Despite the public markets posting a few days of losses, the IPO wave continues to crest as a number of well-known technology companies line up to float their equity on American exchanges. Most recently we saw e-commerce giant Wish file (albeit privately) and news that dating service Bumble could look to go public next year.
Those bits of news came on the heels of Airbnb filing, again privately, and the public release of IPO filings from Unity, Asana, Snowflake and, key for our work today, Sumo Logic and JFrog.
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There are too many venture capital firms associated with the above companies to name here, but the mid-to-late-2020 IPO cohort is a fulcrum upon which a number of venture funds rest, their return profile waiting to see which way the scales tip.
Which made new IPO filings from Sumo Logic and JFrog this morning all the more exciting. The documents provide a bit of homework for us to handle, namely calculating the company’s valuation ranges. But when we do have those figures in place, we’ll be able to see what sort of revenue multiples each company may be able to earn during their public offerings and what sort of delta the former startups can build against their final, private valuations.
If you are just catching up to these IPOs, we have notes on Sumo Logic and JFrog’s earlier SEC filings ready for you. Let’s go!
JFrog and Sumo Logic set IPO price ranges
We’ll proceed in alphabetical order, kicking off with JFrog.
You can read JFrog’s new IPO filing here, which has all the notes you could want on its new price and past performance. Today, however, in honor of saving time, I’ll walk you through the key numbers quickly:
- JFrog final private price: $1 billion, set in October, 2018.
- JFrog initial IPO price range: $33 to $37 per share.
- JFrog implied IPO valuation range: $2.92 billion to $3.28 billion, discounting shares reserved for underwriters.
In its most recent quarter, JFrog had revenues of $36.4 million, giving it an annualized run rate of $145.6 million. Its IPO range values the company at 20x its current run rate to 22.5x the same number. Both of those seem strong for a SaaS or cloud company, but given that JFrog posted a $1.7 million profit in its most recent quarter, the company is simply of a higher quality than most SaaS firms. So, perhaps it will manage to secure and defend above-average revenue multiples. (More on that here.)
Turning to Sumo Logic’s new filing, here’s the latest, again focusing on its its new price and past performance:
- Sumo Logic final private price: $1 billion, set during May, 2019.
- Sumo Logic initial IPO price range: $17 to $21 per share.
- Sumo Logic implied IPO valuation range: $1.68 billion to $2.07 billion.
In its most recent quarter, Sumo Logic had revenues of $49.4 million, giving it an annualized run rate of $197.7 million. As we can already see, Sumo Logic would receive a far smaller revenue multiple than JFrog if it priced inside of its current IPO range. Indeed, the math works out to 8.5x to 10.5x. Or, less than half of what JFrog may manage.
Both companies will go public worth more than their final private price, but Sumo Logic’s returns will be far smaller.
Why? A few reasons come to mind:
- Worse gross margins: In its most recent quarter, JFrog’s gross margins were 82%. Sumo Logic’s were 71%.
- Worse profitability: In its most recent quarter, JFrog’s net income worked out to 4.6% of revenue. Sumo Logic’s was a dismal -24.7%.
- Worse growth rate: JFrog grew around 50% in the first half of 2020, compared to the first half of 2019. Sumo Logic grew by a little under 38%.
You can weight those as “reasons” behind the two different revenue multiples as you deem fit. But what matters is that we’re about to see a smaller company valued more richly than a larger company, and that’s always an interesting test case for how we view the market.
Does the price differential make sense? Yep. And if you want your startup to be more JFrog than Sumo Logic when it comes to IPO pricing, shoot for 80%+ gross margins, 50%+ growth — and don’t lose money.
Of course, we may get new IPO ranges from both companies. JFrog’s doesn’t feel too far off what could be a correct price, but perhaps Sumo Logic is a little cheap at today’s range. More as it comes in.
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