Companies that rode COVID-driven demand for their products during the first years of the pandemic are seeing their fortunes come back to Earth. Whether some of the biggest names in the cohort have a next act is becoming an open question.
Even more, could it be that companies that fell out of favor due to COVID-induced shifts in the economy are best prepared to excel this year?
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It’s never fun to sit around and list bad news. But the tally is starting to pile up: Today’s value of Robinhood, the consumer equities and crypto trading service boosted by the pandemic’s savings and investing boom, is worth just over $10 per share, far from its 52-week high of $85 per share. Coinbase, another company that saw demand for its fintech trading services soar during COVID, is worth just over $130 per share today, sharply lower than its $368.90 per-share 52-week high.
The list goes on: Instacart’s growth is slowing after a torrid period of expansion, leading to a valuation reset at the company. And recently, the Financial Times reported that the value of Hopin’s stock is off sharply on secondary exchanges, and some externally visible data could hint at a demand decline. The company executed layoffs earlier this year.
Seeing a rush of growth is never unwelcome at companies. And such a boom is especially coveted by companies usually valued more on growth than profitability. (Startups, in other words.)
That which has gone up is, it seems, coming down. Let’s talk about it.
Risk tolerance
The global economy is taking hits from many sides at once. Inflation concerns in some markets are stacked against growth woes in others. Geopolitical tensions are running high as the United States and China spar over trade and hot-button issues like the right of Taiwan to self-govern. Russia is busy digging into a quagmire in Ukraine, disrupting the energy market while supply chains creak and jam — not to mention the catastrophic loss of life. COVID lockdowns in China are also causing fears of more supply snarls, or worse.
The ebullient mood of late 2020 and most of 2021 this is not. And startups seeing their growth rates decelerate as their pandemic-led boom in demand fades, therefore taking stick twice at once.
For Hopin, the scale of damage is unclear. The company’s share price — off around 40% in secondary trading, per FT reporting of third-party data — is driven by near-term sentiment and what could be a lack of understanding of its business nuance. So we are stuck with modest numbers, things like Hopin reaching $100 million worth of ARR last August, up from $70 million in March of the same year, per CNBC reporting.
From those numbers, we can see that Hopin rapidly scaled to near-IPO size. That unlocked huge capital resources, including $400 million last year in a single funding round. The company likely still has a good amount of cash on hand to fund its operations. The question is what it is worth in a slower-growing state.
Recall that the faster a company is growing, the more it is worth per dollar of revenue that it generates today. Hopin, growing quickly last year, was able to raise at very rich multiples as investors expected its growth to keep zooming along. That pace has since, it appears, slowed.
So let’s say that Hopin reached $125 million in ARR last year and will grow 50% this year. (These estimates may prove generous, mind, but anything less felt apocalyptic, so here we are.) That would put the online events company at a $187.5 million ARR pace at the end of 2022. Presuming no formal repricing of the company, at its last valuation of $7.75 billion, the online events unicorn would be worth 41.3x its annual recurring revenue. That’s a bit rich.
At a 40% discount, however, the company’s multiple dips to a far more palatable 25x at that end-of-year ARR estimate. That’s nearly correct, I reckon. This is the tight spot that Hopin finds itself in — stuck between a valuation it now must defend in difficult conditions and its need to grow quickly, which could limit its cash runway.
In a perverse way, Coinbase and Robinhood are lucky that they went public when they did. They got to debut when market conditions were hot and could float at attractive levels. What has happened since is out of their control, but as they are repriced daily, they don’t have a huge, illiquid price tag stapled to their chest that they now have to live up to in a later IPO.
In reverse, startups that got whacked by COVID are in flying form. Toast went from being an archetypal early-COVID layoff example to a juggernaut. Airbnb had to cut staff as well, only to see its business recover.
I am not trying to say that companies would have chosen to have a tough early COVID cycle for any reason, but those that did appear to get scrappier and perhaps more efficient. In contrast, the companies that saw their fortunes turbocharge in the wake of a worldwide move to at-home work and school are coming down off a multiquarter party. And their hangover is not going to be something that a few Pedialytes can assuage.