HashiCorp Seeks $1 Billion In U.S. IPO
Summary
- HashiCorp has filed proposed terms for a $1 billion U.S. IPO.
- The firm provides a cloud-based Infrastructure-as-a-Service platform to enterprises worldwide.
- HCP has grown quickly and produced strong metric performance, so the IPO is worth consideration.
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A Quick Take On HashiCorp
HashiCorp (NASDAQ:HCP) has filed to raise $1.07 billion from the sale of its Class A common stock in an IPO, according to an amended registration statement.
The company provides cloud computing infrastructure and related software and services to enterprises worldwide.
It may take some time for the firm to grow into its valuation, but HashiCorp is a good opportunity for a medium to longer term investment time horizon in the Enterprise IT space.
Company & Technology
San Francisco, California-based HashiCorp was founded to create a range of infrastructure services (IaaS) for cloud IT deployments for the purpose of simplifying and automating IT operations.
Management is headed by Chairman and CEO David McJannet, who has been with the firm since July 2016 and was previously VP Marketing at GitHub.
Below is a brief overview video of the firm's approach to cloud IT operations:
(Source)
The company’s primary offerings include:
Terraform - provisioning
Vault - security
Consul - networking automation
Nomad - orchestrator
HashiCorp has received at least $450 million in equity investment from investors including Mayfield Fund, GGV Capital, Redpoint Omega, Mitchell Hashimoto and True Ventures.
HashiCorp - Customer Acquisition
The firm pursues larger customers through a direct sales group and mid-size and smaller firms through a self-serve offering.
HCP also has developed an extensive network of cloud service providers and independent software vendors and integrators that work with the company to broaden its reach.
Sales and Marketing expenses as a percentage of total revenue have dropped as revenues have increased, as the figures below indicate:
Sales and Marketing | Expenses vs. Revenue |
Period | Percentage |
Nine Mos. Ended October 31, 2021 | 63.5% |
FYE January 31, 2021 | 66.6% |
FYE January 31, 2020 | 73.6% |
(Source)
The Sales and Marketing efficiency rate, defined as how many dollars of additional new revenue are generated by each dollar of Sales and Marketing spend, fell to 0.5x in the most recent reporting period, as shown in the table below:
Sales and Marketing | Efficiency Rate |
Period | Multiple |
Nine Mos. Ended October 31, 2021 | 0.5 |
FYE January 31, 2021 | 0.6 |
(Source)
The Rule of 40 is a software industry rule of thumb that says that as long as the combined revenue growth rate and EBITDA percentage rate equal or exceed 40%, the firm is on an acceptable growth/EBITDA trajectory.
HCP’s most recent calculation was 22% as of October 31, 2021, so the firm needs some improvement in this regard, per the table below:
Rule of 40 | Calculation |
Recent Rev. Growth % | 49% |
EBITDA % | -28% |
Total | 22% |
(Source)
The firm’s dollar-based net revenue retention rate for the trailing twelve months was 127%, a good result.
The dollar-based net revenue retention rate metric measures how much additional revenue is generated over time from each cohort of customers, so that a figure over 100% means that the company is generating more revenue from the same customer cohort over time, indicating good product/market fit and efficient sales and marketing efforts.
HashiCorp’s Market & Competition
According to a 2021 market research report by Research and Markets, the infrastructure as a service market (IaaS) is expected to grow by $136 billion from 2021 to 2025.
This represents a forecast CAGR for the period 2021 to 2025 of 27%.
The main drivers for this expected growth are the continued transition of enterprises to cloud applications and the need to drive efficiencies across all aspects of the enterprise.
Also, as companies transition to cloud infrastructures, their systems are becoming more complex and there is a substantial need for vendor reduction to improve integration and lower complexity.
Major competitive or other industry participants include:
Amazon
Microsoft
Google
Red Hat
CyberArk
VMware
IBM
In-house IT approaches
HashiCorp's Financial Performance
The company’s recent financial results can be summarized as follows:
Increasing topline revenue
Growing gross profit and gross margin
Variable operating losses and net losses
Increasing cash used in operations
Below are relevant financial results derived from the firm’s registration statement:
Total Revenue | ||
Period | Total Revenue | % Variance vs. Prior |
Nine Mos. Ended October 31, 2021 | $ 224,246,000 | 49.5% |
FYE January 31, 2021 | $ 211,854,000 | 74.7% |
FYE January 31, 2020 | $ 121,261,000 | |
Gross Profit (Loss) | ||
Period | Gross Profit (Loss) | % Variance vs. Prior |
Nine Mos. Ended October 31, 2021 | $ 187,512,000 | 55.7% |
FYE January 31, 2021 | $ 170,802,000 | 75.5% |
FYE January 31, 2020 | $ 97,346,000 | |
Gross Margin | ||
Period | Gross Margin | |
Nine Mos. Ended October 31, 2021 | 83.62% | |
FYE January 31, 2021 | 80.62% | |
FYE January 31, 2020 | 80.28% | |
Operating Profit (Loss) | ||
Period | Operating Profit (Loss) | Operating Margin |
Nine Mos. Ended October 31, 2021 | $ (62,049,000) | -27.7% |
FYE January 31, 2021 | $ (84,009,000) | -39.7% |
FYE January 31, 2020 | $ (56,217,000) | -46.4% |
Net Income (Loss) | ||
Period | Net Income (Loss) | Net Margin |
Nine Mos. Ended October 31, 2021 | $ (62,438,000) | -27.8% |
FYE January 31, 2021 | $ (83,515,000) | -37.2% |
FYE January 31, 2020 | $ (53,370,000) | -23.8% |
Cash Flow From Operations | ||
Period | Cash Flow From Operations | |
Nine Mos. Ended October 31, 2021 | $ (49,217,000) | |
FYE January 31, 2021 | $ (39,623,000) | |
FYE January 31, 2020 | $ (28,365,000) | |
(Source)
As of October 31, 2021, HashiCorp had $218.2 million in cash and $245.9 million in total liabilities.
