Sweetgreen Investment: Will it Pay Off?

Sweetgreen's Successful IPO: A Detailed Analysis

Yesterday, Sweetgreen, the well-known American fast-casual salad chain, launched its initial public offering (IPO) at a price of $28 per share.

The company offered 13 million shares during the IPO, resulting in initial gross proceeds of $364 million. This figure doesn't include shares allocated to the underwriting banks.

A Positive Outcome for Sweetgreen

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The IPO pricing represents a success for Sweetgreen. The company had originally projected a price range of $23 to $25 per share, indicating that the final price exceeded initial expectations.

Furthermore, Sweetgreen increased the number of shares sold in the IPO by 500,000 compared to its latest S-1/A filing.

Valuation and Investor Sentiment

Considering the increased investor demand and higher share price, a thorough examination is warranted.

We will determine Sweetgreen’s IPO valuation using both basic and fully diluted share counts. Subsequently, we will analyze the company’s final IPO revenue multiple to ascertain how investors are assessing its worth.

Finally, we will compare Sweetgreen’s valuation to that of other recently publicly traded, technology-driven companies.

Why Sweetgreen Matters

Sweetgreen’s journey began with external funding in the mid-2000s, continuing through a Series I round in 2019.

Essentially, numerous private investors, including venture capital firms, have placed their confidence in Sweetgreen’s potential. This makes its IPO performance particularly noteworthy.

Sweetgreen’s Initial Public Offering Valuation

Prior to increasing its initial public offering by 500,000 shares – reaching 575,000 when including the 75,000 shares allocated to the underwriters’ option pool – Sweetgreen projected a total of 106,311,529 shares outstanding following the IPO.

This number increases to 108,761,529 shares when factoring in the additional equity sold and the complete allotment of shares reserved for the underwriting entities.

Based on this revised share count and a price of $28 per share, Sweetgreen’s market capitalization is estimated at $3.05 billion.

Renaissance Capital’s analysis indicated that, at the midpoint of its initial price range of $24 per share, before the share increase, Sweetgreen would have a fully diluted market cap of $2.9 billion. Adjusting this figure to the $28 per share price yields an approximate valuation of $3.4 billion.

Considering the company’s previous valuation of $1.65 billion, as reported by Crunchbase, the IPO pricing represents a substantial revaluation, effectively doubling its last private market value.

Let's now examine the relevant financial multiples. Below are the company’s key performance indicators from its most recent fiscal quarter, ending September 26, 2021:

• Revenue: $95.8 million.
• Net Loss: $30.0 million.

Extrapolating from the latest quarterly revenue, the company currently maintains an annualized revenue run rate of $383.4 million. Applying our calculated fully diluted valuation of $3.4 billion, Sweetgreen is trading at approximately 8.9 times its revenue.

Following the IPOs of Rent the Runway and Allbirds, The Exchange observed the emergence of a valuation corridor for technology-driven public offerings.

Rent the Runway was valued at roughly 7x its revenue upon its public debut. Allbirds achieved a multiple of around 9x. Sweetgreen’s current pricing falls within this range, refining our understanding of the valuation spectrum for similar businesses – expressed as a revenue multiple.

Sweetgreen is being assessed as a high-caliber, technology-enabled enterprise. This is not a criticism; achieving a revenue multiple nearing 9x for a food service business is exceptionally favorable. Is this akin to 2015 software valuations applied to salads? It can only be considered a success.

Naturally, we are keenly interested in observing the company’s trading performance today and its strategy for balancing growth with profitability as it expands its reach.

We previously expressed reservations regarding the company’s reported results and certain adjusted metrics. However, investors evidently disagreed, indicating that this analysis has once again taken a contrarian stance in a financial discussion. No apologies will be offered.

Instead, this moment serves to underscore the current optimism within public markets. Investors are prepared to pay premium prices for businesses with even modest gross margins. Consequently, any unicorn delaying its public debut is assuming inherent risk by not capitalizing on the present market conditions. There appears to be no compelling reason to postpone an IPO at this time.