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Revolut valuation makes little sense when compared with Lloyds | Nils Pratley

It is “great news”, said Rishi Sunak, performing his ra-ra routine for the UK’s fintech sector, that Revolut has raised another $800m (£566m) to fund expansion. And it is: more capital and bold investors is what the UK scene needs. If the new cash helps Revolut take its “financial superapp” to the world, good luck to it.

But how can this six-year-old company be worth $33bn, or £24bn, as implied by the terms of the investment from SoftBank and Tiger Global Management? The valuation is a whisker above that of NatWest, and the more remarkable comparison is perhaps with Lloyds Banking Group, the biggest beast in UK banking. Revolut is supposedly worth 70% of Lloyds’ stock market value. What?

In the UK, Lloyds accounts for 19% of the mortgage market, 25% of credit card balances, 22% of current accounts, 19% of small business lending and 16% of consumer loans. In the “super” stakes, it’s there already. Last year, a period scarred by pandemic impairments, Lloyds still made a statutory pre-tax profit of £1.22bn. This year the City expects a more normal £5.4bn.

Revolut, by contrast, made a comprehensive loss of £168m last year and, while “adjusted” revenue rose at the slick rate of 57%, the line was minuscule by comparison with Lloyds. It was £261m, and £39m comprised fair value gains on cryptocurrency assets”, which doesn’t sound a reliable earner every year.

The usual response to Eeyoreish grumbles about fintech valuations is an instruction to scan the horizon and imagine the coming global digital revolution in consumer finance. “Revolut’s rate of innovation has redefined the role of financial services,” said SoftBank. The company is “in a strong position to continue scaling in both existing and new geographies”, said Tiger.

Well, yes, the global angle is different and, yes, Revolut has expanded beyond its origins in cards to avoid foreign exchange fees. But its sole banking licence is in the eurozone and it hasn’t yet got one in the UK, its biggest market. One can make punchy growth projections years into the future, but it is also true that financial services is a competitive game in which customers tend to be sticky and incumbents are also allowed to spend heavily on whizzy apps.

Revolut was valued at $5.5bn in its last funding round a year ago and is now worth six times as much, which is impossible to explain by events. The arrival of easy fees from punters trading cryptocurrencies on the app is not a game-changer.

If a couple of big investors wish to take a $800m plunge at the higher valuation, you accept their money, of course. But Revolut’s chief financial officer, Mikko Salovaara, was understating matters when he called the fundraising environment “very strong”. Wild would be another description. The valuation makes little sense.

Avast must avoid knockdown price

Not another stalwart of the FTSE 100 index being snapped up by an overseas predator. Actually, cybersecurity specialist Avast doesn’t fit the usual script. It has its headquarters in Prague and joined the London stock market as recently as 2018. It cannot be called a UK national treasure.

Equally, though, Avast should not depart at a knockdown price, which is the risk in the bid approach from US group NortonLifeLock. The potential terms are not yet known – just the fact that “advanced discussions” are happening, which suggests Avast itself is open to a deal in principle.

One hopes, though, it is on better terms than implied by a mere 18% rise in the share price on Thursday, taking Avast’s valuation to £6.1bn. Downloadable security software is plainly a growth market in an age of home-based working, if that’s what we’re now entering. Avast’s kit is well regarded and the company has a more international span than Norton. Under its “freemium” model, not all the 435 million users pay for their services, but the base of customers is enormous.

Avast’s co-founders, Pavel Baudiš and Eduard Kučera, own 35% of shares between them, so should not lack motivation to negotiate hard. There’s a potential issue, though, if they’re keener than outsider shareholders on taking Norton equity in an offer billed as “cash and shares”. But the basic problem is price. City analysts reckon £6bn is about £1bn short of fair value and one can see why. Avast has flown under the radar in London, but there aren’t many companies like it anywhere.

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