Free cash flow during the twelve months ended October 31, 2021, was negative ($61.6 million).
HCP IPO Details
HCP intends to sell 15.3 million shares of Class A common stock at a proposed midpoint price of $70.00 per share for gross proceeds of approximately $1.07 billion, not including the sale of customary underwriter options.
No existing or potentially new shareholders have indicated an interest to purchase shares at the IPO price.
Class A common stockholders will receive one vote per share and Class B shareholders will be entitled to 10 votes per share.
The S&P 500 Index no longer admits firms with multiple classes of stock into its index.
Assuming a successful IPO at the midpoint of the proposed price range, the company’s enterprise value at IPO (excluding underwriter options) would approximate $11.4 billion.
The float to outstanding shares ratio (excluding underwriter options) will be approximately 8.55%. A figure under 10% is generally considered a ‘low float’ stock which can be subject to significant price volatility.
Per the firm’s most recent regulatory filing, it plans to use the net proceeds as follows:
The principal purposes of our selling shares in this offering are to obtain additional capital, to create a public market for our Class A common stock and to facilitate our future access to the public equity markets. We intend to use the net proceeds for general corporate purposes, including working capital.
We intend to use a portion of the net proceeds we receive from this offering to satisfy the minimum anticipated tax withholding and remittance obligations of $90.8 million related to the RSU Settlement based upon the assumed initial public offering price per share of $70.00, which is the midpoint of the price range set forth on the cover page of this prospectus.
(Source)
Management’s presentation of the company roadshow is available here until the IPO is completed.
Regarding legal proceedings, management says the firm is not a party to any proceedings that would have a material adverse effect on its financial condition or operations.
Listed underwriters of the IPO are Morgan Stanley, Goldman Sachs, J.P. Morgan and other investment banks.
Valuation Metrics For HashiCorp
Below is a table of the firm’s relevant capitalization and valuation metrics at IPO, excluding the effects of underwriter options:
Measure [TTM] | Amount |
Market Capitalization at IPO | $12,522,689,900 |
Enterprise Value | $11,383,579,900 |
Price / Sales | 43.78 |
EV / Revenue | 39.79 |
EV / EBITDA | -164.52 |
Earnings Per Share | -$0.38 |
Operating Margin | -24.19% |
Net Margin | -24.23% |
Float To Outstanding Shares Ratio | 8.55% |
Proposed IPO Midpoint Price Per Share | $70.00 |
Net Free Cash Flow | -$61,640,000 |
Free Cash Flow Yield Per Share | -0.49% |
Revenue Growth Rate | 49.46% |
(Source)
As a reference, a potential public comparable would be legacy point provider CyberArk Software (CYBR); shown below is a comparison of their primary valuation metrics:
Metric | CyberArk Software (CYBR) | HashiCorp (HCP) | Variance |
Price / Sales | 13.72 | 43.78 | 219.1% |
EV / Revenue | 12.79 | 39.79 | 211.1% |
EV / EBITDA | -300.57 | -164.52 | -45.3% |
Earnings Per Share | -$1.40 | -$0.38 | -72.7% |
Revenue Growth Rate | 10.4% | 49.46% | 377.91% |
(S-1/A and Seeking Alpha)
Commentary About HashiCorp
HCP is seeking to go public for access to capital for its corporate expansion plans and other financial requirements.
The company’s financials show growing topline revenue, increasing gross profit and gross margin, fluctuating operating losses and net losses, but reduced negative operating margin and growing cash used in operations.
Free cash flow for the twelve months ended October 31, 2021, was negative ($61.6 million).
Sales and Marketing expenses as a percentage of total revenue have been dropping as revenue has increased and its Sales and Marketing efficiency rate was 0.5x in the most recent nine-month period.
The company’s Rule of 40 performance needs improvement but its dollar-based net retention rate of 127% is impressive and a strong indicator of the firm’s product market fit and sales and marketing efficiency.
The market opportunity for providing IaaS software and services is large and expected to grow at a significant rate of growth over the coming years, so the firm has strong industry growth dynamics in its favor.
Morgan Stanley is the lead underwriter and IPOs led by the firm over the last 12-month period have generated an average return of 7.2% since their IPO. This is a mid-tier performance for all major underwriters during the period.
The primary risk to the company’s outlook is the potential for one or more of its major platform competitors bundling competing offerings into its existing pricing structure, putting pricing pressure and integration complexity pressure onto HCP.
As for valuation, compared to partial legacy competitor CyberArk Software, HCP is seeking significantly higher valuation multiples but is also growing revenue at a much higher rate of growth.
While HCP’s high operating losses are a concern, as a percentage of revenue, they are dropping.
The firm’s dollar-based net retention rate of 127% is very impressive and shows the firm is growing sharply by providing what the market wants and doing so efficiently.
It may take some time for the firm to grow into its valuation, but HashiCorp is a good opportunity for medium- to longer-term investment in the Enterprise IT space and the IPO is worth consideration.
Expected IPO Pricing Date: December 8, 2021.
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This article was written by
Donovan Jones is a research specialist with 15 years of experience identifying opportunities for IPOs and software companies.
He also leads the investing group
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