Bitcoin Pricing – Upside with Increased Adoption


  • We dive into different methods of valuating the “intrinsic” value of Bitcoin and get a range of results
  • We focus on 3 main valuation methods and outline them: TAM valuation, Metcalfe Valuation, and the Monetary Equation. We also talk about the “cost of production” method and the stock-to-flow model, but their assumptions both fall short in our view.
  • Each has its own built in assumptions and philosophy in its approach to valuing Bitcoin. Each also implies different levels and ranges of extreme upside given more widespread adoption and acceptance.

There has been much debate on the intrinsic value of Bitcoin. Bulls insist that Bitcoin and cryptocurrencies at large are in their nascency and the future holds a world where crypto is commonly used as a medium of exchange and we use a cryptoasset-powered blockchain to conduct business and activities such as international payments, healthcare, information settlement, and much more. Bitcoin bears insist there is a lack of historical evidence of real use cases, Bitcoin is too volatile to be a real store of value or medium of exchange, scarcity is irrelevant and not an indication of value, and that the future bulls paint is merely a pipe dream.

We concede each side has some correct points, but this write-up isn’t to debate the merits of Bitcoin, but rather to attempt to price it. NYU Professor Aswath Damodaran said back in 2017 on Bitcoin, “Not everything can be valued, but almost everything can be priced.” We agree professor! He further points out, “cash generating assets can be both valued and priced, commodities can be priced much more easily than valued, and currencies and collectibles can only be priced.” We believe Bitcoin is somewhere between commodities and currencies/collectibles. We take a look at future return drivers by asset classes including cryptoassets in the table below. With all that said, let’s dive in!

Approach 1: Total Addressable Market

The most popular and commonly used approach to pricing cryptocurrencies is to estimate their total addressable markets ((TAM)) and compare that estimate with crypto’s current market capitalization. For example, most finance media and commentators believe that gold is the most obvious comparison as a non-sovereign store of value. Taking the gold price of around $1860 as of writing and the USGS website’s estimate of 244,000 metric tons of gold being discovered to date (187,000 metric tons historically produced plus current underground reserves of 57,000 metric tons), we get a Gold TAM of approximately $16 trn. For analysis purposes, we use the 21 million controlled supply of Bitcoin for a full dilutive number to use to estimate value per Bitcoin.

Sources:,, our estimates,

Bitcoin has achieved slightly less than 5% of the total value of gold according to current Bitcoin prices as of writing. We take this exercise further and include other store of value assets such as negative yielding debt, art, and offshore assets. There is approximately $18 trn of negative yielding sovereign debt currently, over $64 bn worth of art, and an estimated $32trn in offshore assets back in 2012 according to Reuters.

Source: Bloomberg estimates,, Reuters, Tax Justice Network, our estimates

If we add up all these store of value assets with gold’s TAM, Bitcoin’s market cap has achieved only 1.2% of their total value. Finally, there is one more store of value asset that dwarfs all the others – real estate. The value of all the real estate in the world is estimated to be $280 trn according to Savill’s. Adding up all these store of value estimates, we get close to $350 trn in total value. Meaning Bitcoin has a current total market cap only 0.2% of all store of value assets’ total value.

Based on the total addressable market pricing method, Bitcoin clearly has multiples of room to run.

The Equation of Exchange Method

An alternative pricing model was proposed by Chris Burniske, a crypto researcher, and Jack Tatar, managing partner of Doyle Capital, in a book called Cryptoassets: The Innovative Investor’s Guide to Bitcoin and Beyond.

In it, the authors introduce a framework widely referred to by the monetary equation of exchange MV = PQ. This model is used traditionally for valuing currencies and is based on the assumption that a currency’s value is related to the size of the market it supports and the rate at which the currency is exchanged in an economy. The definitions of each input are in the table below.

Source: CFA Institute

We get the velocity, number of transactions, and average price of transaction per year of Bitcoin from We take the final day velocity, number of transactions annualized, and average price of transaction as of writing.

