In defence of Revolut's $45bn valuation

Yes, really!

I was on the beach with my kids in exotic Bournemouth (not quite South Beach, Miami I know!) on the English Riviera (yeah the sea is a bit grey and alas not quite the Med!) when the Revolut News broke.

I was ready with my talking points about how Wise made the same amount of net income last year ($450m) but is valued at only $9bn. Yeah Revolut is growing faster but how on earth is it worth 5x what Wise is?

BBC News asked me the opposite - why could investors justify buying in at a $45bn valuation - which got me thinking!

Yes of course this is a secondary raise where a large proportion of the $500m likely went to the founders to keep them happy and pay for their groceries and private jets and there may be all sorts of preferential rights such as anti-dilution provisions i.e., it may be a “dirty” term sheet, a term legendary venture capitalist Bill Gurley commonly refers to about private valuations. But let me do some basic maths and dream a little…

The gold standard in fintech neobanks is Nubank, which reported Q2 results only a few days ago. The company is an absolute monster. Here are a few stats to reminder you:

• 104.5m customers up 20.8m yoy including being the primary bank account for 60% of its clients,

• On constant FX basis: Q2 revenues of $2.8bn +65% yoy and adjusted net income of $562m up 131% yoy

• ROE of 33%

Nu Holdings (Nubank) share price is up 73% so far this year reflecting the strength of the recent financials. But the PE multiple has stayed at around 30x the current run-rate of adjusted net income. US investors love the earnings power and equity story but at the end of the day this a bank with balance sheet risk and interest income not a SaaS business with long-term recurring revenue contracts.

Which bring me back to Wise. The company is growing at 20% per annum so less than the 50% growth at Revolut (excluding the impact of interest rate rises) so the PE ratio of 20x is definitely a floor rather than fair value for Revolut.

Revolut’s revenues including the impact of interest rate rises almost doubled last year and growth was 80% in the first half of 2024. Of course the impact of interest rates will be more neutral in the second half of 2024 and likely to start to become a headwind after that as interest rates decline. But still 80% again for a company with around $2bn of annual revenues is very impressive.

Revolut could also argue that although it is not the primary bank for most of its customers like Nubank, it is less dependent on very high net interest margins and interest income. Revenue multiple comparisons are also meaningless for the neobanks that unlike traditional banks book gross interest income rather than net interest income as revenue. Nubank as a a lender in emerging markets, often to low quality customers makes huge gross yields.

Hence could Nubank’s 30x PE be more of a floor than a ceiling on Revolut’s valuation?

A 30x PE multiple would mean that Revolut needs to generate $1.5bn of net income to “grow into” its new $45bn valuation.

Revolut added 12m customers last year to reach a customer base of 38m at the end of 2023 and reached 45m by June 2024.

In 2023 Revolut added over a $1bn of revenues and net income of $421m.

Assuming a slower rate of growth in H2 2024 Revolut could still add more than $1bn of revenues for the full year and double net income.

The big elephant in the room though is the banking license and whether Revolut can monetise this:

Being able to park cash at the Bank of England at higher rates than Revolut currently earns should offset a couple of interest rate cuts.

The credibility and safety provided by a banking license may mean we all increase our deposit sizes at Revolut but it may finally put pressure on Revolut to pass more back to customers. In 2023 Revolut only passed 8% of interest back to its customers an absurdly low level, even materially lower than money transfer businesses like Wise.

This all means that lending - probably credit cards and SMEs before mortgages - will have to deliver to achieve a net income of $1.5bn and higher to justify the $45bn valuation.

I once IPO’ed a fund of funds business in private equity called Partners Group that was best in class in the space. I was close to the founders but several years after listing I became less bullish because I didn’t believe the company could migrate from being a fund of funds to be a direct private equity sponsor. I was wrong!

I recall exchanging emails with one of the billionaire founders years later discussing it. They had a captive client base of sleepy European pension funds and insurance companies but I just thought investing was hard and different.

Partners Group became one of the largest private equity direct investors in Continental Europe. Not on the scale of the US buyout kings but still big enough. Of course they got a decade of zero interest rates and low credit defaults across the economy to ride but still they did it!

Could Revolut do the same?

Lending is hard. It involves scar issue of understanding credit risk that is very different to the hustling of payments and crypto. When to put hedges on and so forth.

• Anyone can give out money but getting it back and on time is different. Provisions need to be booked upfront as Monzo is finding out. And competition from banks is fierce. The major UK banks were too lazy to cut the absurd supernormal profits they make on retail foreign currency but anyone who has taken a mortgage out in the UK knows how competitive the mortgage market is.

Is there any other way to get to a valuation north of $45bn. Of course Revolut could crack the super competitive US market but they are running out of smaller markets to enter. Finding the next few Ireland’s will not be easy or enough!