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May 28, 2020

What Happened to Pexip?

Following up on the Scandinavian Zoom's performance post-IPO.

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We're back

For those that haven’t been watching Norway’s biggest blockbuster since Thor: Ragnorok, video-conferencing software Pexip has been on quite a ride. Over the course of this newsletter, you’ll hear how the remote work darling has fared since its debut, learn how the rest of the community felt about the stock, and find out where we’re headed next. And of course, we’ll crown the winner of the 1-week pricing challenge.

What’s happened since IPO day?

By the time Pexip made its debut, the company's IPO had been 12x oversubscribed. That was a sign of things to come as the company soared 54% on the first day of trading. Before trading began on May 14th, the stock had been sold at 63 kroner (~$6.40). By 7:10 AM GMT, it had reached 97 kroner (~$9.85), valuing the company at ~$942MM.

That stunning start earned the video-conferencing solution the title of “the new Zoom of Europe” (which is really the “Skype of America”). Remarkably, the stock continued to rise over the succeeding 5 days hitting a high of 105.68 kroner (~$10.74) on May 19th before beginning to bounce between 96 - 103 kroner. The top-end of that range represented a 63% premium over Pexip's initial price.

That fairytale opening was dampened somewhat yesterday as the company tumbled -15.53% without a discernable reason. Meanwhile an index of the Oslo Stock Exchange rose 0.27%. The Dow, Nasdaq, and S&P were all up too, though Zoom fell 1.24%.

How will Pexip fare in the months ahead? Much would seem to depend on the macro-economic environment and persistence of sheltering-in-place, both mandatorily or voluntarily. As David Older, head of equities at Carmignac noted, “A big question is: what happens to the obvious beneficiaries from Covid-19 when people start normalizing their lives? The dominant companies will thrive, while a lot of the smaller companies are going to struggle.”

Intriguingly, many from the community asked a version of the same question, with one reader putting it succinctly: “where does [Pexip] go in a post-pandemic world?”

Pexip will hope to punch above its weight and answer that question over the next quarter, and beyond.

How did we do?

Not unlike the stock with which we began, The S-1 Club got off to a strong start. An impressive group of investors, founders, operators, and MBAs came together from places like Google, Goldman Sachs, Accel, Atomic, Harvard, Wharton, Wayfair, Hearst, Kellogg, AlleyCorp, M13, Box, Columbia, Stanford, Equal, Yale, and other great institutions to share thoughts and take a position on the stock. Thanks to so many of you for sharing some genuinely fascinating insights, and hot takes.

Bull or bear?

The astute readers of the S-1 Club clearly saw latent potential in the Scandi software co. Over 75% of the community were bullish about Pexip’s potential, presaging the company’s opening day pop.

Sentiment analysis

Though most were buyers, the more nuanced consensus view was only what we'd consider "moderately bullish," as most responses clustered around the 6-8 range. The average score was 6.4. Fewer than 7% thought that Pexip rated as a 3 or below while nearly 27% thought it was an 8 or higher. Was it something we said, or is this crew just a naturally optimistic bunch? We’ll compare responses for future editions and see what shakes out.

Your takes

As we hoped, you brought it. The community added thoughtful analysis and commentary beyond our own. In particular, you weighed in on Pexip’s differentiation, predicted an IPO pop, raised a skeptical eyebrow at the company’s long-term future, and mused on the limitations of video-conferencing writ-large. You also added some funny notes that we couldn’t help but include.

Real differentiation

By and large, many of you seemed to find Pexip’s focus on security and interoperability persuasive, especially in the context of Zoom’s stumbles.

Focus on security is key. Interoperability seems like a unique angle to overcome channel conflicts.

Zoom's negative PR has provided an opening for just about every telecon service. Pexip has scale and enough name recognition to be an alternative.

Although video conferencing market is getting congested, I think the market now sees the current offerings as very flawed and will be more willing to embrace a new entrant that has superior security and interoperability features.

Pop...and drop?

Channeling the market’s animal spirits, a few of you foresaw opening day’s price jump, adding that you expected a correction in the medium-to-long-term. It’s too early to say whether Pexip’s (very) recent decline is part of a larger trend or just a bad day at the (virtual) office, but we found these predictions impressive nonetheless.

With the cost of capital being so low and fewer places for those with capital to invest, I would guess there will be a 'pop' after the IPO given the pandemic, rise of videoconferencing, and weaknesses of Zoom.

Think it’ll get blown out media-wise causing an artificial flood. Then drop but not immediately.

Cause for skepticism

Amidst video conferencing’s coronation, some of you looked askance at the would-be Zoomslayer. Specifically, you worried about low name recognition, the possible featurization of Pexip's security-focus, the relative strength of their net retention rate, the well-muscled competitors in the space, and the regulatory environment of the EU.