An example of a transaction value chart courtesy of

As Bitcoin becomes more widely adopted, all of these metrics should continue to increase, thus leading to an increase in value of Bitcoin according to the model. Using all of our most recent data on Bitcoin, we get a value of around $45k per Bitcoin.

Source: our estimates

We take a look at a range of scenarios with these variables and examine their effects. The first table is the QP side of the equation and the second below table is a range of Bitcoin values based on those above quantities and average price of bitcoin transaction, then divided by the Velocity to isolate the M variable of the equation.

As you can see there is a wide range of price estimates using this approach in our different scenarios ranging from $6.5k to over $160k. What is also interesting is that the value of Bitcoin according to this method and using the most recent data for inputs gets pretty close to the current price of Bitcoin before the recent crash.

Cryptoassets as a Network

Another approach to pricing crypto is borrowed from Metcalfe’s law, a popular theory in technology that states “a network’s value is proportional to the square of the number of nodes in the network”. It is used to explain how the value of networks such as Apple, Facebook, Uber, Instagram, Twitter, and others have grown in value exponentially. When a network has a single user, it’s value is 0, however once you add a second, a third, a fourth user, the network’s value grows rapidly. The key part of Metcalfe’s law is that the value of the network is not linear, but rather a square function of the userbase. For example, a network of two users has a value of “4”, while a network of four users has a value of “16”.

Ken Alabi first proposed applying Metcalfe’s law to the valuation of cryptoassets in 2017 in his paper, “Digital Blockchain Networks Appear to be Following Metcalfe’s Law”. In the paper, Alibi showed that the valuation differences between certain cryptoassets (he uses Bitcoin, Ethereum, and Dash) can be explained with a high degree of accuracy.

We revisit Metcalfe’s Law in early 2021 and attempt to value Bitcoin by the same set of principles. We get the number of active Bitcoin addresses from glassnode studio and use the latest number as of writing of just over 1 million active addresses. Just for sanity, we use a second source bitinfocharts and get a similar number of active addresses. Through this method, we get a value of just over $50k for Bitcoin.

We take a look at a different range of number of active addresses to get a range of values of Bitcoin using this method. As you can see, each increase in the number of addresses increases the value of Bitcoin exponentially.

Source: Our estimates

Other Pricing Methods

There are additional pricing methods with less widespread acceptance, one of which is the “cost of production” valuation thesis. First proposed by Adam Hayes in 2015, the “cost of production” method holds that crypto, like any other commodity, is subject to traditional pricing challenges on the supply side. Hayes suggests that, with the view of Bitcoin as a commodity, each marginal Bitcoin’s cost of production should align with the price of the Bitcoin. For example, if Bitcoins had no real fiat monetary value, would crypto miners be incentivized to continue to spend real fiat money on the electricity costs as a part of mining new Bitcoin? It’s likely they would move to other, more rewarding ventures.

Ratio of bitcoin price observed in the market to the expected price produced by the model using historical data (source: 1.00 would indicate that the two prices are identical, anything over 1.00 indicates a premium in the market and below a discount. The average for the study period is 1.05, σ = 0.33, indicating that over the long-term, the market price seems to fluctuate around the modeled price with striking consistency. Source:

However, there are a few issues that come with this method. Its circular reasoning is a significant challenge as it uses two co-integrated variables to value one another. This logically has little explanatory power. Another issue is that the model fails to take into account the massive short-term volatility of Bitcoin or that Bitcoin’s mining difficulty is programmatically adjusted. The “cost of production” valuation method fails to clarify these cause-and-effect relationships and its predictive value is questionable.

Another final approach we want to touch upon is the stock-to-flow model. The model was first published in 2019 by a pseudonymous crypto quant researcher named PlanB. The stock-to-flow model states that Bitcoin’s price is indicative of its scarcity and that this scarcity can be measured by the stock-to-flow ratio – the relationship between the value of a Bitcoin and the new amount of Bitcoin being produced each year.


