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By the Numbers: Are Tech IPOs Worth the Hype?

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Are Tech IPOs Worth the Hype?

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Tech IPOs Shareable

Tech IPOs — Hype vs. Reality

Initial Public Offerings (IPOs) generate massive amounts of attention from investors and media alike, especially for new and fast-rising companies in the technology sector.

On the surface, the attention is warranted. Some of the most well-known tech companies have built their profile by going public, including Facebook by raising $16 billion in 2012.

But when you peel away the hype and examine investor returns from tech IPOs more closely, the reality can leave a lot to be desired.

The Hype in Numbers

When it comes to the IPOs of companies beginning to sell shares on public stock exchanges, tech offerings have become synonymous with billion-dollar launches.

Given the sheer magnitude of IPOs based in the technology sector, it’s easy to understand why. Globally, the technology sector has regularly generated the most IPOs and highest proceeds, as shown in a recent report by Ernst & Young.

In 2019 alone, the world’s public markets saw 263 IPOs in the tech sector with total proceeds of $62.8 billion. That’s far ahead of the second-place healthcare sector, which saw 174 IPOs generate proceeds of $22.5 billion.

The discrepancy is more apparent in the U.S., according to data from Renaissance Capital. In fact, over the last five years, the tech sector has accounted for 23% of total U.S. IPOs and 34% of proceeds generated by U.S. IPOs.

tech-IPOs-Supplemental

The prevalence of tech is even more apparent when examining history’s largest IPOs. Of the 25 largest IPOs in U.S. history, 60% come from the technology and communication services sectors.

That list includes last year’s well-publicized IPOs for Uber ($8.1 billion) and Lyft ($2.3 billion), as well as a direct public offering from Slack ($7.4 billion). Soon the list might include Airbnb, which plans to list within the communication services sector instead of tech.

The Reality in Returns

But the proof, as they say, is in the pudding.

Uber and Lyft were two of 2019’s largest U.S. IPOs, but they also saw some of the poorest returns. Uber fell 33.4% from its IPO price at year end, while Lyft was down 35.7%.

And they were far from isolated incidents. Tech IPOs averaged a return of -4.6% last year, far behind the top sectors of consumer staples (led by Beyond Meat) and healthcare.

SectorAvg. IPO Return (2019)
Consumer Staples103.0%
Healthcare35.9%
Financials30.8%
Materials30.4%
Consumer Discretionary14.6%
Industrials6.1%
Energy-0.4%
Technology-4.6%
Utilities-7.8%
Real Estate-9.4%
Communication Services-66.4%

While last year was the first time tech IPOs have averaged a negative return in four years, analysis of the last 10 years confirms that tech IPOs have underperformed over the last decade.

A decade-long analysis from investment firm Janus Henderson demonstrated that U.S. tech IPOs start underperforming compared to the broad tech sector about 5-6 months after launching.

This dip likely corresponds to the expiry of an IPO’s lock-up period—the time that a company’s pre-IPO investors are able to sell their stock. By cashing in on strong early performance, investors flood the market and bring share prices down.

Interestingly, most gains for these IPOs tend to happen within the first day of trading. The median first-day performance for tech IPOs was a 21% increase over the offer price. That’s why the median first-year return for a tech IPO, excluding the first day of trading, is -19% when compared with the broader tech sector.

How to Make Money from Tech IPOs

So does that mean that investors should avoid tech IPOs? Not necessarily.

Longer-term analysis from the University of Florida’s Warrington College of Business shows that U.S. tech IPOs offer better returns than other sectors as long as investors get in at the offer price.

U.S. Tech IPO Returns from Offer Price

SectorAvg. Three-Year Return Market-adjusted Return
Tech77.0%28.3%
Non-Tech34.6%-11.4%

Even when adjusting for the broader market performance, tech IPOs have been solid in comparison to the offer price.

The challenge is that if investors are buying stock after that first day market bump, they may have already missed out on meaningful gains:

U.S. Tech IPO Returns from First Closing Price

SectorAvg. Three-Year Return Market-adjusted Return
Tech46.1%-2.7%
Non-Tech23.7%-22.2%

So should investors shy away from tech IPOs unless they’re able to get in early?

Generally speaking, the analysis holds that new tech companies perform relatively well, but not better than the broader market once they’ve started trading.

However, in a world of billion-dollar unicorns, there are always exceptions to the rule. The University of Florida study found that tech companies with a base of over $100 million in sales before going public saw a market-adjusted three-year return of 24.4% from the first closing price.

