Challenger bank and for many fintech-favorite Revolut announced last week that the company is set to raise an additional $1,5 billion for its expansion into the US market. In terms of valuation, Revolut is aiming somewhere in the range of $5-10 billion. The big question is whether the company fundamentals and future expectations justify this valuation, or is Revolut the Wework of fintech?
For those unfamiliar with Wework, it serves as a cautionary tale of how inflated valuations quickly plummet when the buzz dies off, and the company fundamentals are exposed. Set to do an IPO this fall, Wework raised $2 billion in January this year from Japanese investment giant Softbank, valuing the company at $47 billion. At this valuation, WeWork would be the 2nd largest IPO of this year. But that’s where the party ended.
A quick peer analysis of Wework to its closest competitor, IWG, showed that there was a fundamental disconnect between actuals and valuation. IWG on its side had revenues of $2,8 billion with an operating profit of $171 million with a valuation of $3,7. Wework on their side reported revenue of $1,8 billion and a staggering $1,7 billion in losses. Despite this, Wework’s valuation was $47 billion.
Following the S-1 filing for IPO, the tale of the emperor’s new clothes was a fact. Even though the company was growing fast, it failed to turn any profits. The risk was sky-high and did not calculate the potential for an economic downturn. The founder and CEO came off as some kind of megalomaniac (it’s all there in the most ridiculous IPO filing ever). “Our mission is to elevate the world’s consciousness,” reads the second line of the coworking giant’s prospectus summary. Corporate governance was downright scandalous, involving a long list of shady transactions and deals between various shell corporations owned by Neumann. Including a deal where Neumann would get payed $6 million for the use of the word we.
As a result, the IPO was announced that it would be postponed September this year, and the latest valuation of the company was set at $10 billion, setting the company value lower than the collective sum of the $12,8 billion capital raised since the company’s inception in 2010.
Even though Revolut is claiming to have tripled growth from 2018 to 2019, their official numbers state that Revolut doubled their losses from 2017 to 2018 and lost $40 million on revenues of $70 million in 2018, as well as an increase in cost of sales of 247% on card scheme charges and user acquisition.
Chris Skinner elaborated further on this subject on his blog, including referring to a LinkedIn post where someone did a quick breakdown of the valuation in terms of customer lifecycle value (saving me some time):
They claim to have 8M customers. Let’s assume *all* of them are active. If they are “valued” at $10Bn that’s a per customer lifetime value of $1,250 or £1,000. Their premium fee is £6/month or £72/year. That’s 14 years to break even, assuming that’s the only revenue source (it isn’t).
Even assuming fees for debit card usage and thin margins for FX, that’s probably a 10 year break even horizon. At a P/E of 20 (= 2x JPM) they’d have to be making $500M of net income to be worth $10Bn. They made £58M of revenue (a great feat). Revenue is not net income. The assumptions you’d have to believe to make this valuation work are pretty astonishing. Let’s see if there are believers out there after the recent public market “revaluations” and the apparent retreat of a major source of private capital.
Continuing to look at these companies from a user acquisition perspective makes sense, as this looks like their core strategy at the moment. To make things easy, let us assume that Revolut lands at a valuation of $8 billion (from the desired target range between $5-10 billion. How does a value per customer of $1000 play out in a peer group analysis?
Digital bank, Number26 from Germany recently raised another $170 million, setting the company value at $3,5 billion. With exactly 3,5 million customers, Revolut’s valuation seems to be in line with N26s. N26s CFO recently told the Financial Times that “In all honesty, profitability is not one of our core metrics”. UK-based challenger Monzo also raised money recently and could show for a value of $1,225 per user.
Looking at incumbent banks, Banco Santander has half the value per customer with a market cap of $70 billion and 144 million customers worldwide. While actually running a profitable business. Facebook as a different reference point reports a value per monthly active user at $236.
While incumbents have a lot to learn from challenger banks when it comes to UX, they are slowly getting there, while still turning profits from traditional banking products.
Revolut might be in line with their peers when it comes to value per customer and wait and see approach to their fundamental business model, but the similarities to Wework are not purely financial.
Revolut has been accused of neglecting compliance, including shutting down the automated transaction surveillance system and has over a few years seen the departure of two chief risk officers, two money-laundering reporting officers, a chief compliance officer, and a chief finance officer. The company has also faced some major concerns on how they treat their employees and potential applicants, where employees are expected to do unpaid work, applicants are required to start selling as part of the recruitment process, all resulting in a high turnover. Even though the CEO denies any links to the Kremlin, the accusations have resulted in an official investigation and have yet to be debunked.
The big question is, how long can challenger banks like Revolut continue to not make money and rely on future expectations, while at the same time not accepting the responsibilities that come with a banking license? Even though Revolut is referred to as some kind of magical fintech unicorn, from my experience if it walks like a duck, quacks like a duck and looks like a duck, it’s probably a duck. Just like Wework beneath tech lingo and smoke an mirrors is a good old fashioned real estate company, N26 and Monzo sure looks like a bank to me. And a bank who does not make money is not worth much in the long run.