Recently, someone at Flipkart asked me what I thought about the company. So here’s what I think. This is of course based on conversations I’ve had with top investors and industry insiders in the last week or so.
Flipkart is Here
Flipkart has raised nearly $1.91 billion in 2014. This year, it is closing in on a $550 mn funding round led by Tiger Global at an estimated valuation of $16 bn. Flipkart’s gross merchandise value, or the sigma of maximum retail price of all goods sold on the platform is close to $4.5 Bn. It is targeting $8 Bn GMV by the end of this year. Essentially, the company is valued nearly 3 to 4 times its gross merchandise value.
Now lets benchmark Flipkart against two other e-commerce companies.
Amazon has a market cap of nearly $200 Bn and net sales of $88.99 Bn (2014). So the market cap, or the public market valuation of Amazon is close to 2 times its net sales. Amazon does not disclose gross merchandise value, which will be much higher. So in Amazon’s case, net sales means the actual revenue it makes and not the price of goods sold on its platform.
Alibaba
For good measure, lets take Alibaba. The Chinese e-commerce giant has a market cap of $243.3 Bn. It’s gross merchandise value (2014) is $370 Billion. That is, its market cap is about 0.65- 0.7 times its gross merchandise value.
Flipkart Goes Up
If everything goes well (that is, everything!) Flipkart will raise subsequent rounds at slightly higher valuations and finally go public. At that time, investors will surely benchmark Flipkart against Alibaba or Amazon. They will need to see profitable growth, with revenue taps that haven’t been turned on yet and massive scale. That would be a time to celebrate.
Or Down
Companies are always at odds with many factors. It's not necessary that they will, but there are many things that can go wrong. If Flipkart struggles to find investors until its initial public offering, at current burn rates, it will be forced to raise capital at lower valuations or at par with current valuations. Discounts will have to go away and it will be forced to improve unit economics.
This is where the company will really struggle to keep pace with competitors like Amazon. Revenues from Amazon's cloud based services just kicked in big time. In the quarter ended March 2015, they made $1.57 Bn or 7% of revenues from Amazon Web Services, beating analysts estimates. It means that market pressure will ease up for Amazon and it will be able to invest more into growing its businesses elsewhere-- like India.
What’s the big worry?
The public markets are far less forgiving these days. Flipkart will have to get a few things absolutely right if it has to IPO. But before that, it will need to raise additional capital. Between the top e-commerce firms, nearly $20 billion needs to be raised, according to Goldman Sachs. According to one estimate, Flipkart could need as much as $2 bn before it goes for a public issue.
Until it turns profitable, Flipkart’s future is closely tied to its ability to raise funds at a higher valuation which is clearly showing signs of slowing down. Pankaj wrote recently that Flipkart is on the verge of closing a funding round of $550 million at a valuation of nearly $16 billion. There are no new investors in this round yet and that’s a worrying sign. An internal round could mean that new investors aren’t convinced if they should invest in Flipkart.
When evaluating a company, they will wonder: if we can buy Alibaba trading at 0.7x its GMV for so much, why would I buy Flipkart? It will be a tough call to make.
PS: Sachin Tendulkar usually has a gameplan ready. Neither does he need batting tips from onlookers. And surely, Sachin Bansal & co has one too.
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