ByteDance – Staying private

ByteDance signals the Chinese IPO window may be closing.

• On top of its star service being hit with draconian regulations (see here) which will damage long-term prospects, the Chinese economy also seems to have done some damage to ByteDance’s financial performance raising questions over its valuation and going public.
• At its last fundraising in October 2018, ByteDance indicated that 2018 revenues would be RMB 50bn – RMB 55bn or around $7.8bn underpinning its valuation at $75bn.
• However, Q4 18 has clearly been a shocker as 2018 revenue has ended up just making the bottom end of the guided range.
• Furthermore, I suspect that things will slow even further in 2019.
• This is due to a combination of the slower economy but also due to the government’s recent clampdown on short video sites.
• ByteDance has been made responsible for the content that its users’ post, meaning that is going to have to police everything.
• This will have two main effects
  • First: margin pressure: ByteDance is no AI powerhouse which means that, like Facebook, it will have to recruit humans to scan and asses all the content that users post.
  • Hence, the revenue trajectory will remain the same but operating expenditure will increase leading to a weakening of profitability.
  • Second: lower engagement: ByteDance has long been known as a source of edgy Chinese content which is now going to be much less the case.
  • Creators will be less inclined to spend time creating content if it simply gets lost in the filter and viewers will become less enthused as the content becomes more mainstream and dull.
  • This will lead to lower engagement which in turn means lower revenues.
• This, combined with a weakening economy, is going to make it increasingly difficult for ByteDance to live up to the promises it has made to its investors.
• Hence I can see BytDance delaying its IPO until such time when expectations have been fully reset or its business has grown enough to justify its current valuation but at a lower multiple.
• It is not a good start to the year for China and there is clearly some read across for Tencent and Baidu particularly when they report their numbers in the coming weeks.
• Alibaba is more isolated from this being almost entirely based on e-commerce, but I think that its guidance for the coming fiscal year will also be increasingly cautious.
• Against this backdrop, Alibaba looks the most defensive, but Baidu also remains the cheapest way to invest in one of the leaders in AI.