This approach is appealing because of its focus on scarcity as value. This approach also falls short because it conflates correlation with causation. Assuming that scarcity is the single factor driving Bitcoin’s price is a logical leap. In addition, the model ‘predicts’ a perpetually rising price for Bitcoin. For these reasons, the stock-to-flow falls short.


We believe each of these pricing methods have their own logical value as well as short comings and none are as sound or defensible as a traditional discounted cash flow analysis if for equities or credit models are for debt. Cryptoassets hold more similarities to commodities and currencies than to equity or debt, and the challenges to pricing commodities and currencies are well-known.

We would hesitate to use a single model with a few inputs to definitely price a cryptoasset. However, what is clear is that given increased adoption, usage, and acceptance, Bitcoin’s value should and will increase under any pricing model. Precision in pricing Bitcoin at this stage is impossible, but we are optimistic that more refined methods will come to exist in the future.

Our view is more aligned to that of the Bitcoin bulls. With crypto in a still early-stage of development and minimal professional investor allocation, we believe it has significant room to run. If small percentages of the trillions of dollars invested in adjacent store of value asset classes were allocated to Bitcoin, the impact and upside would be significant. As with anything there are risks, but with a long enough view, we believe the reward potential is enormous.


Airbnb Valuation – Growth is expensive in this market

Quick Summary:

  • AirBnb has more than 4 million hosts offering private rooms in their own homes to luxury experiences, from one night to several weeks or months. AirBnb has a presence in more than 220 countries and regions and has served over 825 million guest arrivals and has cumulatively earned $110bn in revenue.
  • AirBnb intends to disrupt the one-size-fits-all approach that was the standard for travel and leisure. The company believes that hosting is at the center of the AirBnb experience and this focus enables guests to access unique places and experiences that were previously inaccessible.
  • In 2019, the company generated Gross Booking Value (“GBV”) of $38bn, 29% growth y/y, and has generated $507mm in free cash flow since inception, signifying its clear potential to cash generation in the near future. GBV were down 39% y/y in the first 9 months of 2020 due to the Covid pandemic per the company S-1.
  • The company business model has shown resilience in the face of the pandemic with business beginning to pick up within two months of travel shutting down around the world per the company S-1. Domestic travel has been especially strong and has rebounded at a rapid pace with people choosing to travel closer to home.
  • The stock is priced incredibly high, and while we love the company and what it’s doing, the valuation is simply not enticing as an investor. The stock is trading near our absolute Bull Case scenario which we outline in our valuation.

Business Model:

The concept of AirBnb was born in 2007 when the two founders, Brian and Joe, noticed an international conference was coming to town and every hotel was sold out. The founders quickly created a website,, and were able to rent their apartment to the conference attendees.

Airbnb is the latest company to make use of the sharing economy, or the peer-to-peer economy. The business model is built on buyers and sellers sharing resources through collaborative consumption of goods, services, and of ownership. The Airbnb platform provides tools that make it easy to connect hosts who own houses and apartments with guests who seek to rent them for short-term stays. Airbnb’s revenues comes from fees collected on guest rental stays with fees being charged on both the host and the guest side per the company S-1. In 2016, Airbnb added another business line with experiences, but the business has been slow to gain any meaningful traction with only $10 million in sales in 2017.

This is a handy graphic summarizing the business model courtesy of Aswath Damodaran.

Source: Aswath Damodaran

And Airbnb provides an illustrative example of the business model at work with the fees they would collect in their S-1.

Source: Company S-1


As of September 30, 2020, AirBnb had 4 million hosts around the world, with 86% of hosts outside the United States, and 7.4 million available listings of homes and experiences, 5.6 million of which were active listings per the company S-1. Per the company, “We consider a listing of a home or an experience to be an active listing if it is viewable on Airbnb and has been previously booked at least once on Airbnb.”

