SurveyMonkey down round IPO presents a possible buying opportunity for high risk investors
September 14, 2018 | Blog

SurveyMonkey down round IPO presents a possible buying opportunity for high risk investors

SurveyMonkey is finally pulling the trigger. The nearly 20-year old unicorn, which pioneered Internet polls on everything from consumer brands to politics, recently said it will go public on NASDAQ under the ticker SVMK.

With revenue above $200 million for fiscal 2017, SurveyMonkey has a strong presence in the growing data intelligence industry because of its ubiquitous online surveys. The company has generated noteworthy attention for its partnerships with major media outlets such as the Washington Post and NBC to help forecast national elections.

SurveyMonkey is also known for its two female directors: tennis superstar Serena Williams and Facebook chief operating officer Sheryl Sandberg, who joined the board after CEO and husband David Goldberg unexpectedly died in 2015.

Waited Too Long?

During its last financing round in 2014, investors valued SurveyMonkey at roughly $2 billion. Given its advanced age for a unicorn, we wonder if the company waited too long to go public.

Here’s why: From a valuation standpoint, we believe the company’s 2020 revenues could exceed $300 million, translating to a steady mid-teens growth rate. If investors apply a high single-digit revenue multiple, above 7.0x ’20E revenue, for example, the company’s valuation would exceed $2 billion. It would effectively avoid a down round IPO.

While SurveyMonkey has reported positive free cash flow in the first half of 2018, the company’s adjusted EBITDA margins have declined on a year-over-year basis. Moving forward, SurveyMonkey will need to stabilize those margins. However, if the company’s EBITDA margin exceeds 25 percent in 2020, SurveyMonkey could offer investors a compelling story: mid-teens revenue growth and an accelerating bottom line. Investors could then comfortably apply a premium 25.0x or a higher EV/EBITDA multiple to such a valuation, and SurveyMonkey could avoid a down-round IPO.

Based on the most recent S-1 filing, if investors priced SurveyMonkey shares $11 per share (high-end of the pricing range), we estimate the company’s market cap would be just shy of $1.4 billion. As a result, SurveyMonkey’s IPO translates to a roughly 30 percent valuation haircut from its private market valuation of $2 billion.

Effectively, SurveyMonkey would be trading below 4.5x estimated 2019 revenues (likely to exceed $300 million). While there are lots of moving parts here, including profitability outlook, for bargain hunters with a higher tolerance for risk, this is an opportunity.

The Upside Scenario:

A market leader with strong brand awareness. The company was one of the first to popularize online surveys. According to the company’s SEC filings, 45 percent of businesses prefer the SurveyMonkey platform. In relative terms, SurveyMonkey is used twice as often as the next most recognized product and seven times as often as the third-most recognized polling platform. In addition, 75 percent of its customers last year were repeat business from 2016, a number that demonstrates strong brand loyalty.

Stable financials with positive free cash flow generation. Survey Monkey finds itself on stronger financial footing of late. In the most recent fiscal year, the company generated $218.8 million in revenue, a 5 percent increase from 2016. In the six-month period ending June 30, 2018, period-over-period revenue jumped 18.7 percent. Furthermore, the average revenue per user grew to $362 in fiscal 2017 from $349 the previous year. SurveyMonkey in the most recent fiscal year generated positive free cash flow.


A diverse customer base. SurveyMonkey boasts 600,000 customers, none of which contribute more than 1 percent of revenue. With companies accounting for just half of those customers, we can see a large growth opportunity in converting more users to enterprise products. According to the prospectus, approximately 14 percent of the Fortune 500 held organization-wide contracts with SurveyMonkey. That group accounted for just 12 percent of SurveyMonkey’s overall revenue. Yet, 98 percent of the Fortune 500 companies pay to use some kind of service from SurveyMonkey. Convincing more of these companies to sign enterprise contracts represents a lucrative opportunity.

Promising secular trends. For SurveyMonkey, helping companies understand the ’why’ behind their customer data and take proper action is a great value proposition. Such a market is worth $60 billion a year, according to the prospectus. Given revenue multiples of comparable SaaS companies in the range of 7.5x to 9.5x, a valuation north of $1.7 billion seems appropriate.

The Downside Risk:

IPO likely used to pay off debt. Unlike typical VC-backed tech IPOs, SurveyMonkey will use a significant portion of the proceeds to pay off debt and other tax liabilities, rather than funding innovation. Moreover, SurveyMonkey has yet to turn a profit, although the losses are decreasing. Paying off debt will reduce future interest expense.

Competitive landscape is getting crowded. SurveyMonkey faces stiff competition. Google provides an online survey platform. Qualtrics and Medallia, as well as more traditional market research firms, operate in this space.

Freemium model continues to face execution and conversion challenges. Only 10 percent of SurveyMonkey’s registered users pay for the service, and only 26 percent of this group actually used the platform last year. So we anticipate the company will need to spend considerably to convert users to subscribers. In the last fiscal year, the company devoted 35 percent of revenue to sales and marketing.

