Mispriced: A Deep Dive as to Why Canva's $26 Billion Valuation Doesn't Add Up

Canva, the design software unicorn, is currently involved in a massive secondary transaction, where existing investors and employees are selling  shares at a valuation of US$26 billion.

This move marks one of the largest secondary transactions in the tech industry's history.

In contrast to primary transactions, such as Series A, B, C funding rounds, which involve the sale of newly created shares, a secondary transaction deals with the transfer of shares from current investors to new ones. Canva initially aimed to sell US$1 billion in shares, but due to high demand, they ultimately sold US$1.5 billion worth.

What's particularly interesting is Canva's valuation in this transaction. As of December 2023, Canva’s annual recurring revenue (ARR) stands at $2 billion.

Valuation Approach

Software-as-a-service (SaaS) companies are typically valued on a multiple of revenue. To calculate the implied revenue multiple of Canva from this transaction, I didn't simply divide the $26 billion valuation by Canva's $2 billion ARR.

Instead, my methodology incorporates two adjustments which would then allow me to compare with the EV/Revenue multiples of publicly listed counterparts:

1. Adjusting for Illiquidity: Canva is a private company, unlike publicly listed companies whose shares are liquid. The $26 billion valuation would have already been adjusted for an illiquidity discount. My analysis reverses this discount before determining the implied revenue multiple.
2. Focusing on Enterprise Value (EV): Instead of using a Price/Revenue multiple, I derived the implied EV/Revenue multiple. This approach disregards a company's capital structure and in this case, corrects for distortions that arise from Canva's substantial cash reserve of $750 million.

Considering these adjustments, I derive Canva's implied EV/Revenue multiple to be 15.9x

My view is that a multiple of 15.9x underprices Canva's shares in this transaction. Continue reading to discover the rationale behind this perspective.

I use the term "underpriced" rather than "undervalued" to reflect the nature of my assessment—it's a high-level pricing analysis. For a comprehensive valuation, access to management, historical financial data, and Canva's business plan (i.e., detailed financial forecasts), would be necessary.

Selection of Comparable Companies

Canva offers a SaaS design platform and primarily serves freelancers and small to medium-sized businesses.

In my analysis, I chose to benchmark Canva to other SaaS companies that have a similar customer base. Adobe, a leader in design software, has long-been the obvious comparable for Canva . Another significant comparable is Atlassian, an Australian company like Canva, known for its "team collaboration" software such as Jira, Confluence, and Trello.

As shown in the chart below, Canva's implied EV/Revenue multiple is (i) at the high end of the comparable company set and (ii) very similar to the multiple of Atlassian, the only other Australian company in the set.

The similarity in valuation multiples with Atlassian is not a new observation. Back in September 2021, when Canva was valued at a staggering $40 billion, its implied revenue multiple of 40x was also closely aligned with Atlassian's multiple during the same period.

This suggests that Canva's management may be benchmarking their company’s valuation against Atlassian's trading multiple, considering they are both Australian born software companies.

Justification

However my view is that Canva deserves a far superior multiple than Atlassian for the following reasons :

1. Superior Growth Rates

Canva's growth trajectory significantly outpaces that of Atlassian, making it a standout candidate for a higher valuation multiple. If it were publicly traded, Canva would rank among the fastest-growing software companies.

Over the past three years, Canva's growth has eclipsed that of its peers, as illustrated in the accompanying charts. In a remarkable feat, Canva added 60 million monthly active users in 2023 alone, surpassing its user growth in its first nine years. This rapid expansion signals a strong future growth potential.

2. Profitability

Unlike many of its counterparts, Canva has maintained profitability since 2017, a notable achievement for a fast growing SAAS company. This is because Canva doesn't need to spend tons of cash to acquire users and has been growing organically thanks to a superior product.

Since the interest rate hikes of 2022, free cash flow and profitability have become very important metrics for investors.

While specific profit margins for Canva, being a private entity, are not publicly available, its sustained profitability is a strong positive indicator for investors and therefore, warrants a higher multiple compared to Atlassian, which is yet to achieve profitability.

3. Competitive Advantage

Having a durable competitive advantage is important as it gives investors a level of comfort that the company will continue to grow and make profits in the future which wont be easily eroded by the competition.

Investors can take comfort in Canva's strong brand recognition which is renowned for its accessible and user-friendly platform. It continuously strengthens its market position and network effects with its extensive library of user generated templates and the introduction of new features such as its recent Generative AI tools.

4. Large Addressable Market

The potential market size matters because this allows a company to grow and thus continue compounding at high rates.

Canva operates in a large and still-expanding market. Its focus on accessibility and affordability has enabled it to penetrate markets typically underserved by more traditional design software companies. With the ongoing digital transformation across industries, Canva's potential for growth in both domestic and international markets is substantial.

5. Exceptional Management

Investors prefer founder-led management teams, as they own significant equity and therefore invested in the company's success which is the case for Canva.

Canva’s management team has shown remarkable foresight and execution ability particularly around product development and market expansion, demonstrating a keen understanding of both industry trends and customer needs.

Furthermore, they are not overly optimistic and promotional as they have a proven track record of providing conservative revenue targets and then consistently beat those targets. This instills confidence in their future projections.

6. Robust Financial Health

Canva most likely has a strong balance sheet, as they are profitable and have a reported cash reserve of $750 million. This positions them favorably compared to many other startups that consistently need to raise funding.

This financial health is a significant advantage, especially in a market environment that is less forgiving of loss making and highly levered companies.

Conclusion

Benchmarking its multiple to Atlassian may be easily justifiable to investors however my view is that Canva is a far superior company and given its stellar growth rate should command a much higher multiple.

I can understand why this transaction was over subscribed and the investors who got in are getting a very good deal🚀.

I'm excited to share that I have launched Fair Value Academy. Our first course will be on business valuation, where I focus on delivering practical, hands-on training in creating professional-grade valuation reports. The course is designed to be highly practical with real-world case studies and assignments. If you're interested in joining our first cohort and want a learning experience that goes beyond theory, comment below or send me a direct message for more details.  Look forward to connecting.