Hosts generally fall into two categories – individual and professional. Individual hosts activate their listings directly on the Airbnb platform through the website or app. Professional hosts in contrast run their own property management or hospitality business and use programs to list their properties on the Airbnb platform. As of December 31, 2019, 90% of hosts were individual hosts and 72% of nights booked were with individual hosts per the company S-1. Individual hosts are the core component and key supply for Airbnb.

Airbnb provides a number of services to enable their 4 million hosts. Anyone can become a successful host on the Airbnb platform and Airbnb is able to provide a number of services per the S-1 including:

Source: Company S-1
  • Global demand: Anyone with an internet connection can book an Airbnb experience from anywhere in the world
  • Merchandising: Airbnb helps hosts create and activate their listings on the platform. By taking hosts step-by-step through the process, Airbnb is able to make posting effective and easy.
  • Pricing: Hosts can set their own prices, but Airbnb does provide smart pricing tools that suggest prices based on changes in demand for other similar listings based on factors like the season and expected demand.
  • Scheduling: Hosts can easily manage their calendars and accept and manage their listings and reservations on the platform through the website or app.
  • Payments: Airbnb facilitates all payments by collecting payments from guests and processing the payments to hosts. In 2019, Airbnb processed approximately $70bn of guest and host transactions.

Airbnb also provides services like community support, host protections, posted reviews and feedback, and a superhost program.

Key metrics and Covid resilience:

According to the company S-1 filing, the majority of guests who have ever made a booking on Airbnb were between the ages of 18-34. In 2019, 54 million active bookers worldwide booked 327 million nights and experiences on the platform.

Source: Company S-1

Nights and experiences booked are a key measure of the true scale of the Airbnb platform. Per the company S-1, “Nights and Experiences Booked on our platform in a period represents the sum of the total number of nights booked for stays and the total number of seats booked for experiences, net of cancellations and alterations that occurred in that period.”

In 2019, Airbnb had 326.9 mm Nights and Experiences booked, a 31% increase from the 250.3 mm in 2018, which grew 35% from 2017. Typically, the first, second, and third quarters of the year each have higher Nights and Experiences Booked compared to the fourth quarter, as guests travel during the peak travel season, which is in the third quarter for North America and EMEA according to the company S-1.

Covid has obviously had an effect on the hotel industry, and Airbnb is not immune with 2020 being a down year and Q2 being particularly severe across several key metrics. However, the business model has shown resilience and management attributes this to the renewed ability and willingness of guests to travel. I know personally I’m looking at Airbnb’s in warmer climates as I’m itching to get out of the cold and soon to be lock downed northeast US.

Source: Company S-1

For the nine months ended Sept 30, 2020, the company had 146.9 mm Nights and Experiences Booked, a decrease of 41% compared to the prior year period according to the company S-1. However, the decline was most severe in the second quarter and business has rebounded with Q3 being down only 28% y/y. The company credits this improvements primarily to stronger results in North America and Europe and in particular to resilience in domestic and short-distance travel.

Gross Bookings value ((GBV)) is defined in the S-1 as “the dollar value of bookings on our platform in a period and is inclusive of host earnings, service fees, cleaning fees, and taxes, net of cancellations and alterations that occurred during that period.” Growth in GBV reflects the company’s ability to attract and retain hosts and guests and reflects growth in Nights and Experiences booked. In 2019, GBV grew 29% y/y and 2018 grew 40% y/y.

Source: Company S-1

In 2020, there is a similar drop in GBV due to the Covid pandemic. For the first nine months ended Sept 30, 2020 GBV was $18bn, a 39% decrease from the prior year period according to the S-1. The decline was once again most severe in Q2 and Q3 rebounded, being down only 17% y/y.

