Hello and welcome back to our regular morning look at private companies, public markets and the gray space in between.
Last Friday something very odd happened: the public debut of Kingsoft Cloud, a company that we’ve covered before. I’m nigh-incredulous about this IPO for the host of issues that we discussed when the company first filed. Since then, IPOs have only gotten only stranger.
Kingsoft is not the only company looking to tap the public markets. Vroom, which has raised over $700 million according to Crunchbase, is looking to go public this summer. The company sells used cars, which makes it going public all the more fun; aren’t car sales in the toilet?
But that IPO filing is still private, pushing Vroom’s debut at least a month into the future. Today, then, let’s work understand why Kingsoft Cloud successfully going public is surprising. And why what happened after it priced is even more of a shock.
This company went public?
When Kingsoft Cloud filed its F-1 to go public, we were in awe of its wild and weird financial results.
Sure, the company was growing quickly, but there were some real problems under the hood. You know the old joke that it’s not hard to grow a business selling dollars for $0.50? Well Kingsoft Cloud did that in 2017 and 2018, selling its cloud services for less money than it took to deliver them. That’s to say that Kingsoft Cloud was gross margin negative those years. In 2019, the firm was not gross margin negative; indeed, it saw gross margins in the period of 0.2%.
Watch out world, a profit machine is coming through!
Anyway, Kingsoft only lost $28 million last year thanks to its low operating costs. But its revenue quality was still garbage. That’s why the company selling more shares than expected (30 million, up from 25 million) in the middle of its proposed IPO range was a surprise. At $17 per share, Kingsoft raised $510 million in its public debut. That’s a lot!
After its IPO, the company completed a second feat. Namely appreciating rapidly, closing Friday at $23.84 per share, worth some $4.77 billion. On a revenue multiple basis, that’s around 8x its 2019 revenue. That would be lower middle-tier for a SaaS company, but those firms sport recurring revenue and gross margins in the 70 to 80 percent range. Not 0.2% for the preceding calendar year.
Does any of this make sense? Perhaps Kingsoft Cloud can rapidly scale its gross margins. If it can 50x them in 2020, it would close the year with 10% gross margins—likely generating enough gross margin to cover its operating costs, provided they don’t grow too rapidly. But, even then, its profit would be so slim that the firm would still feel expensive. And with China’s economy struggling — more here — how much growth is there in the short-term for the third-largest cloud player in the country?
Investors don’t seem to be too worried. The stock market is off this morning, but shares of Kingsoft Cloud are up 6.96%, or $1.66 per share, to $25.50 as of the time of writing. The company is now up precisely 50% from its IPO price. Heh.
The IPO window is more open than I thought. I would have bet you lunch that Kingsoft Cloud would not go public at an attractive price. I would have bet you dinner that it wouldn’t go public at an attractive price and then do well post-IPO. And I’d bet you dinner at our house that it won’t hold onto these gains. But since my first bets would have gone so poorly, I should probably start setting the table.
All this bodes well for Vroom. Vroom wants to race into the public markets right when equities have come back a bit. Maybe it can go public? And if Kingsoft Cloud and Vroom can go public, why can’t, say, late-stage SaaS companies?
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