What an opening couple of weeks for ServiceTitan (TTAN ticker). From raising the IPO range from $52-57 to $65-67 then pricing the IPO at $71, the stock opened at $101. With the Series H round priced at $84.57, the IPO ratchet structure took effect with 11% annual growth rate, compounding quarterly, kicking in effective May 2024. The stock has settled in over $100 per share, equivalent to a market cap of $9 billion, valuing the company at 11x and 9x 2024 and 2025 revenue, respectively.
The rule of thumb is a 10-20% increase in the IPO price is ideal as it rewards investors in the IPO but does not leave too much money on the table. Pricing the deal at $71 and seeing over a 40% increase as it opened, cost the company $264 million in lost proceeds (e,g, $101 less $71 IPO price times 8.8 million shares sold to the public). Bill Gurley, the famous Benchmark VC investor advocates for a direct listing where a company avoids investment banks and sells shares directly to investors. I would strongly concur, as you avoid investment banking fees and get more of a true market price versus rewarding the investment banks’ top customers.
The big winners are the VC’s ICONIQ (19.4%), Bessemer (11.2%), Battery (6%) and TPG (5.25), who are subject to lockup restrictions but will be free to see the stock 60 days after the IPO. Expect some pressure when these lockup restrictions are off as these VC’s capitalize on some much needed exits.
The gold standard for software companies is the Rule of 40, where combining revenue growth and profit margin (EBITDA) should be 40 or higher. Based on the October quarter, TTAN’s forward revenue growth is 23% year over year and the free cash flow margins improve but still are negative at -2%, equating to 21, well below the Rule of 40.
ServiceTitan appears fairly valued until growth accelerates and/or margins head firmly into the positive.
