ByteDance IPO: How we got to a $250 billion valuation
‘You almost always apply a private company or “illiquidity” discount, which often ranges from 10% to 30%, to these multiples.’
Reports emerged this week that ByteDance – the Chinese tech company behind the immensely popular Tik Tok app – had reached a valuation of US$250 billion in the secondary market.
In May of last year, ByteDance’s valuation was said to be around US$100 billion, following a secondary market investment from Tiger Global Management.
This new bumper valuation comes as investors grow increasingly confident in the business ‘and founder Zhang Yiming weighs options for an initial public offering,’ according to Bloomberg.
Despite that, timing around a potential IPO remains deeply uncertain and no official date has been set.
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Background
ByteDance and its potential path to a public listing has been closely watched by the market over the last year, as users flock to the company’s TikTok app and revenue growth explodes. It’s also courted controversy.
Peak ByteDance hype in 2020 was cut down by a series of escalating demands from former US President Donald Trump. Centrally, a variety of concerns about the company, chiefly centred on privacy, would see Trump order the company to divest its US operations.
In what became a relatively melodramatic affair, the parameters of these divestment demands continued to change: At one point Microsoft was poised to snap up the social media giant, then in another twist of events, Oracle was set to buy or partner with the company.
Trump’s defeat to Joe Biden in November 2020 however would see any potential deal cut short and ByteDance would retain complete control of its US operations.
Fundamentals ↑
Taking one step back, in 2020, the company is said to have booked $37 billion in revenue, more than double the year prior, against $7 billion dollars in operating profits, compared to $4 billion in operating profits the year prior.
According to eMarketer, TikTok is forecast to have 73.7 million users by the close of 2021, and 88.7 million users by 2024.
Discounts
Against its current billion valuation, ByteDance trades at ~6.7x 2020 sales. How does that stack up against three high-profile US-listed social media companies? Check out the table below:
The basic reason that ByteDance trades at such a discount to some of its US peers is the liquidity discount investors apply to private companies.
Because ByteDance isn't publicly listed – it means that buying and selling its stock is more difficult/ time consuming, and generally open to a smaller pool or individuals.
- Investors generally value liquidity – which is just to say the ability to quickly convert an asset to cash.
How much do they value liquidity? According to Adam Paul Patterson, ‘you almost always apply a private company or “illiquidity” discount, which often ranges from 10% to 30%, to these multiples.’
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