It’s Squarespace direct-listing day, and the SMB web hosting and design shop’s reference price has been set at $50 per share.
According to quick math from the IPO-watching group Renaissance Capital, Squarespace is worth $7.4 billion at that price, calculated using a fully diluted share count. The company’s new valuation is sharply under where Squarespace raised capital in March, when it added $300 million to its accounts at a $10 billion post-money valuation, according to Crunchbase data.
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The company’s reference price, however, is just that: a reference. It doesn’t mean that much. As we’ve seen from other notable direct listings, a company’s opening price does not necessarily align with its formal reference price. Until Squarespace opens, whether it will be valued at a discount to its final private price is unclear.
While the benefits of a direct listing are understood, the post-listing performance for well-known direct listings is less obvious. Indeed, Coinbase is currently under its reference price after starting its life as a public company at a far-richer figure, and Spotify’s share price is middling at best compared to its 2018-era direct-listing reference price.
This morning, we’re going over Squarespace’s recently disclosed Q2 and full-2021 guidance. Then we’ll ask how its expectations compare to its reference price-defined pre-trading valuation. Finally, we’ll set some stakes in the ground regarding historical direct-listing results and what we might expect from the company as it adds a third set of data to our quiver.
This will be lots of fun, so let’s get into the numbers!
Squarespace’s Q2
Per Squarespace’s own reporting, it expects revenues between $186 million and $189 million in Q2 2021, which it calculates as a growth rate of between 24% and 26%. That pace of growth at its scale is perfectly acceptable for a company going public.
For all of 2021, Squarespace expects revenues of $764 million to $776 million, which works out to a very similar 23% to 25% growth rate.
In profit terms, Squarespace only shared its “non-GAAP unlevered free cash flow,” which is a technical thing I have no time to explain. But what matters is that the company expects some non-GAAP unlevered free cash flow in Q2 2021 ($10 million to $13 million), and lots more in all of 2021 ($100 million to $115 million).
So, by what could be called the non-GAAPiest of non-GAAP profit metrics, Squarespace expects its profitability to improve during the year. That’s good.
Regardless, with $770 million in (midpoint) 2021 revenues and a growth rate of 24% (midpoint), we can do some market-comping. Digging through the Bessemer Cloud Index companies, we can see that Anaplan has a similar growth rate (24.7%), if a lesser free cash flow margin (-2.1%, trailing). And it trades for an enterprise value of 15.4x its current annualized revenues.
We don’t have a correct enterprise valuation for Squarespace; we’ll need to wait for its next set of earnings to do that math. And we are considering its expected 2021 revenues instead of rocking ahead with Q2 forecasts, annualized, because that seems to be a bit much. But 15x $770 million does tell us that it isn’t hard to see Squarespace worth more than $10 billion in today’s market.
That makes its reference price a bit of a mystery. Why does it feel so low compared to what the company might be worth? Here’s one idea.
The direct-listing trap
The Spotify direct listing was a big fucking deal, if I recall correctly. Not only because it was hotly anticipated and a bit of a gamble. Going public using less traditional methods was not always as in vogue as it is today. Recall that Google went public using a reverse-Dutch auction, something that went so well no one ever tried it again.
Spotify’s first day was fine, with its stock trading above its reference price. As Reuters reported at the time:
Spotify shares opened at $165.90, up nearly 26% from a reference price of $132 set by the NYSE late on Monday. The stock ended the session at $149.01, valuing the world’s largest streaming music service at $26.5 billion.
Spotify went on to trade under its reference price in 2018 and 2019 and 2020. Only recently did it appreciate materially above that initial marker, though it has been busy giving back those gains in recent trading sessions.
What’s Spotify worth today? $214.39. At the time it went public, the Nasdaq Composite was around 5,800. Since then, it has more than doubled to over 13,000 today. So, Spotify has proven to be a pretty lackluster investment since it direct listed. (To be clear, I love the product, and am writing this to you with Spotify on in the background; that doesn’t mean that the company has produced even better-than-market returns since its flotation.)
Coinbase is a company on which we have less data because its direct listing was 28 minutes ago. However, from a direct-listing reference price of $250, Coinbase shot as high as $429.54 since its recent debut, per Yahoo Finance. Today it’s worth $217.64, or less than its reference price.
Past is not always prelude, and Squarespace’s reference price may be sufficiently conservative as to allow the company to bid it goodbye from today onward. But to provide the small idea we promised before about why Squarespace’s direct-listing reference price feels low, our answer is that it gets to set a floor for its future value to be measured against; lower is maybe better?
Our concern about Squarespace staying above its direct-listing reference price is because the performance of super-unicorn direct listings so far has been not that great compared to their reference prices and early post-listing highs. Which is surprising, frankly. Both Spotify and Coinbase are tremendous businesses, having taken a contrarian perspective on their core markets (music, money) and managing to convert that viewpoint into huge revenues.
So why have they been such lackluster stocks thus far? I have a small hypothesis. Feel free to disagree over on Twitter:
- The unicorns able to direct list are the most cash-secure; that means that they are either hugely capitalized or cash-efficient.
- In either of those two cases, it’s likely that most of their value has been consumed (earned?) by the private markets.
- Thus, when they begin to trade publicly, they are the victim of their own hype, crossed with the fact that their key growth period is behind them.
“Hugely capitalized” implies a very high valuation because unicorns are able to juice investors for access to their equity while private in today’s cash-rich investing world. Cash-efficient generally implies slow, or rapidly slowing, growth among unicorns. And thus maybe, maybe it’s not that surprising that we’re seeing direct-listed companies not scale the heights after they list?
Perhaps they are just not that sort of company anymore? Which means that the reasons they can direct list are why, when they do, they don’t hold onto gains as we might expect?