens, the company’s expected growth ramp becomes all the steeper. Not only a return to growth, then, is what C3.ai must do to defend its new valuation, but a return to quick growth to boot.
More when they trade.