Understanding Stripe’s $95bn Valuation

The COVID-19 pandemic has rapidly accelerated a number of forms of digitization of human to human interaction, including ecommerce (44% growth in 2020), online grocery sales (up from 3.4% sales in 2019 to 10.2% in 2020), and telehealth (50–175x YoY growth). For many of these processes, online processing of payments is required therefore online payments has grown alongside these markets. Stripe, a technology company with a mission to “increase the GDP of the internet, provides a variety of payments related services including online payment processing (Stripe Payments), card issuing (Stripe Issuing), and business incorporation (Stripe Atlas) and has been one of the prime beneficiaries of this growth.

On March 14th, Stripe announced a $600mm venture round at a post-money valuation of $95bn. Investors in the round include Allianz A, Sequoia Capital, and Fidelity Management. The round came after raising a $600mm round at a $36bn valuation in April of 2020, meaning the investing community has nearly tripled its valuation in under a year, likely due to the aforementioned acceleration in digital payments. In addition, with $600mm in additional capital on top of the $1.6bn Stripe had raised previously (many of which is reported to have been secondary), Stripe has pushed out its eventual IPO at least another few quarters, enabling the business to remain under the radar.

As mentioned earlier, Stripe has built a wide array of payment-related services. Its initial business was Stripe Payments. When Stripe launched Payments 2010, it rapidly took market share by focusing on the underserved SMB segment. Unlike traditional “merchant acquirers” (i.e. businesses such as First Data and Bank of America Merchant Services that enable merchants to process card payments, both online and in-person), Stripe embraced a business model known as “payment facilitator”, in which it applies for a master merchant account with a bank rather than each merchant applying for their own account with a bank. This in turn massively simplifies and expedites the underwriting and onboarding process. In addition, Stripe designed its product with a focus on simplicity. Unlike enterprises, with complex procurement processes and requisite IT sophistication, SMBs require easy-to-use solutions that could be installed and functioning in a matter of days. Therefore, Stripe designed its solution so that developers implementing Stripe on behalf of Stripe’s merchant customers would need to integrate only a few lines of code to integrate Stripe into their website.

In 2012, Stripe launched a business providing payment processing for marketplaces and platforms called Stripe Connect. Marketplaces and platforms face a number of complexities including the necessity to both collect payments on the demand side while paying out on the supply side as well as the need to localize its services as the platform scales internationally. By foreseeing the growth of platforms, Stripe Connect was able to land a number of marquee platform customers early including Shopify, Lyft, and Instacart and therefore benefit from their growth.

Over time, Stripe has expanding its offerings. Stripe’s product expansion can be grouped into two buckets:

· Expanding upon its payments technology DNA to enter ancillary areas of payments (e.g. Stripe Terminal, which provides in person card payment processing, and Stripe Issuing, which provides card issuing services for businesses)

· Providing additional services to its SMB customer base (e.g. Stripe Atlas, which provides business incorporation services and Stripe Sigma, which provides business analytics and intelligence)

While these additional products and services have expanded Stripe’s revenue and market opportunity, payment processing via Payment and Connect remains its primary line of business.

At a $95bn valuation, Stripe is worth more than any other Silicon Valley backed startup. While it is difficult to justify any valuation without first reviewing financial figures, there are several reasons to believe the valuation is reasonable. First of all, Stripe’s estimated gross processing volume is roughly equal to Adyen, a publicly-traded Netherlands-based payments processor with a similar, digital payments focus as Stripe. The two businesses have similar pricing implying that their revenues are likely similar as well. As of 3/21/21, Adyen has a market cap of ~$68bn, reflecting ~15x trailing revenue. Given Adyen’s age (founded in 2006) and end market focus (enterprises, which are generally more likely to have already adopted online payments acceptance solutions and therefore growing slower), it’s likely Stripe is growing at a consistently higher clip than Adyen’s very impressive ~40% YoY growth. In addition, like Adyen, Stripe is reportedly profitable, thus giving investors a rare opportunity to invest in a hyper growth business that is generating free cash flow. Finally, any intelligent investor would ascribe meaningful value not only to Stripe’s existing lines of businesses but also the potential for it to continue to leverage its technology talent and customer base to enter new markets.

Stripe is a fascinating business that has achieved immense success in its 10 years of existence. Its recent $95bn valuation is a testament to the immense excitement the technology investing community has for the business’ future.