Tag: ipos

Bumble bonanza almost too good to be true

bumble

It’s a VERY happy Valentine’s Day for Bumble CEO Whitney Wolfe Herd. On Thursday, Wolfe Herd (reportedly) became the youngest female CEO ever to take a US company public when the Austin-based dating app’s IPO raised $2.15bn and the shares surged about 63% on their Nasdaq debut.

By the end of the week, Bumble was carrying a market cap of $15bn (and she owns about 10% of the company herself). That’s mind-blowing considering private equity firm Blackstone took control of Bumble barely a year ago in a transaction that valued the company at just $3bn.

Now I don’t know, maybe there were some non-financial reasons why Blackstone found such a willing seller in Russian entrepreneur Andrey Andreev, who started Badoo in 2006 and then helped Wolfe Herd start Bumble in 2014. The umbrella Bumble company that went public owns both Bumble and Badoo, the former being the “women-first” mostly US-centric app and Badoo being better known internationally.

Consider here that Blackstone not only takes home the bulk of the IPO proceeds (around $1.7bn of the proceeds are being used to buy back its equity interests), but it still holds a roughly 60% economic interest in the company.

Blackstone also collected the bulk of a $330m debt-funded distribution to pre-IPO holders paid in October. And remember this is just a dating app.

We also know Blackstone used lead left underwriter Goldman Sachs‘ new-fangled hybrid auction process (also used on the DoorDash and Airbnb IPOs late last year) to try to get a better IPO price than it might from a traditional bookbuild. Yet the stock still ran, probably because the Bumble name was recognized and resonated with the Robinhood/retail crowd in the aftermarket.

And remember all this is happening during Covid-19, a time when the romantic notions have been thwarted by everyone being confined in their homes (though this WSJ article suggests use of dating apps during Covid rose strongly).

The bullish view on Bumble is that its operating model of only letting women make the first move will mean that many, many women will join its site and the men will have no choice but to follow.

And while Bumble is not nearly as profitable as its more diversified rival and comp, Match, Bumble has big earnings upside as it improves its margins to Match’s level. Bumble’s adjusted Ebitda margin was 26.3% in the period from January 29, 2020 to September 30, 2020, whereas Match margin is consistently up around 40% (the IPO filing is here, incidentally).

Maybe Bumble is a great investment and, yes, it is tough to be short at the moment.

But in a market many believe is priced for perfection, there are at least a few reasons to wonder whether Bumble can meet the lofty expectations now built into its stock price.

For one, ask yourself why Blackstone cashing in its investment so aggressively and so quickly.

Logically it would have been better to wait for Bumble to show better post-Covid numbers, unless it turns out the post-Covid world is tougher and the dating app market more competitive than expected.

Of course, Blackstone is just being smart in taking advantage of a white-hot IPO market to effectively cash its original investment and leave only house money at risk.

By the way, there is nothing stopping women from making the first move on other dating apps. And if blocking men from doing so is such a winning strategy for Bumble, how hard is it for some other dating app to do the same? I just pose the question.

Also lost in the fanfare is that Bumble’s average revenue per paying user fell slightly last year, in part as it tweaked its subscription pricing during the pandemic. As the prospectus points out, if Bumble can’t get more money out of each existing paying user, it will have to rely more on turning non-paying customers into payers. Bumble is yet to really prove it can do that since only 2.5m of its circa-40m users are paying for the privilege. The point is that Bumble’s metrics are not as pristine as the stock price action seems to imply.

Personally I think this is yet another stock that has raced well ahead of its true value (it now trades at more than 25x trailing revenue). I think few investors in their hearts (!) would contest this statement. And with markets at a point at which it is hard to think they could get any better, to me it seems a decent bet that Bumble will struggle to maintain its current levels ($75.46 on Friday) once the post-IPO honeymoon period is over.

Let us know what you think.

Nobody knows anything: the Netflix story

I just finished reading Netflix founding CEO Marc Randolph’s That Will Never Work: The Birth of Netflix and the Amazing Life of an Idea. While it trails off a little towards the end, I highly recommend it, both for investors and aspiring entrepreneurs.

