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The Covid-19 pandemic has made online retail an unavoidable part of nearly every American’s day-to-day life. Since the power of online retail depends on flexible and easy-to-use payment technology, investing in one of the leading players in online payments, like Stripe, might seem like an easy choice.
Brothers John and Patrick Collison founded Stripe more than a decade ago and have turned their startup into a behemoth valued at nearly $95 billion in its latest round of funding. If the company goes public, it could fetch an even higher valuation, making for one of the biggest initial public offerings (IPOs) of all time.
Stripe’s timing couldn’t be better, but the payments sector is festooned with established players, from giants like Paypal to disruptive startups like buy-now-pay-later powerhouse Affirm. Here’s what you need to know to decide if the Stripe IPO is the right investment choice for you.
The Case in Favor of the Stripe IPO
There’s a lot to love about this San Francisco-based startup. Stripe saw revenue jump to nearly $7.5 billion in 2020, per the Wall Street Journal, a 70% increase from the year before. It processed $350 billion in transactions, according to CB Insights, and operates in nearly 50 countries.
Stripe has been able to capitalize on the huge transition to online purchases taken by hundreds of thousands of companies since the onset of the pandemic. Digital purchases jumped an astonishing almost 32% in 2020, before returning to pre-pandemic levels of growth in 2021.
The fact that growth hasn’t decelerated as the pandemic wanes strongly suggests that a fundamental shift is underway. The transition to online shopping and online payments could deepen further even as the U.S. economy fully opens again.
But Stripe is making inroads in the world of in-store purchases as well. Apple Inc. (AAPL) is planning to allow merchants to accept payments on their iPhones, and reportedly Stripe will be the first partner to offer the new feature via a new Shopify (SHOP) app.
Stripe has also announced a line of product and tools that aim it make it easier for customers to buy and store cryptocurrency and non-fungible tokens (NFTs). The new tools also aim to help crypto exchanges handle compliance issues like Know Your Customer (KYC) regulations.
Funds raised in an IPO will help Stripe develop new businesses, such as small business loans or banking services like cash management accounts, to complement the business of charging fees on every transaction it processes online.
The Case Against the Stripe IPO
There’s no denying Stripe has grown tremendously over recent years. Potential IPO investors, though, should consider whether the company’s strongest growth has already come and gone.
A recent history of mega-IPOs can only buttress those concerns. Alibaba Group (BABA)—not only one of the largest global tech stocks but also the biggest IPO in history—has seen annualized losses of 10.5% over the past three years. Uber Technologies, Inc. (UBER) has lost more than 41% over the past year while Rivian (RIVN) is down 36% year-to-date.
Other massive IPOs haven’t fared as poorly, but have still trailed the stock market as a whole. Meta Platforms (FB), the company formerly known as Facebook, has seen an average annualized gain of 9% over the past five years, about 7 points lower than rivals.
Investors would have fared far better by shunning these four companies in favor of a low-cost S&P 500 exchange-traded fund (ETF).
How could things go poorly for Stripe? Competitors like Paypal (PYPL) or Block Inc. (SQ), formerly named Square, could very well outmaneuver their smaller rival. And in the highly fragmented fintech space, buy-now-pay-later companies like Affirm could pose a threat as well.
Finally, it remains unclear how much further the e-commerce boom that was launched by the pandemic has to run. Shares of Paypal and Square, Stripe’s closest rivals, have struggled mightily as social distancing restrictions have been lifted.
Should You Invest in the Stripe IPO?
Despite recurring press reports on new funding rounds and developing partnerships, Stripe has not yet announced a target date for its initial offering. Once the company does file paperwork with the SEC, you’ll have better insight into its finances, prospects for the future and potential pitfalls.
Nevertheless, approach the IPO with a healthy amount of caution. While Stripe’s business looks sound, and is very much intertwined with one of the most dynamic sectors of the American economy, that doesn’t necessarily mean Stripe itself will see endless robust stock gains once its shares hit the market.
Big private companies, with big promises, often fail to deliver over the long haul, and there’s no guarantee Stripe will be different. Ideally, you would have gotten in on the ground floor, often available only to the likes of private equity investors and early employees. But with that route no longer available, you shouldn’t feel you have to enter at any cost.
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