In 2019, GBV and revenue by region were about equal between EMEA and for North America. However, as a result of the pandemic, GBV and revenue have reflected a shift toward NA where the recovery has been strongest. “For the first nine months of 2020, GBV was $9.7 billion, or 54% of the total, in North America compared to $5.6 billion, or 31%, in EMEA, $1.6 billion, or 9%, in Asia Pacific, and $1.1 billion, or 6%, in Latin America” – company S-1

Source: Company S-1

Historically, Airbnb has had a strong weight toward cross-border travel, with 49% of nights in 2019 compared to management’s estimate of 20% of total overnight paid trips for the travel industry as a whole according the company S-1. However, the pandemic has marked a shift to domestic travel in Airbnb’s traditional travel corridor mix. In September 2020, 77% of experiences booked were domestic compared to 52% in January. In fact, domestic bookings have grown at a rapid clip with 54% growth in June 2020 and 35% growth in September 2020.

Source: Company S-1

This shift has been especially pronounced in short-distance (within 50 miles of guest origin) travel and travel outside of Airbnb’s top 20 cities. From May through September 2020, short-distanced GBV actually grew year over year and travel between 50 miles and 500 miles returned to growth in June of this year. Airbnb’s top 20 cities typically make up high single to low double digits of total experiences booked, but travel outside of these cities has been resilient throughout Covid being down only 19% y/y in September 2020 according to the company S-1.

Source: Company S-1

Clearly, Airbnb is well-positioned because of its wide offering to cater shifting consumer travel habits and this has enabled the company to be more resilient in a downturn than travel competitors, in some metrics even being able to achieve grow. If we look at hotel and travel booking competitors, we see that Airbnb has weathered the pandemic much better than most peers when looking at 9 months ended Sept 30 2020 revenue. Airbnb revenue is down -31.9% so far in 2020 compared to the median hotel revenue being down -48.2% and travel bookings being down -53.3%. Airbnb has also bounced back faster than every competitor minus CHH in Q3 with revenues down -18.4% compared to the 50.9% median for hotels and -52.7% for travel bookings companies.

Source: Company 10-Qs and Airbnb S-1

TAM and growth strategy:

Management highlights massive market opportunities in its S-1 filing, “We have a substantial market opportunity in the growing travel market and experience economy. We estimate our serviceable addressable market (“SAM”) today to be $1.5 trillion, including $1.2 trillion for short-term stays and $239 billion for experiences. We estimate our total addressable market (“TAM”) to be $3.4 trillion, including $1.8 trillion for short-term stays, $210 billion for long-term stays, and $1.4 trillion for experiences.

In general, these assumptions are based on the belief that new travel behaviors will expand the market opportunity over time as well as the need to justify a large market cap. Management uses their own internal estimates to come up with the $1.2trn for short-term stays and Euromonitor estimates of tourist spend on attractions and experiences to estimate the $239mm for Experiences.   To get the TAM short-term stays estimate, management assumes an increase in trips per capita based on The World Travel and Tourism Council estimated 3.5% CAGR. For long-term stays, the company uses 10% of the $1.6trn global residential rental market. And for experiences, they add $1.1trn of non-tourist recreational spend, again as estimated by Euromonitor.

Source: Company S-1

In its early stages when it was a startup pitching to VCs back in 2009.  Airbnb estimated the TAM to be 2 billion+ trips a year and its SAM to be 560mn trips a year.

Source: Airbnb 2009 Pitch to VCs

Another way to look at Airbnb’s TAM is to look at the hotel business globally. According to NYU professor Aswath Damodaran’s Airbnb analysis. The industry generated over $600bn in revenues in 2019, but its growth has stalled and the industry remains concentrated among the top 5 hotel chains. The US is the leading geographical market, but Asia has been gaining ground.

Source: Aswath Damodaran

The truth is Airbnb’s TAM, and we agree with Damodaran’s analysis here, is probably somewhere in between these two numbers. Ignoring Airbnb’s experiences portion of the TAM calculation because that business line is nascent at best, we get an upper estimate of $2trn and a lower estimate of $600bn for Airbnb’s TAM.