If you can sift through the hype and properly analyze the right tech IPO to support, the reality can be rewarding.

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Technology

Which Streaming Service Has the Most Subscriptions?

From Netflix and Disney+ to Spotify and Apple Music, we rank the streaming services with the most monthly paid subscriptions.

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Streaming Service Subscriptions 2020 - Share

Which Streaming Service Has The Most Subscriptions?

Many companies have launched a streaming service over the past few years, trying to capitalize on the digital media shift and launching the so-called “streaming wars.”

After Netflix grew from a small DVD-rental company to a household name, every media company from Disney to Apple saw recurring revenues ripe for the taking. Likewise, the audio industry has long-since accepted Spotify’s rise to prominence, as streaming has become the de facto method of consumption for many.

But it was actually the unexpected COVID-19 pandemic that solidified the foothold of digital streaming, with subscription services seeing massive growth over the last year. Although it was expected that many new services would flounder along the way, media subscription services saw wide scale growth and adoption almost across the board.

We’ve taken the video, audio, and news subscription services with 5+ million subscribers to see who came out on top—and who has grown the most quickly—over the past year. Data comes from the FIPP media association as well as individual company reports.

Streaming Service Giants: Netflix and Amazon

The top of the streaming giant pantheon highlights two staples of business: the first-mover advantage and the power of conglomeration.

With 200+ million global subscribers, Netflix has capitalized on its position as the first and primary name in digital video streaming. Though its consumer base in the Americas has begun to plateau, the company’s growth in reach (190+ countries) and content (70+ original movies slated for 2021) has put it more than 50 million subscribers ahead of its closest competition.

The story is the same in the audio market, where Spotify’s 144 million subscriber base is more than double that of Apple Music, the next closest competitor with 68 million subscribers.

Meanwhile, Amazon’s position as the second most popular video streaming service with 150 million subscribers might be surprising. However, Prime Video subscriptions are included with membership to Amazon Prime, which saw massive growth in usage during the pandemic.

ServiceTypeSubscribers (Q4 2020)
NetflixVideo203.7M
Amazon Prime VideoVideo150.0M
SpotifyAudio144.0M
Tencent VideoVideo120.0M
iQIYIVideo119.0M
Disney+Video94.9M
YoukuVideo90.0M
Apple MusicAudio68.0M
Amazon Prime MusicAudio55.0M
Tencent Music (Group)Audio51.7M
ViuVideo41.4M
Alt BalajiVideo40M
HuluVideo38.8M
Eros NowVideo36.2M
Sirius XmAudio34.4M
YouTube PremiumVideo/Audio30M
Disney+ HotstarVideo18.5M
Paramount+Video17.9M
HBO MaxVideo17.2M
Starz/StarzPlay/PantayaVideo13.7M
ESPN+Video11.5M
Apple TV+Video10M
DAZNVideo8M
DeezerAudio7M
PandoraAudio6.3M
New York TimesNews6.1M

Another standout is the number of large streaming services based in Asia. China-based Tencent Video (also known as WeTV) and Baidu’s iQIYI streaming services both crossed 100 million paid subscribers, with Alibaba’s Youku not far behind with 90 million.

Disney Leads in Streaming Growth

But perhaps most notable of all is Disney’s rapid ascension to the upper echelons of streaming service giants.

Despite Disney+ launching in late 2019 with a somewhat lackluster content library (only one original series with one episode at launch), it has quickly rocketed both in terms of content and its subscriber base. With almost 95 million subscribers, it has amassed more subscribers in just over one year than Disney expected it could reach by 2024.

ServiceTypePercentage Growth (2019)
Disney+VideoNew
Apple TV+VideoNew
Disney+ HotstarVideo516.7%
ESPN+Video475.0%
Starz/StarzPlay/PantayaVideo211.4%
Paramount+Video123.8%
HBO MaxVideo115.0%
Amazon Prime VideoVideo100.0%
Alt BalajiVideo100.0%
YouTube PremiumVideo/Audio100.0%
DAZNVideo100.0%
Eros NowVideo92.6%
Amazon Prime MusicAudio71.9%
Tencent Music (Group)Audio66.8%
New York TimesNews60.5%
SpotifyAudio44.0%
HuluVideo38.6%
ViuVideo38.0%
NetflixVideo34.4%
Tencent VideoVideo27.7%
iQiyiVideo19.0%
Sirius XmAudio17.4%
Apple MusicAudio13.3%
YoukuVideo9.6%
PandoraAudio1.6%
DeezerAudio0%

The Disney+ wave also spurred growth in partner streaming services like Hotstar and ESPN+, while other services with smaller subscriber bases saw large growth rates thanks to the COVID-19 pandemic.

