Stripe IPO: Advanced Valuation Interview Questions for Finance

Neu

Valuing a company like Stripe for an IPO involves a market-based approach, primarily using public company comparables. The process typically follows these steps:

1. Identify Comparable Public Companies
   The first step is to select a group of publicly traded companies with similar operating models, growth rates, and financial metrics. For Stripe, relevant comparables may include Adyen, PayPal, Block (formerly Square), and Global Payments, as they all operate in the digital payments and fintech space.
2. Select Appropriate Valuation Multiples
   For high-growth companies like Stripe, Enterprise Value-to-Revenue (EV/Revenue) or EV-to-EBITDA multiples are commonly used, depending on profitability. If the company is not yet profitable, EV/Revenue tends to be more relevant.
3. Estimate Enterprise Value
   The selected multiple is applied to a relevant forward-looking financial metric (e.g., next twelve months’ revenue or EBITDA) to estimate Stripe’s Enterprise Value.
4. Convert to Equity Value
   From the Enterprise Value, net debt is subtracted, and IPO proceeds are also subtracted, since the raised cash is new to the balance sheet. This yields a pre-IPO Equity Value.
5. Calculate Per-Share Price
   The Equity Value is divided by the fully diluted share count (including existing shares and new shares issued in the IPO) to calculate the per-share offering price. This is the figure typically referred to when an IPO is said to be “priced at” a specific value.

This approach ensures the IPO valuation reflects both market comparables and capital structure changes resulting from the offering.

Enterprise Value = Revenue × EV/Revenue multiple

To calculate Equity Value from Enterprise Value the following formulas need to be applied:

Equity Value = Enterprise Value − Net Debt − IPO Proceeds

Net Debt = Debt − Cash

IPO proceeds are subtracted to arrive at the pre-money Equity Value – the value of the company before the new capital from the IPO is added. 

Since Enterprise Value reflects the company’s value without considering incoming cash, including the IPO proceeds would overstate Equity Value by double-counting that new cash. Subtracting it ensures the valuation reflects only the business as it stood pre-IPO, not the fresh capital being raised.

First, calculate the fully diluted share count:

Then divide Equity Value by the total share count:

The actual share count could be higher than the initial estimate if additional dilutive securities are included. Two common examples:

1. Underwriter Over-Allotment (Greenshoe Option):
   Investment banks often reserve the right to issue up to 15% more shares to meet excess demand. These shares should be factored into the fully diluted count.
2. Stock Options, RSUs, and Convertible Securities:
   Any employee stock options, restricted stock units (RSUs), or convertible debt that could become shares post-IPO also need to be included in the fully diluted share count. Ignoring these would understate the number of shares and overstate the per-share valuation.

In practice, IPO filings (like the S-1) will disclose these dilutive elements, and valuation models use the treasury stock method to estimate their impact.

The discrepancy between the model price and market behavior suggests a need to incorporate investor sentiment into the valuation framework. Several approaches can be considered:

1. Reassess Comparable Multiples:
   Update the peer group multiples to reflect more recent market conditions. If peers have traded down due to macro or sector-specific factors, the target multiple for Stripe should be lowered accordingly.
2. Introduce a Market Discount:
   Apply a marketability or sentiment discount to the valuation – for example, pricing at a 10–20% discount to the calculated fair value to ensure investor interest and aftermarket performance.
3. Run a Sensitivity Analysis:
   Present a range of valuation outcomes based on more conservative revenue forecasts or multiple compression, and use this to set more realistic price guidance for the IPO.

Ultimately, while intrinsic valuation is important, IPO pricing is a market-driven exercise, and aligning with investor appetite is critical to avoid a failed or poorly performing offering.

To calculate TTM metrics as of November, the goal is to create a 12-month snapshot ending with the most recent quarter (Q3), rather than relying solely on the last full fiscal year.

The standard formula is:

TTM = Most Recent Fiscal Year + Current Partial Period (Q1–Q3) − Old Partial Period

In this case:

• Start with the most recent full fiscal year (e.g., FY 2022)
• Add the newly reported Q1–Q3 2023 figures
• Subtract Q1–Q3 2022, which are already embedded in FY 2022

This way, Q4 2022 remains from the full year, and Q1–Q3 2023 replaces the outdated quarters to give an accurate TTM as of Q3 2023.

The necessary data can be pulled from the company’s 10-K (for the full year) and 10-Q filings (for quarterly data).

For Stripe’s IPO, forward revenue multiples would generally be more appropriate than TTM. Here’s why:

• Stripe is a high-growth tech company, and public market investors in IPOs typically focus on future potential, not just past performance.
• Using forward multiples allows valuation to reflect expected growth, which is especially important if recent performance (TTM) lags behind where the company is heading.
• However, the forward estimates must be credible, either from company guidance or third-party analyst projections.
• It's important to ensure consistency: if valuing Stripe on a forward multiple, the comparable companies should also be assessed on a forward basis to avoid mismatched valuations.

If Stripe’s recent revenue includes significant non-recurring or atypical spikes, those figures may inflate TTM or even forward projections, leading to an overvaluation. To adjust:

1. Normalize the revenue base by excluding or adjusting one-off events to reflect sustainable, recurring performance — particularly if using EV/Revenue multiples.
2. Consider presenting both reported and adjusted revenue figures to investors, highlighting the difference between core business and temporary spikes.
3. Reassess the comparable company set to ensure they reflect similar revenue quality (e.g., if peers have cleaner recurring revenue, Stripe may look richer than it actually is).
4. Optionally, shift emphasis toward unit economics, customer retention metrics, or cohort-based revenue analysis to build a more robust valuation narrative.

When financial data like EBITDA isn’t available through public sources, there are a few common approaches to fill in the gaps:

1. Search Press Releases and News Coverage
   Sometimes deal announcements, investor presentations, or financial press articles (e.g. Reuters, Bloomberg) include revenue or EBITDA figures mentioned by management or sources close to the deal.
2. Check Equity Research Around the Deal Date
   Analysts covering the acquiring company may include estimates or commentary on the target’s financials, especially if the deal is material.
3. Use Financial Databases
   Platforms like Capital IQ, FactSet, or PitchBook sometimes include estimated or back-calculated figures for private or opaque deals, often based on industry benchmarking or disclosed multiples.

While these methods aren’t perfect, triangulating across multiple sources can help build a reasonable estimate for valuation purposes.