We identify comparable peers to get a sense of Airbnb’s valuation and how in-line it is with the industry, while also keeping in mind Airbnb is growing faster and attempting to disrupt the hotel and travel booking industries. Current Hotel comparable peers are trading at a median of 4.1x 2021 sales and 2.0x 2022 sales according to Bloomberg Analyst Consensus estimates, while Airbnb’s IPO price implies – 18.45x and 15.33x Sales based on our own estimates of 2021 and 2022 sales, respecivetly. The EBITDA comparison is tough to make with Airbnb because we estimate they will be EBITDA negative in 2021, and the EBITDA in 2022 and 2023 will be $130mm and $370mm leading to high multipliers. We can see that the median hotel company is trading at 22.3x 2021 estimated EBITDA and 13.9x 2022 estimated EBITDA according to Bloomberg consensus.

However, perhaps a more apt comparison is looking at online travel booking peers such as Expedia (EXPE) and (BKNG). The EV / Sales and EV / EBITDA are slightly higher for this comparable group vs the pure hotels peers, primarily due to The median among this group trade at 4.5x 2021 sales and 3.4x 2022 sales according to Bloomberg consensus.

Source: Bloomberg Consensus Estimates

Is the Airbnb premium justified? One can argue a more resilient business model, the promise of fast growth, and large market opportunities created by disruption and innovation may make the premium seem reasonable when we try to compare the company to peer groups. There truly is only one Airbnb and these peer groups aren’t entirely indicative of the future company profile of Airbnb.


Setting the stage for the valuation, we take a look at Airbnb’s Venture Capital pricing in the rounds leading up to the IPO. We can see that the company has raised $5.8bn in VC funding and it’s latest Series F round in 2016. In April 2020 the company was valued at $18bn.

The IPO has clearly priced in a lot of generous assumptions as well as simple speculation with a hot market. Initially, Airbnb planned to sell shares for a range of $44-$50 per share in a filing made December 1. Then on December 7, they announced plans to sell shares for a range of $56 – $60. The company then priced their IPO at $68 a share on Wednesday, December 9. Shares opened trading at around $150 and ended the day at $144.71.

Here’s some institutional investor background on how this IPO is being looked at, Sanford Bernstein ran a Procensus investor survey to compile major talking points. ~100 investors participated, representing >$10T in AUM. Consensus suggests Airbnb delivers a +16% revenue CAGR in the next decade with steady state margins at ~25%. Bulls will argue the IPO price range (now indicating near ~$60) is reasonable”

+16% Revenue CAGR seems somewhat reasonable to us, so the biggest assumption in question really is the ~25% margins in our view. With that being said, and trying to remain reasonable from an assumptions stand point, here are our main assumptions:

  • In 2020 Airbnb Bookings will be down ~34%, but Airbnb will have a bounce back year in 2021, with high Bookings growth in 2022-2025, and Bookings growth slowing in 2026-2030. Our Base case in Bookings growth is shown below.
Source: Our estimates
  • Revenues as a % of Bookings will continue to increase in the future as the new host model for professional hosts and Experiences business gain steam and a larger % of Airbnb Bookings. Revenue as a % of Bookings was 12.6% in 2019 and we estimate it will be around 14.6% in 2025 for example.
  • Operating costs will continue to decrease as a % of revenue as Airbnb continues to grow in scale. This continuing growth in scale culminates in a high single digit operating margin by 2025 and a 27.1% operating margin by 2030. This is lower than Booking’s (BKNG) operating margin of 35.5% in 2019, but higher than hotel operators such as Marriott’s (VAC) or 17.4% Hyatt (H), 9.1% respectively in 2019.
Source: Company S-1 and our estimates

Taking a look into future revenue growth scenarios with revenues increasing as a % of Bookings and Bookings growth, we get a range of potential 2025 revenues. We think anywhere from $11bn to $13.7bn in revenue is the likeliest scenario for Airbnb in 2025.

Source: Our estimates

Using a discounted cash flow model with a Weighted Average Cost of Capital of 8% and a perpetual growth rate of 3%, we get a Base Case price of $77.40.