The lingering question is how the landscape will look when the pandemic starts to wind down, and when all the new players are accounted for. NBCUniversal’s Peacock, for example, has reached over 30 million subscribers as of January 2021, but the company hasn’t yet disclosed how many are paid subscribers.

Likewise, competitors are investing in content libraries to try and make up ground on Netflix and Disney. HBO Max is slated to start launching internationally in June 2021, and ViacomCBS rebranded and expanded CBS All Access into Paramount+.

And international growth is vital. Three of the top six video streaming services by subscribers are based in China, while Indian services Hotstar, ALTBalaji, and Eros Now all saw surges in subscriber bases, with more room left to grow.

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How Do Esports Companies Compare with Sports Teams?

With some esports companies more valuable than traditional sports teams, we visualize esports vs sports in franchise value.

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Esports Companies VS Sports - Share

How Do Esports Companies Compare with Sports Teams?

Are esports on the same level as “real” sports? These comparisons range from tricky to subjective, but the monetary value of companies speak for themselves.

The world’s largest esports companies have definitely risen to the occasion. Valued at almost half-a-billion dollars, they’ve started to pass some sports franchises in value.

In the above graphic, we compare Forbes’ valuation of the top 10 esports companies in 2020 against median franchises in the “Big Four” major leagues (NFL, MLB, NBA, and NHL). Despite competitive gaming’s rapid growth, there’s still a long way left to go.

Esports Impress but NFL Teams Reign Supreme

The world’s top esports companies have grown quickly, and impressively.

As of 2018, there was only one esports company worth more than $300 million in valuation. By 2020, four of the top 10 were valued at more than $300 million.

Esports CompanyGames with FranchisesValue (2020)
TSMLeague of Legends$410M
Cloud9League of Legends, Overwatch$350M
Team LiquidLeague of Legends$310M
FaZe ClanCall of Duty$305M
100 ThievesLeague of Legends, Call of Duty$190M
Gen.GLeague of Legends, Overwatch, NBA 2K$185M
Enthusiast GamingCall of Duty, Overwatch$180M
G2 EsportsLeague of Legends$175M
NRG EsportsCall of Duty, Overwatch$155M
T1League of Legends$150M

When compared to traditional sports valuations, esports companies have already reached major league hockey status.

TSM, the world’s most valuable esports company in 2020, has a higher valuation than five NHL franchises. In fact, four esports companies were estimated to be more valuable than two NHL franchises, the Florida Panthers and Arizona Coyotes.

But other sports leagues are further away. While the median value of an NHL franchise in 2020 was $520 million, the MLB, NBA, and NFL all saw median values of over $1.6 billion.

Esports vs. Sports FranchisesLowest Valued TeamHighest Valued TeamMedian
NFL$2.0B$5.7B$3.0B
NBA$1.3B$4.6B$1.8B
MLB$980M$5.0B$1.6B
NHL$285M$1.6B$520M
Esports (Top 10)$150M$410M$188M

Differences in Esports vs Sports Structures and Growth

Try as we might to make a clean apples-to-apples comparison between esports and traditional sports teams, there are significant differences in the business models to consider.

For starters, major esports companies own multiple franchises and non-franchise teams across many games. Cloud9 owns both the eponymous Cloud9 League of Legends franchise and the London Spitfire Overwatch franchise, for example, as well as non-franchise teams in Halo, Counter Strike: Global Offensive, Fortnite, and other games.

The revenue streams for esports companies are also extremely varied. Companies like TSM, 100 Thieves, FaZe Clan and Enthusiast Gaming made 50% or more of their revenue from outside of esports, having instead expanded into diverse companies with an equal focus on content creation and apps.

But it’s this greater ability to diversify, and the still-increasing size of esports fandom, that continues to grow esports valuations. In fact, TSM’s estimated 2020 revenue of $45 million is less than half of the Arizona Coyotes’ estimated revenue of $95 million, despite a $100+ million valuation difference in favor of TSM.

That’s why the continued maturation of esports is only going to make traditional sports comparisons easier, and closer. Instead of having to pit companies against franchises, direct league-to-league comparisons will be possible, and the differences will likely shrink from billions to millions.

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