With a $20 billion valuation, payment processor Stripe Inc. is the clear leader among private U.S. financial technology startups in terms of implied value.
Stripe's valuation is now so high that it rivals tech companies even outside the fintech space. Ride-hailing company Lyft Inc., for instance, was valued at $15.1 billion in June 2018. Critics have argued that Stripe is overvalued, which seems valid based on a comparison with publicly traded payment processors. But Stripe's valuation is in the same ballpark as Adyen NV, which is arguably the closest publicly traded comparison.
In addition to its large size, Stripe's valuation is striking in how quickly it has grown. Stripe added about $11 billion in value in less than two years.
Given how little insight we have into Stripe's operations, it is tough to say whether the fundamentals justify its latest valuation. But Stripe's figure is in line with rival Adyen, which has a market cap of more than $19 billion. Founded in 2006, Adyen went public in June 2018 on the Euronext Amsterdam exchange. Netherlands-based Adyen has a global reach; the Europe and North America regions accounted for 59.3% and 25.6% of Adyen's total revenues, respectively, in 2017, followed by Latin America at 7.9% and Asia-Pacific at 6.7%.
Adyen itself seems richly valued compared to other payment processors. Its ratio of market cap to last-12-months revenues is 12.8x, versus a median ratio of 2.4x for all publicly traded payment processors in the S&P Global Market Intelligence coverage universe. PayPal Holdings Inc. and Square Inc., for instance, have ratios of 7.0x and 8.8x, respectively. Additionally, Adyen's valuation climbed quickly as a private company. Less than three years prior to its IPO, a funding round valued the company, on a post-money basis, at only $2.3 billion.
Though Stripe executives tend to avoid conversations about financial performance, there is precedent for early profitability in the payment processing startup space. Stripe is similar in focus to Braintree Payment Solutions LLC, which was founded in 2007 as a developer-focused payments processing platform and sold to PayPal in 2013 for $800 million. The company was more forthcoming about its operations than Stripe and in 2011 announced that it had been "highly profitable" since its founding.
It is worth noting, particularly for Social Finance Inc., that these valuations are based on when a company raises capital. It is possible that SoFi no longer commands such a high valuation, as its latest figure was calculated nearly two years ago, and the company's internal troubles might have exerted downward pressure. Since its $500 million capital raise in February 2017, which valued the company on a post-money basis at $4.3 billion, SoFi's future has become more uncertain with the departure of co-founder Mike Cagney, who resigned in 2017 amid sexual harassment allegations and other reported concerns among the board over his leadership. The recent IPO of digital lender GreenSky Inc. might have put additional pressure on digital lender valuations, as GreenSky's stock has tanked since it went public in May 2018.
Like Stripe, Coinbase Inc. and Robinhood Financial LLC have relatively high valuation velocities, which we define as the increase in dollars divided by the number of days between valuations. As such, they too might arguably be overvalued.
Financial data on Robinhood, like Stripe, is unfortunately scarce, but its closest comparison is likely E*TRADE Financial Corp., which has a market cap of around $12 billion. Robinhood disclosed in October 2018 that it has more than six million customers, on par with the much older E*TRADE, whose total accounts at the end of October 2018 were approximately six million, including four million brokerage accounts and 1.7 million stock plan accounts. Robinhood notably lacks commission revenue as it famously charges zero commissions for equity and option trades, whereas E*TRADE generated $441 million in revenue from commissions in 2017. Commission revenues made up about 18.6% of E*TRADE's total net revenues for the year, but even if one discounts E*TRADE's market cap by 18.6%, it comes out to nearly $10 billion, which is still considerably larger than Robinhood's $5.6 billion valuation.
While Robinhood is losing out in the short term on commission revenue, it might be ahead of the curve. Its stance seems to be having an impact on the rest of the industry, as discount brokers, including E*TRADE, have lowered their commissions, and newly unveiled products such as JPMorgan Chase & Co.'s You Invest service offer a certain amount of commission-free trades. Robinhood has other avenues for generating revenue — including interest on cash held in brokerage accounts and routing order flow to exchanges — and the offer of zero-commission trading has led to swift user growth.
Revenue data for Coinbase is available courtesy of Bloomberg, which reported in October 2018 that Coinbase was on track to generate revenues of $1.3 billion in 2018. That would put its $8 billion valuation at about 6.2x revenue. The tricky part about evaluating Coinbase's valuation, however, is a lack of similar, publicly traded companies. Coinbase's focus on cryptocurrency makes its situation unique.
One might have assumed that Coinbase would feel pressure from the swoon in Bitcoin prices in 2018, but that did not appear to be the case. The closing price for one bitcoin, per CoinMarketCap, dropped 74% from $14,156.40 as of Dec. 31, 2017, to $3,742.70 as of Dec. 31, 2018. Volume also fell during that time. Based on a 100-day moving average, volume dropped by about 22% to 4.8 billion at the end of 2018 from 6.2 billion at the end of 2017. But Coinbase's profitability climbed during the year, according to the Bloomberg report. Coinbase was on pace to end 2018 with $456 million in net income, up about 20% from $380 million in 2017.
While the tech industry has a reputation for overvaluing companies, the valuations of Stripe and Robinhood seem appropriate based on their closest publicly traded peers. Coinbase's profitability might justify its valuation as well, and the fact that these are all young companies likely means they have a significant amount of growth potential.