At a time of peak cynicism about the companies/IPOs coming out of Silicon Valley, Randolph’s “memoir” of the DVD rental-cum-streaming service’s early years offers a timely case study of an idea that not only worked but overcame many of the challenges/issues that have plagued today’s up-and-coming tech stars.

Netflix today

The book covers the period roughly from the company’s foundations in 1997 to its IPO in 2002, since Randolph bowed out not long after the company went public.

Here are some insights that I took away from reading the book:

  1. Success is not linear, even for really good ideas. It’s tempting to think the setbacks that startups face reveal some fatal flaw in their business model that will eventually bring them undone. Not really. Netflix had its share of existential moments, not least the tech bust in 2000 which dried up sources of capital and forced the company to put its finances on a sustainable footing and refocus by slashing its staff. But it came back stronger after that setback, as it has done a few times. Luck cannot be underestimated as an element of success either. Netflix got into DVD rentals before/just as DVD players and DVDs began replacing video cassettes, and was lucky that the big electronics manufacturers were prepared to support it (by putting its promotional material in their boxes). Even then it wasn’t clear that online DVD rental would be a success. Later on, Netflix didn’t let success go to its head, recognizing the need to constantly reinvent itself. The company knew that DVDs would not be the preferred format forever and made an early effort to investigate streaming, even when download speeds were too slow to support it.
  2. Leadership is everything. Already a seasoned and successful tech entrepreneur, Reed Hastings put up much of the early money. But he wasn’t so hands-on until he realized Netflix could be something really big. Hastings comes across in the book as an enigmatic figure (I suspect the full extent of Randolph and Hastings’ relationship is a little sanitized), but an extremely decisive person and someone not afraid to make very tough business decisions or criticize the way the business is run. Randolph often doesn’t agree with Hastings but later accepts that he was right almost every time. Hastings’ track record prompted the VCs to overlook some deficiencies in the company’s pitch, enabling Netflix to get enough early financing.
  3. Focus on where there is less competition. A key early decision was to ditch DVD sales and focus solely on rentals, even at a time when sales of DVDs were overwhelmingly the company’s largest source of revenue. Hastings and Randolph knew that Amazon (which also offered to buy Netflix early but not for much) would eventually sell DVDs as well as books and margins would collapse. It was much harder for anyone else (even Blockbuster as it turns out) to get into the online DVD rental business, which didn’t really take off until the company introduced a monthly subscription service.
  4. Balancing scale and profitability is not easy. It is easy to criticize recent IPOs for coming to market before they are showing profits. But businesses that are growing fast and are subscription-based will chew up cash. Netflix was giving away free rentals to new subscribers while collecting only a small amount on a monthly basis from its existing subscribers. Though the book did not mention it, I went back and checked the original IPO filing. Netflix went public when it had 600,000 subscribers and was still to pass through $100m of revenue. It had just reported a $30m quarter so it would have passed through that threshold that year. The company also reported a $4.5m loss in that quarter, but was Ebitda positive and operating cash flow positive. WeWork has a lot more revenue but reports negative operating cash flow. Incidentally, Netflix went public at $15.00 (versus the $13-$15 range) with a $310m market cap, whereas the shares now trade at more than $260.00 each with a $115bn-plus mark cap (the shares traded as high as $386.00 last year). To the extent that WeWork was/is looking to get a $10bn-$47bn valuation, it is a lot harder to see WeWork producing Netflix-like returns (if WeWork ever goes public).
  5. Nobody knows anything. Randolph cited screenwriter William Goldman for this line, which is saying no one really knows what the future holds. When we see the hype around WeWork and Uber, it is sometimes easy to think their success was pre-destined. Similarly, when analysts and others write them off they are stating an opinion – they may be right but a lot comes down to whether management makes the right decisions about the next steps for these businesses.
  6. Rules for success. Randolph provided a list of rules for success handed down from his father. These are particularly good for modern kids whose parents are starting to worry they are getting a little too entitled. Here they are: “Do at least 10% more than you are asked. Never, ever, to anybody present as fact opinions on things you don’t know – takes great care and discipline. Be courteous and considerate always—up and down. Don’t knock, don’t complain—stick to constructive, serious criticism. Don’t be afraid to make decisions when you have the facts on which to make them. Quantify where possible. Be open-minded but skeptical. Be prompt.”