Qualtrics IPO Pricing: A First Look

This morning, Qualtrics released a new S-1 document, specifically outlining its anticipated IPO price range. This allows for a detailed assessment of the company’s potential valuation upon its public offering later this month.

TechCrunch has been anticipating this launch ever since Qualtrics announced its separation from its previous owner, SAP. In 2019, SAP, a German-based enterprise technology company, acquired Qualtrics for $8 billion, immediately preceding its planned initial public offering.

This initial acquisition price serves as a useful benchmark for evaluating SAP’s success with the transaction and the growth in Qualtrics’ value over the subsequent period. It’s important to note, though, that valuations for software businesses have significantly increased in recent years, meaning the figures presented below are influenced by a broader market adjustment in how recurring revenue is priced.

Qualtrics projects a share price between $22 and $26 when it becomes publicly traded. But does this represent a substantial valuation? Let's analyze the details.

Qualtrics’ Initial IPO Price Range

Let's begin with the scale of the offering. Qualtrics is offering almost 50 million shares to the public. Considering a price exceeding $20 per share, the company aims to secure over $1 billion in funding.

Following the public offering, Qualtrics projects approximately 510,170,610 shares will be outstanding, including the 7.4 million shares allocated for underwriter options. Based on this share count, the company’s valuation would fall between $11.2 billion and $13.3 billion.

Typically, we would calculate the total number of shares, including vested options, at this point. However, a review of the S-1/A filing reveals no additional shares that would normally be included in such a calculation.

While additional shares do exist, they appear to be designated for compensation in 2021 and beyond, and have not yet vested, therefore they are not currently factored into the share count. In this instance, the straightforward share count seems both accurate and complete, which simplifies the process.

Next, we must assess these figures in relation to the company’s performance. Here are the most recent financial results reported by the company, which we will use to determine whether Qualtrics should anticipate pricing its IPO above its current range. Please note that we are utilizing the midpoint of the company’s preliminary range:

• Qualtrics Q4 2020 revenue, midpoint: $213 million.
• Qualtrics Q4 2020 revenue midpoint, annualized: $852 million.
• Qualtrics Q4 2020 midpoint revenue growth, compared to Q4 2019: 23.2%.

This information is valuable. At that annualized revenue level, the company is trading at a revenue multiple of 13.1x to 15.6x. These multiples are notably lower than the average and median benchmarks of the Bessemer Cloud Index, which stand at 21.1x and 17.9x respectively for current public software companies.

However, Qualtrics’ growth rate is lower than both the average and median revenue expansion rates, which are 38.2% and 27.5%. Nevertheless, considering the lower multiple offered by the market to companies with only slightly faster growth, it’s possible that Qualtrics’ current range is conservative.

This is particularly true if one anticipates accelerated growth in the coming year, and considers the company’s near-breakeven profitability. (Following years of losses attributed to SAP’s employee stock option settlement, Qualtrics anticipates a Q4 operating loss of approximately $10 to $13.5 million. This represents a significant improvement from the $145 million loss in the same quarter last year.)

Qualtrics is either undervalued, or its initial IPO range appears modest. This suggests the company may increase its range before formally setting the price, which would increase its valuation and further enhance the value of the deal for SAP from a few years prior. SAP is poised to retain majority ownership of a company that could see a 50% or greater increase in value within a few years, and that will soon be publicly traded.

This is a positive outcome, in our view.

There are complexities not fully addressed here, including enterprise value calculations compared to market capitalization for Qualtrics and the Bessemer numbers. However, given the company’s intention to use a portion of the IPO proceeds to reduce debt, it would be prudent to await the final accounting before making definitive statements regarding enterprise value. The above analysis is sufficient for general understanding.

The Qualtrics IPO is expected to be significant, and that has implications. The question remains whether the investment banks can align the IPO price with what retail investors are willing to pay. Time will tell.