International Challenges. With 35 percent of current users outside the United States, SurveyMonkey is not immune to escalating global trade tensions and intellectual property disputes. Foreign customers respresent a large portion of SurveyMonkey’s future growth.

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Analyst compensation is based upon various factors, including the overall performance of SharesPost, Inc. and its subsidiaries, and the performance and productivity of such analyst, including feedback from clients of SharesPost Financial Corporation and other stakeholders in our ecosystem, the quality of such analyst’s research and the analyst’s contribution to the growth and development of our overall research effort. Analyst compensation is derived from all revenue sources of SharesPost, Inc., including brokerage sales.

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This report does not contain a complete analysis of every material fact regarding any issuer, industry, or security. The opinions expressed in this report reflect our judgment at this date and are subject to change. The information contained in this report has been obtained from sources we consider to be reliable; however, we cannot guarantee the accuracy of all such information.

Any securities offered are offered by SharesPost Financial Corporation, member FINRA/SIPC. SharesPost Financial Corporation and SP Investments Management are wholly owned subsidiaries of SharesPost, Inc. Certain affiliates of these entities may act as principals in such transactions.

Investing in private company securities is not suitable for all investors. An investment in private company securities is highly speculative and involves a high degree of risk. It should only be considered as a long-term investment. You must be prepared to withstand a total loss of your investment. Private company securities are also highly illiquid and there is no guarantee that a market will develop for such securities. Each investment also carries its own specific risks and you should complete your own independent due diligence regarding the investment, including obtaining additional information about the company, opinions, financial projections and legal or other investment advice.

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Alejandro Ortiz

Alejandro Ortiz

Alejandro is a Research Analyst, Private Investment Research for SharesPost Research LLC. Prior to joining SharesPost, he was a Valuation Analyst at Duff & Phelps with a focus on TMT industries.
PLEASE READ THESE IMPORTANT LEGAL NOTICES & DISCLOSURES

CONFLICTS

This report is being published by SharesPost Research LLC, and distributed by SharesPost Financial Corporation, a member of FINRA/SIPC. SharesPost Research LLC, SharesPost Financial Corporation and SP Investments Management, LLC, an investment adviser registered with the Securities and Exchange Commission, are wholly owned subsidiaries of SharesPost, Inc.

Recipients who are not market professionals or clients of SharesPost Financial Corporation should seek the advice of their own personal financial advisors before making any investment decisions based on this report. None of the information contained in this report represents an offer to buy or sell, or a solicitation of an offer to buy or sell, any security, and no buy or sell recommendation should be implied, nor shall there be any sale of these securities in any state or governmental jurisdiction in which said offer, solicitation, or sale would be unlawful under the securities laws of any such jurisdiction.

This report does not constitute an offer to provide investment advice or service. Registered representatives of SharesPost Financial Corporation do not (1) advise any member on the merits or advisability of a particular investment or transaction, or (2) assist in the determination of fair value of any security or investment, or (3) provide legal, tax, or transactional advisory services.

ANALYST CERTIFICATION

The analyst(s) certifies that the views expressed in this report accurately reflect the personal views of such analyst(s) about any and all of the subject securities or issuers, and that no part of such analyst compensation was, is, or will be, directly or indirectly related to the specific views contained in this report.

Analyst compensation is based upon various factors, including the overall performance of SharesPost, Inc. and its subsidiaries, and the performance and productivity of such analyst, including feedback from clients of SharesPost Financial Corporation and other stakeholders in our ecosystem, the quality of such analyst’s research and the analyst’s contribution to the growth and development of our overall research effort. Analyst compensation is derived from all revenue sources of SharesPost, Inc., including brokerage sales.

DISCLAIMER

This report does not contain a complete analysis of every material fact regarding any issuer, industry, or security. The opinions expressed in this report reflect our judgment at this date and are subject to change. The information contained in this report has been obtained from sources we consider to be reliable; however, we cannot guarantee the accuracy of all such information.

Any securities offered are offered by SharesPost Financial Corporation, member FINRA/SIPC. SharesPost Financial Corporation and SP Investments Management are wholly owned subsidiaries of SharesPost, Inc. Certain affiliates of these entities may act as principals in such transactions.

Investing in private company securities is not suitable for all investors. An investment in private company securities is highly speculative and involves a high degree of risk. It should only be considered as a long-term investment. You must be prepared to withstand a total loss of your investment. Private company securities are also highly illiquid and there is no guarantee that a market will develop for such securities. Each investment also carries its own specific risks and you should complete your own independent due diligence regarding the investment, including obtaining additional information about the company, opinions, financial projections and legal or other investment advice.

Accordingly, investing in private company securities is appropriate only for those investors who can tolerate a high degree of risk and do not require a liquid investment.

SharesPost, the SharesPost logo, My SharesPost, the SharesPost Index, and SharesPost Investment Management are all registered trademarks of SharesPost, Inc. All other trademarks are the property of their respective owners.

Copyright SharesPost, Inc. 2019. All rights reserved.