Is Canva Really Worth $6 Billion?
A detailed analysis on the trending design software business
Canva is great. I used it for months before switching to more advanced options. It is easy, accessible, and cool. Everybody can produce a little piece of art in seconds. It’s not a surprise that every month 30 million users choose Canva over more complex solutions like Adobe or Sketch. Canva’s numbers are growing exponentially each month, but is the company really worth $6 billion?
Canva’s financials
Unlike many unicorns, Canva is profitable (apparently). The founders declared a paid user base of 1.5 million subscribers to Canva’s Pro account (Forbes, 2020). Hence, we can assume that Canva’s yearly revenues are close to $234 million (1.5 million times $13 -which is approximately the average monthly fee for the Pro account - times 12 months). Actual revenues have not been disclosed by the company.
The last information I could find on profit is dated December 2017, when the company declared a $1.8 million after-tax profit for the last six months (Australian Financial Review, 2019). The company declined to reveal earnings for the last two and a half years, even though the founders claim constant and growing profitability.
I tried to retrieve more figures through Creditsafe, a platform that discloses financial information of private companies, but Canva does not disclose its balance sheets.
Canva’s user base
Even though Canva’s product is awesome, only 5% of subscribers are willing to pay for it. I don’t think this is bad, but it shows that monetization is quite hard. With the last investments, the founders can speed up the development of new features, but will they be able to keep growing Canva’s paid user base?
I myself had to switch to more advanced solutions once I realized Canva’s features were not enough for my needs. Many users may go through my same path, leaving Canva with a user base made of beginners with lots of comings and goings.
Canva’s valuation
Is Canva’s valuation correct or is it another tech valuation gone wrong? The fact that Canva makes a profit is good, but it is not enough to value a business $6 billion. Actually, making profits should be a prerequisite, not a rare event. In order to understand whether Canva’s valuation is correct, we should compare it to another tech company and also to a non-tech company.
Let’s take for example TransferWise. TransferWise is a fintech company valued $3.5 billion that declared a $12.8 million profit in 2019 with a $221 million revenue (CNBC, 2019). Its CEO reported that the company is “a rare breed of unicorn” because, unlike many unicorns, it is profitable. TransferWise’s financials are very similar to Canva’s, yet the company’s valuation is lower. With this first comparison, we can already assume that Canva’s valuation is probably overpriced.
For the non-tech example, let’s look at Salvatore Ferragamo, an apparel company with a very strong luxury brand. Even though the comparison may seem unreasonable, we need to forget the tech industry for a moment to understand the real value of a company.
Salvatore Ferragamo was founded in the 1930s and it is now valued $3 billion with a $92 million net profit and revenues over $1.3 billion (WWD, 2019). The brand is an emblem of fashion and it’s known all over the world. If you take a look at the company’s financials, you will see that the company has been highly profitable since ages. Hence, the question now is: can we value this company $3 billion and Canva $6 billion?
Canva and the tech bubble
We can argue on many levels that Canva’s financials are outstanding when compared to the ones of other unicorns. That’s the same argument we could use to praise TransferWise, but we must understand that the valuations of many tech companies are unreal. It is true that tech companies can scale quickly, but it does not seem that scaling comes at no cost. Technology is hard to make and hard to maintain, hence costly. In the end, it all comes down to how much value (profit) a company can generate.
If you had $6 billion, would you buy Canva or Salvatore Ferragamo? If you choose the first, the only expectation you can have is to keep blowing up the valuation to resell the company at a higher price. If you choose the second, you can make money with an established company and spend $3 billion for other acquisitions.
The real valuation of a tech company
In order to give a proper valuation to a tech company, we should look at its present value and not at its future value. The future is uncertain and the value of a company needs to be correlated with its profits and not with its growth rate. Let’s try to use Salvatore Ferragamo’s valuation (or any other “normal” valuations) to retrieve Canva’s real valuation.
We don’t know Canva’s profits, but we could assume that yearly net profit is close to $12 million, almost 8 times less than Salvatore Ferragamo’s. We also need to consider that Canva has just raised $60 million, while Salvatore Ferragamo does not need cash injections for its operations. Hence, we could assume that a good market value for Canva would be around 8 to 12 times less than the value of Salvatore Ferragamo. Why? Because neither the user base nor the financials of Canva are good enough to price the company at $6 billion.
After this analysis, if you had $6 billion, would you buy Canva or Salvatore Ferragamo? I think you agree with me that buying Canva at $300–400 million becomes a very good option. Even though Canva has been experiencing tremendous growth, the company is not established enough to predict that its profits will skyrocket. Hence, the risk on the investment becomes reasonable.
This valuation could be confirmed by a Times-Revenue Method which is used to determine the value of a company based on revenues. If we take Canva’s revenue (approximately $234 million) and we multiply by 0.5, which is the standard coefficient of a service business, we get a $117 million valuation. On the other hand, if we use a standard coefficient for a tech company which is usually 3, we get a $702 million valuation. As the truth always lies in between, if we add the two valuations and divide by 2, we get an average of $410 million, which is close to an appropriate valuation.
Conclusion
Canva is an awesome product, but it is definitely not worth $6 billion like many other unicorns are not worth $1 billion or more. We need to go back to reality when determining the valuation of a tech company. The tech industry is not a safe paradise and we must treat it like any other industry. Most importantly, the valuation of a company needs to reflect its present value to avoid overpricing based on deceiving predictions.
Overpricing a valuation is like cheating on a test. We may get through the first times, but in the long term the professors will understand that our grades do not reflect our true value. In the case of the tech industry, an entire class is cheating on tests like it happened during the dot-com bubble.
In the end, I hope Canva will find a way to keep pleasing investors. It would be very sad to see such a good product ruined by a silly valuation and financial greed.
References
- “Canva raises $60 million on a $6 billion valuation” by Jordan Crook on TechCrunch
- “Is Canva really worth $4.7 billion?” by Michael Bailey on The Australian Financial Review
- “Design Software Unicorn Canva Hits $6 Billion Valuation In $60 Million Raise Amid Covid-19 Boom” by Alex Konrad on Forbes
- “TransferWise, the $3.5 billion fintech firm backed by Peter Thiel, posts its third year of profit” by Ryan Browne on CNBC
- “Salvatore Ferragamo 2019 Profit Up 1.7%” by Luisa Zargani on WWD
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