NerdWallet IPO: How Content Drove a Unicorn Valuation

The Divergent Paths of Software and Writing Revenue

Developing and selling software online presents a significant opportunity for profitability. The minimal costs associated with digital distribution enable developers to realize substantial margins from a single codebase through repeated sales.

Furthermore, the increasing preference for recurring revenue models, such as subscriptions, over one-time purchases, provides a strong basis for high valuations of software companies.

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The Unfulfilled Promise of Online Writing

Initially, it was anticipated that writing would mirror the success of software distribution. The internet facilitates widespread, low-cost dissemination of written content. However, the economic realities proved challenging.

The most viable path to monetization for online writers has involved treating content as a product, similar to software, and offering it through subscription services. This approach has allowed media organizations to resemble contemporary software companies more closely than originally envisioned.

The New York Times, with 68% of its Q2 2021 revenue derived from subscriptions, exemplifies this successful model. TechCrunch+ also operates on this principle, albeit on a smaller scale.

The Failure of the Traditional Advertising Model

The initial expectation for free online content relied on advertising revenue mirroring rates from established media like television and print. This largely did not materialize, despite some niches still achieving reasonable ad rates.

However, companies like NerdWallet demonstrate that substantial revenue can be generated through online writing without direct charges. This success also results in significant company valuation.

NerdWallet’s recent IPO filing revealed its anticipated public market valuation, confirming its status as a unicorn – a privately held startup valued at over $1 billion.

This outcome highlights an unexpected success story in the digital content landscape.

Assessing NerdWallet’s Valuation

The operational model of NerdWallet differs from traditional journalistic practices. However, the company emphasizes the editorial independence of its writing staff, a point we’ve previously discussed in articles and on the Equity podcast.

This independence, in theory, means the writing teams prioritize the needs of the reader over the immediate revenue and marketing objectives of the company.

NerdWallet explicitly stated in its IPO documentation its commitment to avoiding short-term revenue gains that could compromise its long-term credibility. Specifically, the company intends to refrain from accepting payments to promote inferior products. The core of NerdWallet’s business relies on maintaining user trust – ensuring the best products are recommended regardless of commission rates.

Functioning as a personal finance equivalent of Wirecutter, trust and the efforts to uphold it are fundamental to NerdWallet’s user relationships.

Considering the projected IPO price of $17 to $19 per share, with a share count of 64,747,341 (or 65,834,841 including underwriter shares), NerdWallet’s business could be valued at up to $1.25 billion. This equates to more than $1 per word published, suggesting a substantial return on content creation.

Renaissance Capital, a leading IPO analysis firm, estimates the company’s fully diluted valuation at $1.3 billion, using the midpoint of the IPO price range. At the higher end of $19 per share, this valuation increases to $1.37 billion. This represents a significant achievement for a company whose success is predicated on monetizing written content.

To understand this valuation, it’s important to compare it to the company’s last private funding round. Data from Crunchbase and PitchBook regarding NerdWallet’s capital history is incomplete, lacking the full data set required for a precise assessment.

The company’s final investment was structured as a continuation of its Series A funding, complicated by various conversion rights that make valuation challenging. The “Series A redeemable convertible preferred stock” appears to be valued at $17.9592 per share – double the original Series A price – aligning closely with the midpoint of the IPO range.

A review of the financials indicates that investors from the final private round are poised to approximately double their investment.

Evaluating NerdWallet's Valuation

The previously mentioned valuations appear questionable upon closer inspection.

During the third quarter, NerdWallet reported $98.5 million in revenue. This extrapolates to an annualized revenue of $394 million, resulting in a maximum revenue multiple of approximately 3.5x. This figure prompts considerable questioning.

Gross Margin Considerations

NerdWallet achieved a gross margin of 92% in the latest quarter. However, the company's practice of including its writing team's expenses within its marketing budget, rather than cost of goods sold (COGS), obscures a true understanding of its operational costs.

This accounting method, in our assessment, is a misstep that prevents a clear view of the actual expenses incurred to generate business outcomes.

Editorial Staff and Revenue Growth

The company employs over 100 editorial staff members, which would naturally impact gross margins, though not critically. Our analysis of the S-1 filing hasn't revealed further clarifying details.

Despite this, it seems NerdWallet is receiving a relatively low revenue multiple considering its 48.5% growth rate during the first nine months of 2021 compared to the same period in 2020.

Comparison to Other Companies

Considering that Rent the Runway has achieved a significantly higher revenue multiple, the comparatively low valuation assigned to NerdWallet is perplexing.

It's possible that the financial markets do not place the same high value on written content as some observers, despite the company’s strong financial performance. This discrepancy is somewhat puzzling.

Potential for Price Adjustment

Due to these uncertainties, we wouldn't be surprised if NerdWallet ultimately sets its initial public offering (IPO) price slightly above its current target range.

Further updates will be provided as more information becomes available.