By: Maxim Manturov, Head of Investment Research at Freedom Finance Europe
TikTok owner ByteDance, which is based in China, has finally shed light on its plans to go public. Determined to run its IPO in Q4 2021 or early 2022, the company is submitting all required applications and undergoing the necessary verification processes to set the wheels in motion. Exact details on this IPO are expected to go live in September.
In light of this, Maxim Manturov, Head of Investment Research at Freedom Finance Europe, explains what investors need to know before the IPO is launched. This includes the company background, business model, financial performance and reasons for investing.
When is the IPO being launched?
“ByteDance will launch its IPO on the Hong Kong Stock Exchange in late 2021 or early 2022.
“Previously, it had to hold off due to demands from Chinese regulatory authorities regarding data protection and other risks. In fact, the Chinese government tightened regulations for IPOs outside of China, including tech companies that store over one million users’ information. Such corporations are now required to get approval before launching their IPOs, as user data may be affected or used by other government bodies.”
The rise of ByteDance and TikTok
“ByteDance was founded in 2012 and is mostly famous for TikTok, although it accounts for only 3% of the company’s earnings, while the other 97% comes from activities in China. Still, TikTok succeeded in what other Chinese companies failed: it conquered the globe.”
“TikTok gained extreme popularity over the last year, with many people being forced to stay at home during the pandemic and spending more time on social media. In early 2021, TikTok had over 689 million active users across the globe per month, and while relatively new, the app is already among those that have the most downloads, being even ahead of Facebook, that was previously the world’s most downloadable app.
“There has been, however, a good deal of disagreement regarding TikTok. In 2019, the company got banned in India, although only for a short time, due to the suspicion of offensive and inappropriate adult content that could be streamed through the app. The second ban, again in India, was due to insufficient data protection. Finally, ByteDance got fined $5.7 million by the US government for illegally collecting information on minors.”
How much are TikTok and ByteDance worth?
“In 2020, investors valued TikTok at around $50 billion, which was significantly higher than other media giants, such as Snapchat.
“As for ByteDance, it is worth much more. The most recent information is that the company has around 1.9 billion monthly active users, and it is valued at $250 billion in private capital markets, and at $400 billion overall, which makes it the world’s most profitable startup.”
What does ByteDance’s business model look like?
“ByteDance’s business model is centred around mobile apps and content platforms, such as Toutiao, which delivers a customised news feed.
“Advertising also accounts for a good deal of ByteDance’s earnings, by focusing on developing new products that could boost earnings. This has resulted in increased users, with the company benefiting from three times more active users than Snapchat, which ran its IPO in 2017.
“Alongside this, the TikTok business model combines traditional social media platform strategy centred on content sharing, with new creative strategies that allow users to post their own videos. It has a variety of features found in Instagram, Facebook and YouTube.
“However, what makes TikTok stand is that it is AI based, meaning that when users create or watch content, the app collects this data with a machine learning algorithm. This allows TikTok to improve content feeds for its users, which, in turn, increases engagement and generates more data.
“This business model does take regulation in various countries into account. For example, following US tensions, ByteDance separated TikTok from all its Chinese assets to ensure it wasn’t severely impacted by US regulations.”
Should you invest?
“ByteDance is undoubtedly generating profit. In 2019, the company’s net profit amounted to over $3 billion, with $17 billion in revenue. That was an incredible year after the company reported a $1.2 billion loss with $7.4 billion earnings in 2018. In 2020, TikTok’s earnings were valued at $1 billion, being just a small fraction of ByteDance’s total earnings of $30 billion. The consensus for TikTok’s value, $50 billion, is thus 50 times more than its net profit. In 2021, the management aims to get $6 billion in earnings.
“Another reason for investing is that TikTok aims to dominate the video content industry. Although it has harsh competition, such as Instagram that launched the same feature, it is still the most popular video content creation solution amongst Gen Z users. On top of this, TikTok’s success got boosted with the acquisition of Musical.ly at $1 billion in 2018, which was its direct competitor.
“Ultimately, the app is extremely in demand throughout the world. However, there is always risk that other countries may take the same measures as the US and India, as many governments are concerned about the influence of China’s tech. Investors should also take financial performance into consideration, as poor fundamental factors may lead the stock price to decrease. At the same time, you shouldn’t ignore risks and diversification rules. Instead, you should aim to invest only a fraction of your portfolio into high-risk companies. Depending on your risk appetite, this could be around 3% to 5% of your overall investment capital.”