I do think the lack of brand familiarity is a massive weakness. Furthermore, with Google and Microsoft having their own solutions and using Pexip only as a "partner", I do worry that growth numbers will stall in the longer term.

I am not particularly fond of the videoconferencing industry, despite current tailwinds. The space is crowded and there is not a ton of opportunity to differentiate. I would guess competition will continue to drive up CAC and reduce profitability. The mass market is already controlled by Zoom, who has the advantage of good engineering talent, scale, network effects, and name recognition. The upper end of the market where Pexip would compete is increasingly being overrun by large tech giants with strong balance sheets and a diversified product offering. I could see secure video conferencing becoming more of a feature.

From a software fundamentals standpoint, Pexip may not deserve a best-in-class premium valuation. For one, a 99% net retention rate (esp. at this scale of ARR) is actually quite low among public software "high grower" stocks. In general, net retention rates below 100% means churns/downsell was higher than upsells. If that's the case, it essentially means that (1) Pexip isn't landing and expanding on a seat-by-seat basis throughout customer orgs, and/or (2) customers churn (gross retention rate probably not great). Nevertheless, most software investors do have an understanding of software metrics and will likely price Pexip accordingly we can assume this is already priced in. The bar to beat isn't necessarily just Zoom, but rather MSFT Teams (bundled free with Office packages) and Google Teams (also basically free).

Large exposure to EU both worries me (given macro environment the region is facing) and encourages me (less competition from zoom, more focus on security with GDPR, progressive politics, etc.).

Early days for the industry

If we were to map the progression of video conferencing to the film industry, we may very well be in the age of the Lumière brothers. One reader discussed the limitations of talking online. Very interesting and a point well-made.

No one has solved for teleconference software's key flaw that it can't accurately replicate real human interactions above n > 2. Zoom, Pexip, all these services are phenomenal at providing 2 person conversations, or one-way group conversations (effectively 2 person conversations) with various efficiencies but all breakdown above that n > 2 threshold. My thinking is that the space will continue to crowd with new entrants until someone devises a way to breach that threshold in a way that feels seamless and real, consolidating market share.

Other musings

Not everything falls into neat categories. Beyond the high-level groupings above, you shared interesting tidbits that we wanted to pull out. We admired the intrigue, succinctness, and honesty offered by these three.

One of the software giants (maybe even Zoom itself, though likely not b/c of antitrust) will buy them in the next 12 months.

Not a zoom killer.

How do I pronounce it?

We’ve been saying PECK-ZIP. Hopefully that's right.

What's next?

We take your commentary seriously and are grateful that so many were willing to tell us what you hoped for from this community. In particular, you expressed a desire for conversation and connection. You want to learn from other brilliant, thoughtful folks, and find a regular cadence with which to analyze and understand public companies. A few indicative comments:

Looking for genuine community-building.
Active opinion exchange with people from different backgrounds, but similar curiosity tier. Twitter-like discussions with no word limit :)
I think it would be cool to have a discussion forum where people could discuss each company outside of the Typeform.
I am looking forward to learning from others in the community and discussing interesting and polarizing companies. My hope is that this is like Twitter, except more respectful and open to big ideas.
I think it will be interesting to learn about some under the radar companies from my big bank perspective.
Very excited to have a forcing function (as well as social group) to be regimented about reviewing new S-1’s & learning!
I'm looking forward to reading what other engaged minds have to share and offering my own unique perceptions for discussion. I hope to connect with others who have an interest in analyzing businesses.

We heard you loud-and-clear. Please know that we’re working behind-the-scenes, thinking through the best forum and structure for more frequent discussion. If you have strong opinions about what that should look like, let us know. Just respond to this email, and we’ll get back to you. Thanks for being along for the ride and sharing your thoughts. Our ultimate hope here is that you build this with us, telling us what you want, where we could be better, and what you enjoyed.

On that subject, and at the risk of inflating our fragile egos, we were excited to see the first edition resonate with so many of you. While we were tempted to include every single nice thing you all said and making everyone read them, we thought better of it.

The investor in me is very excited about this.
I appreciate the down to earth tone. Alex Danco or Matt Levine vibes.

Reader, when we saw that last comment, we blushed.

Buckle up

Where we’re going...we absolutely will need roads.

After starting with a competitor of Zoom, S-1 Club is Tokyo-Drifting our way over to used car marketplace, Vroom. Let’s hope all of our analyses are so phonically linked.

Next Thursday we’ll bring you our thoughts on the company hitting the Nasdaq in early June. Founded by the former CEO of BMW Financial Group, the company has raised $250MM in the private markets and is led by ex-Priceline CEO Paul Hennessey. We’ll unpack Vroom’s history, current leadership, competitive positioning (Carvana looms large), and the pandemic-related obstacles the company currently faces: miles driven have declined by 50-90% in many major metro areas, and Hertz’s bankruptcy may flood the market with hundreds of thousands of used cars. Buckle up — this may be a bumpy ride.