Squarespace Direct Listing: Is It a Value Trap?

Squarespace Direct Listing: Price and Valuation

Today marks the direct listing of Squarespace, a company specializing in web hosting and design for small and medium-sized businesses (SMBs). The initial reference price has been established at $50 per share.

Calculations by Renaissance Capital, a firm tracking initial public offerings (IPOs), indicate a valuation of $7.4 billion for Squarespace at this price point. This figure is based on the total number of shares outstanding.

Valuation Compared to Previous Funding

This new valuation represents a significant decrease compared to Squarespace’s most recent funding round in March. At that time, the company secured $300 million, resulting in a post-money valuation of $10 billion, as reported by Crunchbase.

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Reference Price Considerations

It’s important to note that the reference price is merely an indication. It doesn’t definitively determine the opening price. As demonstrated by other direct listings, the actual market opening price can deviate from the initially stated reference price.

Whether Squarespace will ultimately be valued at a discount relative to its last private valuation remains to be seen until trading commences.

Historical Direct Listing Performance

While direct listings offer certain advantages, their post-listing performance has been mixed. For example, Coinbase currently trades below its reference price, despite a strong initial public offering. Similarly, Spotify’s share price has shown moderate performance since its 2018 direct listing.

Analyzing Squarespace’s Financial Outlook

We will now examine Squarespace’s recently published Q2 results and full-year 2021 guidance. This analysis will compare these expectations against the valuation implied by the reference price.

Furthermore, we will consider the historical performance of other direct listings to establish benchmarks and anticipate potential outcomes for Squarespace as it contributes a new data point to this growing trend.

A detailed review of the financial data will provide valuable insights. Let's proceed with the analysis!

Squarespace’s Second Quarter 2021 Performance

According to Squarespace’s official reports, the company anticipates revenues to fall between $186 million and $189 million for Q2 2021. This projection represents a growth rate estimated to be between 24% and 26%. Such a growth rate is considered quite satisfactory for a company of its size contemplating a public offering.

For the entirety of 2021, Squarespace forecasts revenues ranging from $764 million to $776 million. This translates to a comparable growth rate of 23% to 25%.

Profitability Metrics

Squarespace disclosed its “non-GAAP unlevered free cash flow” as its primary profitability measure. A detailed explanation of this metric is beyond the scope of this analysis. However, the key takeaway is that the company projects positive non-GAAP unlevered free cash flow for Q2 2021, estimated between $10 million and $13 million.

Furthermore, Squarespace anticipates significantly increased non-GAAP unlevered free cash flow for the full year 2021, projecting a range of $100 million to $115 million.

Therefore, based on this non-GAAP profitability metric, Squarespace expects its profitability to strengthen throughout the year, which is a positive indicator.

Market Comparison

Considering a midpoint revenue of $770 million for 2021 and a growth rate of 24% (midpoint), a market comparison can be performed. Analysis of companies within the Bessemer Cloud Index reveals that Anaplan exhibits a similar growth rate of 24.7%, though with a lower free cash flow margin of -2.1% (trailing twelve months).

Anaplan currently trades at an enterprise value of 15.4 times its current annualized revenues.

A precise enterprise valuation for Squarespace remains unavailable until the release of its next earnings report. We are utilizing projected 2021 revenues rather than annualizing Q2 forecasts, as the latter approach appears overly speculative.

However, applying a 15x multiple to the $770 million revenue figure suggests a potential valuation exceeding $10 billion for Squarespace in the current market.

Valuation Considerations

This potential valuation raises questions regarding the company’s reference price. The current price appears conservative when compared to its possible worth. A potential explanation for this discrepancy is outlined below.

The Challenges of Direct Listings

The initial public offering of Spotify via direct listing was a significant event, particularly considering the unconventional approach it represented. At a time when alternative methods of going public weren't as prevalent, Spotify’s decision was a notable gamble. It’s worth remembering that Google previously attempted a reverse-Dutch auction for its IPO, an experiment that wasn’t replicated due to its outcome.

Initially, Spotify’s stock performed adequately, trading above its reference price on the first day. As reported by Reuters at the time, the debut was met with cautious optimism.

However, Spotify’s stock subsequently traded below its reference price throughout 2018, 2019, and 2020. Significant appreciation above the initial marker only occurred recently, though recent trading sessions have seen some of those gains relinquished.

Currently, Spotify’s stock is valued at $214.39. When the company went public, the Nasdaq Composite index stood around 5,800. This has since risen to over 13,000. Consequently, Spotify has delivered relatively modest returns since its direct listing. (To clarify, I personally enjoy the product and am listening to Spotify while writing this; however, this doesn’t negate the fact that the company’s post-flotation performance hasn’t exceeded market averages.)

Coinbase represents a more recent case, with less historical data available. Following a direct-listing reference price of $250, Coinbase’s stock briefly reached $429.54, according to Yahoo Finance. Today, its value is $217.64, which is lower than the initial reference price.

While past performance isn’t necessarily indicative of future results, Squarespace’s reference price may be intentionally conservative, potentially setting a foundation for future growth. This leads to the question: could a lower initial price actually be advantageous?

Our apprehension regarding Squarespace’s ability to sustain a price above its direct-listing reference point stems from the performance of other high-profile direct listings, which have generally underperformed relative to their reference prices and initial post-listing peaks. This is somewhat unexpected, given the strength of the companies involved. Both Spotify and Coinbase are substantial businesses, having adopted innovative strategies within their respective industries (music and finance) and successfully translating those strategies into significant revenue streams.

The question then becomes: why haven’t these companies been more successful as publicly traded stocks? I propose a hypothesis for consideration, and welcome discussion on Twitter:

• Companies choosing direct listings typically possess strong financial security, either through substantial capitalization or efficient cash management.
• In either scenario, a significant portion of their potential value may have already been realized within the private markets.
• Therefore, upon entering the public market, they may be subject to inflated expectations, coupled with the reality that their period of most rapid growth may have already passed.

“Hugely capitalized” suggests a high valuation, reflecting the ability of unicorns to attract investment while remaining private in the current investment climate. Cash efficiency often indicates slower, or decelerating, growth. Therefore, it may not be entirely surprising that direct-listed companies haven’t consistently achieved substantial gains after their listing.

It’s possible these companies have simply evolved beyond a phase of rapid expansion. This suggests that the very factors enabling them to pursue a direct listing may also contribute to their limited post-listing gains.