Why aren’t Rackspace and BigCommerce worth more?

by admin July 28, 2020 at 6:34 pm




Why aren’t Rackspace and BigCommerce worth more? – TechCrunch






























Unpacking their initial IPO prices in light of today’s market conditions

This week has brought with it two tasty pieces of IPO news — Rackspace’s return to the public markets and BigCommerce’s debut will be far more interesting now that we know what a first-draft valuation for each looks like.

But amidst the numbers is a question worth answering: why aren’t cloud-focused Rackspace and e-commerce-powering BigCommerce worth more?

Using a basic share count and the top end of their initial ranges, Rackspace is targeting a roughly $4.8 billion valuation, and BigCommerce a $1.3 billion price tag. Given that Rackspace had $652.7 million in Q1 2020 revenue and BigCommerce reaped $33.2 million in the same period, we have a puzzle on our hands.

Let me explain. At its IPO price, Rackspace is worth around 2x its current revenue run rate. For a company we associate with the cloud, that feels cheap at first glance. And BigCommerce is targeting a valuation of around a little under 10x its current annual run rate, which feels light compared to its competitor Shopify’s current price/sales ratio of of 66.4x (per YCharts data).

We did some maths to hammer away at what’s going on in each case. The mystery boils down to somewhat mundane margin and growth considerations. Let’s dive into the data, figure out what’s going on and ask ourselves if these companies aren’t heading for a second, higher IPO price range before they formally price and begin trading.

Margins and growth

Let’s unpack Rackspace’s IPO pricing first and BigCommerce’s own set of numbers second.

Rackspace

While Rackspace has a public cloud component, its core business is service-driven, so it isn’t a major cloud platform that competes with Microsoft’s Azure, Google’s GCP or Amazon’s AWS.  This isn’t a diss, mind, but a point of categorization.

The company has three reporting segments:

  • Multicloud Services
  • Apps & Cross Platform
  • OpenStack Public Cloud

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Youssef Choksi explains how to get your startup acquired u2014 not sold”,”content”:{“rendered”:”

Today, Priti Youssef Choksi is a partner with venture firm Norwest Venture Partners. But she previously spent five-and-a-half years at Google, where she worked on strategic partnerships, and nearly nine years at Facebook, where she began in corporate development and later focused on M&A.n

Because Choksi knows firsthand how some of the biggest companies on the planet think about potential acquisition targets and how deals ultimately come together, we asked if she would share some of those insights with us during our recent founder-centric Early Stage event. The idea was to help attendees better how understand how — and why — certain acquisitions come together; her advice was so helpful that we wanted to share it more widely here.n

So where to start? Choksi suggested people first understand the “build, partner, or buy” mentality of big acquirers. Indeed, while deals can look very much alike to outsiders (a deal is a deal is a deal), they are not. First, big companies will build internally if they are bolstering a strategic asset or what they need involves sensitive information or technology. A good example of something that Google would never buy, for example, is search tech, because search is the company’s crown jewel, she noted. Companies will meanwhile partner in order to fill a product or service gap or when they’re looking to stand up a new platform, she said, pointing to the early days of Google’s Android ecosystem.n

As for when they finally go shopping, companies are driven by three things, said Choksi: talent, technology and traction. With talent, as you might imagine, companies may conduct an acqui-hire with the goal of filling a talent or leadership gap internally or to acquire niche skills that their current employees don’t already have, she said.n

Companies meanwhile shop for technology when they need outside tech to boost their organic efforts. Choksi pointed to Luma.io by way of example. Back in 2013, the young company, which created a video-capture, stabilization and sharing app, was acquired by Instagram (which was itself already owned by Facebook); a week after it closed the Luma deal, Facebook launched video on Instagram largely based on Luma’s platform.

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