What’s interesting in our valuation is that the vast majority of value in Airbnb is from the Net Present Value of the terminal value. Because Terminal Value is based on the company’s value in perpetuity beyond our 10-year cash flow forecast, assumptions have an incredibly large effect on the current valuation. Any sort of valuation can be justified based on any set of input growth assumptions. We try to stay reasonable while acknowledging the upside that Airbnb does really exhibit. We show a range of cases below:

Source: Our estimates

Upside and Downside Risks:

Upside risks include higher than anticipated Bookings leading to higher revenue estimates. It is certainly possible we (and the market) are underestimated top line growth potential as Airbnb continues to expand domestically and abroad.

Another upside risk is profitability. Airbnb in theory should be able to scale effectively given its business model and that the company itself does not own or hold the properties. They provide a platform and services, not the physical product, so as they become larger more efficiencies should be achieved and redundancies should be eliminated.

The main downside risks are two: valuation and regulatory issues. We love this company, but the valuation is simply incredibly rich and already at our Bull Case. A good company does not equal a good investment if the price is not good. However, we are not calling for shorting this because the market is red hot and can continue to be for months or even years. We are simply stating that odds are not in your favor here at this price level.

Another meaningful risk is regulatory scrutiny. Airbnb lists what regulations apply may to a host’s city and there has been pushback in certain cities and communities against short-term rentals through platforms like Airbnb. Here is a list of certain short-term rental laws across the US.

Investor Takeaway:

If you were in on the offering, congratulations. If you are a trader then do as you see fit as this name will be volatile and has a lot of interest. However, if you are an investor, this is clearly overvalued even though it’s a great company. Is it possible that Airbnb grows into this valuation years from now? Certainly, but everything must go absolutely right to justify this valuation. Is it likely to grow into today’s valuation? Not very.

We attach our model for free download here:

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Roblox Valuation – A First Look

  • Roblox is a global platform where millions of people gather together to imagine, create, and share experiences with each other in immersive, user-generated 3D worlds
  • Roblox plans to IPO before Christmas, so we take a look at the rumored valuation of $8bn
  • Covid-19 has generated a huge boost to traffic with Daily Active Users ((DAUs)) growing 82%, hours engaged growing 122%, revenue growing 68%, bookings growing 171%, and a large $292.6 mm in free cash flow in the nine months ended Sept 30, 2020
  • The valuation story depends on Roblox’s ability to continue growing once the Covid pandemic is in the rear-view mirror

When Roblox was first brought to my attention, I thought they were some sort of gimmick legos. Full disclosure, I have never played this game, but I did play Runescape many, many years ago. Chopped the hell out of some Yew trees. This makes me not the least qualified to gauge Roblox as a video game, but we are gauging it’s potential as a stock instead.

Roblox Business and Technology: Roblox was founded in 2003 and has hit many milestones before the planned IPO launch. The most important recent developments being the Joint Venture with Tencent to establish Roblox China and re-launching Roblox Premium to develop a subscriber base with steadier cash flows.

Source: Company S-1

The Roblox business model is based on the underlying technology and infrastructure that support the 31.1 million average DAUs. Roblox defines a DAU as “a user who has logged in and visited Roblox through our website or application on a unique registered account on a given calendar day. If a registered, logged in user visits Roblox more than once within a 24-hour period that spans two calendar days, that user is counted as a DAU only for the first calendar day” (source: company S-1).

This business is based on three elements:

  • Roblox Client: The underlying app that allows users to explore 3D worlds
  • Roblox Studio: The toolset that enables developers and creators to build, publish, and operate 3D experiences and content
  • Roblox Cloud: The services and infrastructure that power the platform
Roblox: 'I thought he was playing an innocent game' - BBC News
I think this is what Roblox players do but I can’t be sure

The Roblox platform and the key technology characteristics are as follows:

