What is Twitch worth? A look at what you need to believe…

A good friend of mine came to me full of excitement about the prospect of Amazon’s “hidden gems.” He had heard Amazon owned Twitch and was very excited for what that could mean for the company given the success of Fortnite and other games, which have driven a new era for e-Sports (that is, watching other people play video games). Twitch could also serve as a platform for other content. I decided to take a moment and explore what Twitch might be worth and put into context what that may mean for Amazon’s share price.

Warning: As with any investment analysis, I make a lot of assumptions in this post given I have very limited disclosure from Amazon.

With that warning out of the way, I hope that you can take these assumptions with you and think about “what do I need to believe?” when it comes to Twitch (and Amazon) and determine whether or not the market is pricing this in (as I wrote recently about here). Let’s get started:

Most internet platforms like Facebook, Twitter and YouTube are analyzed by a popular KPI called, Monthly Active Users (or MAU). MAU is important, and different than valuing a company via “eyeballs” as was common in the tech bubble, because MAU measures engagement with the platform and that helps advertisers determine whether placing an ad on the site has impact or not.

According to a very trustworthy source, Wikipedia, Twitch had 100MM MAUs in 2015. I assume that has likely grown significantly since then, given the dawn of Fortnite and internet celebrities like Ninja. I assume 130MM MAUs for 2017, which compares to Twitter’s 328MM.

As for Average Revenue Per User, or ARPU, I think Twitch is still in its infancy stage. I don’t think it is likely capturing as much money as it can right now because (i) it is owned by Amazon which has a long investment horizon and (ii) they likely want to keep engagement up and growing as much as possible in the near term to drive stickiness with the platform. However, I do have it growing substantially over time. In fact, this may be an aggressive assumption given Twitch has a monopoly on this niche for now, and competitors may move in. In addition, advertisers can move elsewhere, such as Instagram, Facebook, Twitter, Youtube, and so on. There is only 1 advertising pie and all these players are competing for the biggest slice.

On the flip side, Twitch should benefit from a “live TV” aspect of its content, much like ESPN which is able to charge a large premium in the broadcast world compared to its peers. As a result, I expect ARPU to ramp up quickly. Twitter’s total advertising revenue / MAU ramped from $2.20 in 2013 to $5.30 in 2017. I have Twitch scaling much quicker than that given what I’ve noted above.

For now, I don’t think Twitch is a major contributor to EBITDA given investment in R&D, sales staff and general expenses, but with price gains comes scale. For reference on how I derived my assumptions, I looked at Twitter. Twitter in 2015 spent ~36% on R&D, 39% on sales and marketing, and ~12% on G&A (though some of this includes a massive stock based comp expense, at ~30% of sales). This has stepped down to R&D being 22%, Sales being 29%, and G&A being 11.6% (again, these expenses include an 18% of sales expense for stock comp, which is non-cash but is a real expense at the end of the day).

Twitch est

Therefore, you may view my assumptions still as aggressive, but I’m trying to show what you need to believe. Net / net, I have Sales growing at a 127% CAGR from 2017 to 2020 and EBITDA growing at 450% (albeit off of a low base). I’ve also included some multiples so far as a proxy for where the value of Twitch may shake out.

I do not know where Amazon puts Twitch today in its reporting, but I’ll assume it is in the North American Retail business for now, given I don’t have a better idea of where to put it (I know that AWS is distinct from any ad revenues though so I didn’t put it there). here is a snapshot of Amazon today then, including my rough Twitch estimates.

AMZN Today - Segments

Now, for my next assumptions, I am going to go with some street estimates here, but a big assumption on my end is that I do NOT think they are baking in the value of Twitch. That is a big “if”, but given how small Twitch is today relative to the rest of the business, I don’t think it is out of the realm of possibility. Below are the 2020 estimates for AMZN, including my assumptions in value for Twitch.  All in all, it shows pretty strong growth for a company that has already grown massively. AMZN 2020

I took the liberty to assign multiples that you may disagree with, but I have a sensitivity table later that will let you be the judge.

The problem you may be seeing is that the total EV of Amazon of slightly less that $600BN is less than the current ~$890BN. As shown below, my “price target” is well below the current price.

AMZN PT

Uh ok… Ok OK I must have done something wrong. My multiples must be WAY off. That’s for you to judge and that is the “art vs. science” part of investing. As we see below, I think I am pretty comfortable given where other Tech titans trade on my multiples, especially when we look out 2.5-3 more years.

AMZN 2020

So what do you need to believe??

Below I show a sensitivity of AMZN’s stock price relative to (a) changes in my EBITDA estimate and (b) estimated changes in the multiple. If you think Amazon is worth 18x EBITDA and will produce $50BN of EBITDA, for example, then today’s price of $1,830 looks OK (if not a little rich given this PT is based on 2020 estimates).

AMZN Sensitivity

Does this seem reasonable to you? It may, or it may not. That’s part of doing the analysis. After all this you may say, “Yes, actually. Amazon is such a dominant force, with a loyal customer base, I think it is worth a high multiple and the street is underestimating it.” On the flip side, you may say to yourself, “Geez, I don’t know. Those are some lofty figures it will need to reach… Maybe I’ll stay on the sidelines for now.”

Both are equally fair.

That’s all for now. Full disclosure: I am long AMZN.

 

3 thoughts on “What is Twitch worth? A look at what you need to believe…”

  1. thanks a lot for your analysis! One thing puzzle me though, isn’t ARPU supposed to be computed on a monthly basis?

    1. Thanks for the question! And to answer your Q, only if you want monthly revenues… it needs to be apples-to-apples. For example, take a look at FB. They reported Q3’18 worldwide advertising revenue of $13.5BN and MAUs of 2.27BN in Q3 and 2.234BN in Q3 (for an average of 2.25BN users). This equates to a ~$6 ARPU for the quarter. This foots to what they reported in their Q3’18 presentation and filings. Now, what if you wanted full year numbers?
      You would need to sum the FY revenue and divide by average MAUs for the year for annual revenue. If we do the same math for Q4’17 to be able to check our numbers, $39.9BN in wordwide ad revenue, I averaged the Qs MAUs and get 2.038BN MAUs and that gets me ~$21 in ARPU for the year. FB quote from their filing: “For 2017, worldwide ARPU was $20.21…”

  2. Also it feels like you are not accounting for Tipping & Subscription revenues and we know that they can be major topline contributors (e.g. see YY)

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.