Fintech vs SaaS: Valuation Comparison

Fintech Companies Experience Favorable Market Conditions

The past week has been exceptionally positive for companies operating within the financial technology (fintech) sector.

Following the successful initial public offering (IPO) pricing of Toast, a Boston-based software and payments provider, Remitly also priced its shares above the initially proposed range during its debut yesterday.

Remitly's IPO Details

The Seattle-based fintech company offered 12,162,777 shares, with 7,000,000 being primary shares, at a price of $43 per share.

Previously, the company had anticipated a maximum share price of $42 for its IPO equity.

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At $43 per share, Remitly’s valuation aligns more closely with a mid-range public Software-as-a-Service (SaaS) company than a typical fintech firm.

This is due to its strong gross margins, falling between 50% and 60%, coupled with net-dollar retention exceeding 100% and consistent recurring revenues.

Toast, whose shares experienced a significant increase in value after commencing trading yesterday, exhibits a comparable revenue multiple despite having lower overall gross margins.

Shifting Market Priorities

Current market conditions suggest that revenue growth is now prioritized over immediate profitability for fintech companies.

This allows them to achieve valuations that exceed their previous private market assessments.

These results represent a highly optimistic outlook for fintech startups, indicating they may be worth more than previously estimated by themselves or their investors.

This outcome supports The Exchange’s recent observation that the IPO market is not only open for venture-backed companies but is particularly advantageous for fintech ventures.

Let's analyze the financial figures and then consider the potential IPO timelines for companies like Chime and Klarna.

Is Fintech Following the SaaS Valuation Model?

During the second quarter of 2021, Toast announced revenues totaling $424.7 million, with associated revenue costs of $336.3 million. This resulted in a combined gross margin of just under 21% for the company.

Toast generates revenue from high-margin SaaS offerings, lower-margin fintech services, and smaller business segments operating near the breakeven point. The resulting figure is relatively moderate.

Despite this, Yahoo Finance data indicated a valuation of $30.856 billion for Toast this morning, representing a run-rate multiple of 18.2x. According to Bessemer data, this aligns closely with the median revenue multiple observed for publicly traded SaaS companies.

Our analysis suggests that public markets are prioritizing growth over margins when evaluating Toast. This implies that fintech startups can achieve SaaS-like multiples regardless of their gross margins, as long as they demonstrate substantial near-term revenue growth.

Remitly presents a comparable, yet distinct, scenario. The company boasts significantly stronger gross margins, reporting figures of 55% and 58% in the first and second quarters of this year, respectively. Furthermore, the company is experiencing rapid expansion, as highlighted by TechCrunch:

To provide context, Toast’s growth rate in the first half of 2021, compared to the same period in 2020, was 105%. Both companies are expanding at approximately the 100% rate, with Remitly exhibiting superior gross margins. Consequently, one might expect a higher valuation per dollar of revenue for Remitly. However, this is not the case:

• Remitly’s Q2 2021 revenue reached $111.1 million.
• This translates to an annualized run rate of $444.2 million.
• At its IPO valuation, Remitly’s run rate multiple was 18.2x.

To complete the calculation, we required an IPO valuation for Remitly. Renaissance Capital determined that Remitly’s fully diluted valuation at $40 per share was $7.5 billion, increasing to just over $8.0 billion at $43 per share. This figure was used in our multiple calculations.

Despite a similar growth rate and considerably better margins, Remitly is also valued at around 18x its run rate. While Remitly could experience a successful trading debut, similar to Toast, and see its revenue multiple increase, the current company valuation presents an interesting puzzle following Toast’s initial public offering.

Several observations can be made regarding this unusual market situation:

• Toast’s high multiple, despite its narrow margins, may reflect investor confidence in the potential for its software business to expand, potentially improving the company’s overall gross margins over time. This would be positive news for software-and-payments companies generally.
• Alternatively, Toast may be overvalued.
• It’s also possible that Remitly is undervalued.
• Or, both companies could be overvalued, with Toast being more so.

Regardless of the preferred explanation, it’s evident that public markets are assigning significant value to fintech companies. This is a trend that private-market investors should carefully consider.

Toast was valued at $4.9 billion in early 2020, according to Crunchbase data. Its current value exceeds $30 billion. Remitly was valued at approximately $1.5 billion in mid-2020 and is now worth over $8 billion.

The current market dynamics suggest that venture investors may consistently undervalue private companies.

Further insights will emerge when Remitly begins trading, but the key takeaway from our analysis is that fintech revenues are not experiencing the valuation reduction one might anticipate given their lower margins and non-recurring income streams. Investors seeking growth are willing to pay a premium for strong top-line performance, particularly if there is potential for margin improvement.

This is a noteworthy observation.

Perhaps all unicorn companies should consider going public now, while investors prioritizing value are still debating the merits of growth-focused investments.