Back in March 2021, online payment processing giant Stripe announced that it had raised $600 million at a $95 billion valuation. The numbers made a splash when they were made public months after the deal leaked.
That Stripe raised in early 2021 is notable. Some private companies that raised large sums of capital last year have struggled to hold onto their valuation — or even their business — in the ensuing quarters. This raises an interesting question about Stripe: Did the company raise at a price that it cannot defend, as many other startups and unicorns did last year?
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Until recently I wasn’t sure, even if I did think about the question from time to time. Happily, Stripe put out a mostly data-free 2021 update letter this month that includes just enough information for us to get dangerous with. With some creative math and, I hope, fair extrapolation, we can derive valuation calculations for Stripe that should help us better understand how well the payments juggernaut busy masquerading as a private company priced its last equity round.
All our math today will become dated the moment that Stripe drops an S-1 filing, but given the dearth of recent rumors to that end, either the company is running a quiet process or really isn’t that close.
More context for our question regarding Stripe’s worth comes from news a few weeks back: Fidelity cut its internal valuation of its Stripe stock by 9% from its 2021 level. Was that too much, too fast?
Let’s have some fun with numbers this morning. We’ll start with the company’s newly released processing volume and then get wild. Into the breach!
Is Stripe overvalued?
Stripe’s 2021 update — which you can read in its entirety here — includes the following verbiage about its historical and future growth:
Collectively, businesses on Stripe processed more than $640 billion in payments in 2021, up 60% from the prior year. (Since a lot of this came from one-time behavioral adjustments caused by the pandemic, 2022 won’t match the same level of growth.)
How kind of the company to give us so much to play with. Taking the above data in hand, and bringing to bear some of our prior reporting on the company, we can compile a list of data points regarding its processing volume:
- 2015: ~$20 billion [source]
- 2017: ~$50 billion [source]
- 2019: “[H]undreds of billions of dollars of transactions a year,” per The New York Times.
- 2020: $400 billion [2021 Stripe update]
- 2021: $640 billion [2021 Stripe update]
There are gaps in there, of course, but the dataset provides a rough picture that shows how much Stripe has accelerated its yearly adds in terms of gross processing volume. It added $30 billion between 2015 and 2017 and then went on to jump $240 billion between 2020 and 2021, or $20 billion per month.
Yeehaw.
Today Stripe has a host of products from billing and invoicing systems to checkout tech, corporate cards, working capital, and fraud detection. This is to say that when we do math about Stripe’s payment processing volume, we are describing what we believe is by far the majority of its business, but not its only money-maker. (The situation feels a bit like Coinbase, where trading revenues constitute the vast bulk of its revenues, while other efforts contribute more modestly to top-line growth.)
But we do have processing data, so we will use those figures to better understand the company. Stripe charges 2.9% plus 30 cents for each “successful card charge,” per its current pricing page. Large customers get discounts, which means that we should presume that a good portion of processed payment volume on Stripe is paying a bit less than those headline figures.
That in mind, let’s calculate Stripe’s revenues at an effective 2.5% and 3% rate — you can choose which you feel is more accurate and ignore the other:
- Stripe 2020 processing revenue at 2.5%: $10 billion
- Stripe 2020 processing revenue at 3.0%: $12 billion
- Stripe 2021 processing revenue at 2.5%: $16 billion
- Stripe 2021 processing revenue at 3.0%: $19.2 billion
Impressive, yeah? Now there is a chance that we are under-indexing on discounts and Stripe’s effective payment processing fee is more like 2%. But the above numbers seem reasonable from where I sit and are not inclusive of other Stripe incomes. When we do some valuation calculations, then, we’ll be executing conservative math; we’re de-risking the above take-rates by not counting other revenue streams, from a revenue multiples perspective.
Cool? Cool. Now here are the company’s valuations against those prices, using the company’s $95 billion price tag set at the start of 2021:
- Stripe 2020 revenue multiple range: 7.9x-9.5x
- Stripe 2021 revenue multiple range: 5.0x-5.9x
Stripe said that its growth would slow this year, but even at a 30% growth rate in 2022 and using our lower revenue figure (more simply: a lower take rate), the company’s multiple dips under 5x — and that’s before we count any revenues that are not processing-based. That’s starting to feel cheap, yeah?
To know, we need a comp. Fiserv, a public company, offers payment processing to companies large and small. It is growing far more slowly than Stripe, at just 11% in the fourth quarter. Much like Stripe, it generates the bulk of its income from payment processing. And with modest profits and slow growth, it is worth 4.2x its trailing revenues, per Yahoo Finance.
Stripe at 5x or 6x doesn’t feel expensive given its far-greater growth rate and, I would hazard, more impressive tech stack.
All this is to say that unless our general vibe when it comes to Stripe’s ability to rip revenues out of processing volume is very wrong, Stripe doesn’t look expensive at all at its current price. Even more, it could go public today and defend its final private price, likely without too much bother. It would be riskier than not to go public now, and Stripe doesn’t have to, but that its growth has effectively de-risked its valuation in a downturn is notable.
One more thing
If you are confused as to why we are discussing Stripe’s revenue multiple in single-digit terms, and not in terms of, say, a more SaaS-like number, a few things: First, processing revenue is inherently less stable than SaaS incomes, as it can vary greatly with macroeconomic conditions; the pandemic taught us that that’s not the case with software, recall.
And Stripe likely has lower gross margins than your average SaaS firm that we tend to consider when we value startups against their public comps. Non-recurring revenues, more macro instability, and lower margins mean lower multiples. This isn’t a diss, mind, but rather a reminder that even some of the best software companies won’t get SaaS multiples because they lack one or two of the key ingredients in what makes high-margin, recurring, naturally expanding software revenue worth its high price.