Why Toast POS is 20x More Valuable than Poynt, But Half its Size!
GoDaddy (NYSE:GDDY) recently announced its planned acquisition of payment processor, Poynt, for $365 million. What’s remarkable is by pure size, Poynt is larger than Toast. Yet, Toast is reportedly now worth $8 billion despite recently cutting half its staff.
Earlier this year before the pandemic, Toast raised $400 million at a $4.9 billion valuation, a 100% increase from its valuation in 2019.
The size gap between these two companies in valuation vs processing volume is very common in the FinTech and payment processing industry, which easily confuses many investors who do not understand why and look solely at the respective operating size of such companies.
Investors could miss out on incredible investment opportunities by not understanding what drives value in the world’s largest and most acquisitive industry. In this post, I am explaining the cause while also supporting Sky’s business model and value proposition to new investors from Sky’s Series A and venture capitalists who are assessing our Series B investment opportunity.
Value of owning your network
What makes Poynt worth $365 million and a similar, yet smaller restaurant specialist worth $8 billion is the same reason that Global Payments (NASDAQ:GPN) is considerably larger than Square (NASDAQ:SQ) in terms of processing volume, yet Square at $110 billion is nearly twice the value of Global Payments……. the same reason General Motors has 3x more revenue but Tesla is 10x more valuable!
Unlike Tesla, General Motors must leverage a network of dealers to sell its product, much like Global Payments and Poynt rely on a network of resellers (ISOs) to commercialize their product. Toast, Square, Shopify, Stripe, and PayPal all operate direct B2B.
While working with resellers is a great way to grow your business quickly, there are many issues. You are unable to control the sales and customer service experience of your customers and there is no unified product support or sales experience; there is no unified message.
Perhaps most importantly as it pertains to the valuation of these companies, B2B software companies that rely on resellers are competing with other B2B software companies to gain the support of third party sales organization. For example, Poynt is competing with Clover, or Global Payment’s new Vital POS. That means Poynt, Clover (First Data), or Global Payments must offer resellers a 50% or more revenue share after hard costs.
The larger independent sales organizations (ISOs) can demand revenue share upwards of 80%. In this business model, ISOs become the customer much like car dealerships become the customer of General Motors, and these product manufacturers must be very aggressive to gain the support of their customers… or else the local dealerships will sell Ford instead of GM.
Meanwhile, Square, Toast, Shopify, Stripe, and PayPal with their direct B2B model keep 100% of the revenue while controlling their narrative between product and customer service, which in turn creates longevity. For these businesses, the end user is actually their customer.
Therein lies the difference in $365 million and $8 billion for seemingly equal companies of similar size. Companies like Toast offer the following, whereas Poynt can not with its reliance on ISOs and resellers.
- Retain more of their revenue
- Offer a unified experience
- More effective method of retaining customers long-term.
- Aggressive corporate development strategy (explained below)
Hence, both Wall St and Main St are willing to bet on continued success and a high conversion of processing volume to revenue for such companies that possess the above points.
Sky Systemz “Toast” business model
Fact is the public market and venture capital demand for software companies that make money from payment processing is at unprecidented heights, for those who sell direct to the end user.
Ultimately, GoDaddy’s acquisition of Poynt will likely prove very valuable to the company if it can begin to internalize some of the sales practices that Poynt currently outsources. In retrospect, GoDaddy could turn a $365 million acquisition into $12 billion in market capitalization value if done correctly. The assumption is based on the percentages of GPV that payment companies like Square and Toast currently support.
With a similar business model that captures a 95% revenue share of processing volume and a new subscription model for larger businesses in 2021, Sky is confident it will support similar ratios to Square and Toast as it grows larger.
The following is completely hypothetical, but also plausible given what we have seen in the industry. The outlook is based on feedback from ongoing corporate development conversations with venture capitalists and investment banks that Sky Systemz is working with.
The above is an illustration of the corporate development strategy for a startup that operates like Toast, Stripe, Square, and Shopify from Series A to public entity. Likewise, the illustration is an outlook for Sky Systemz based on our internal GPV growth expectations.
There are three major observations related to the above chart. One, the gross processing volume/value trend rises as the company’s volume grows larger. Two, the rising GPV/value ratio is based on an observation of Square, Toast, and Shopify over the last few years…. with the value of each company rising significantly faster than the growth of its overall volume. We can conclude that investors are willing to take bigger bets as the company captures more market share, which is somewhat unusual.
Typically, investors make larger bets when startups are maturing as a reflection of future expectations, but its valuation grows slower than its fundamentals to normalize the stock price. The unusual reality for FinTech and B2B software companies that make money from payment processing just shows the level of demand and promise for these types of companies…. when operating like Toast and Square.
This leads to my third observation — the “event” and status of the company matters. This can also be referred to as corporate development. Poynt was not a company that raised capital often, whereas Toast does so a couple times per year. Hence, the valuation of said companies is largely tied to its activity in capital markets, and with Toast planning an IPO in 2021, demand will be significant and likely yield the industry’s highest GPV/value ratio.
Toast would unlikely secure such interest if not for its aggressive fund raising activities and corporate development strategy.
Conclusion
Payment companies with aggressive corporate development are able to spend more and grow faster. When coupled with the right business model, investors can capitalize on once in a lifetime returns when they are able to identify these opportunities at an early stage (ie Sky).
This is an industry that is rapidly changing with greater investment in cashless, cloud, and unified business services technology. Ironically, Poynt showed great promise and progress with investments in all of the key areas, much like Toast, Square, Shopify, and yes, even Sky.
But, Poynt lacked the corporate development and business model parts of the equation, parts that are essential to creating long-term shareholder value. This explains why Poynt, a company of equal size to Toast, just got bought for a whopping 5% of Toast’s latest $9 billion valuation. And while that may sound like Toast is a bad investment, the likely reality is when Toast IPOs next year, it will maintain a 100% volume/value ratio because investor demand for a fast-growing direct to customer software company that makes money from subscriptions and payment processing is off the charts.