  • Identity: The Roblox avatar system allows users to create and personalize their unique 3D identities. There are a wide variety of character styles.
  • Friends: The Roblox Client allows users to connect through various means, including detecting nearby players or meeting in the Roblox world. The social graph created by these connections is stored in the Roblox Cloud. The Roblox Platform supports text-based chat among users sharing the same 3D experience and between users connected through the social graph.
  • Immersion: The Roblox platform allows developers to build deeply immersive 3D environments where users can share experiences.
  • Low friction: Users have the ability to interact with experiences almost instantly, on most popular client devices, and from anywhere in the world over existing broadband and cellular networks. When a user joins an online experience, the Roblox Cloud assigns that user to a particular game instance based on the user’s social graph, geographic location, spoken language, and age group. 
  • Variety of content: Roblox provides developers with reference material, tutorials, community forums, and analytics to build their creations. Developers and creators build nearly all of the content for the Roblox Platform. Once content is built, it can be replicated and shared across multiple experiences giving developers the ability to scale their efforts and make rapid updates. There were over 18 million experiences on Roblox as of Sept 30, 2020.
  • Global: The Roblox Platform serves a global audience. In the nine months ended September 30, 2020, developers from over 170 countries and users spanning over 180 countries accessed the platform.
  • Economy: Roblox has a vibrant economy built on a currency called Robux, which can be purchased. Developers and creators earn Robux by selling access to virtual content or by driving engagement of Premium subscribers through an engagement-based payout system. When Premium subscribers spend time in a developer’s experience, that developer earns a prorated share of the user’s monthly subscription fee.
Robux, the currency of the online Roblox world, buying options

Developer Incentives: With nearly the entire Roblox online universe being built by the ingenuity of developers and creators, Roblox has developed a system to incentivize natural development expansion.

Roblox currently offers developers and creators four ways to earn Robux:

  • The sale of access to their experiences and enhancements to these experiences
  • Engagement-based payouts – rewarding developers for the amount for time that Premium subscribers spend in their experiences
  • The sale of content and tools between developers
  • Sale of items to users through the Avatar marketplace

As users purchase and spend their Robux on Roblox, developers receive 70% of the Robux spent within their experiences and 70% of the items that appear in the Studio marketplace. Creators receive 30% of the Robux spent for their items on the Avatar marketplace.

Example of a store from Mining Simulator by Runaway Rumble within Roblox

These earned Robux are deposited into virtual accounts where developers can convert Robux into U.S. dollars at an exchange rate of 1 Robux to $0.0035. In the nine months ended Sept 30, 2020, developers and creators earned $209.2 mm, up from $72.2 mm in the nine months ended Sept 30, 2019. Clearly, the Roblox developers and creators are also benefiting from the massive spike in users on Roblox.

Current Roblox Business Profile: When users sign up for Roblox, they can create an avatar and explore the vast majority of experiences for free, although the business model for any experience is ultimately up to the developer. Users can purchase Robux either as one-time purchases or via Roblox Premium, a subscription service billed monthly.

For one-time purchases, users can purchase the virtual currency through various channels including the Apple App Store, Google Play Store, credit cards, prepaid cards, Microsoft app store, PayPal, and others. For the nine months ended September 30, 2020, 34% and 18% of Roblox revenue was generated on Apple App Store and Google Play Store, respectively. For operations through both the Apple App Store and Google Play Store, Roblox must pay the customary 30% to Apple or Google.

Roblox has managed to rapidly expand its DAU base.

Source: Company and our estimates

Roblox has grown its DAU count by 94.9% and 96.9% in Q2 and Q3 of this year, respectively. DAUs are up in every geographic region with the Rest of the World segment growth being particularly impressive. However, Roblox acknowledges that this upsurge in growth during the pandemic may not be sustainable when they say, “We do not expect these activity levels to be sustained, and in future periods we expect growth rates for our revenue to decline, and we may not experience any growth in bookings or our user base during periods where we are comparing against COVID-19 impacted periods” (source: company S-1).

The growth profile and future look of Roblox as an attractive investment hinges on their ability to keep the surge in DAU growth they’ve experienced as a result of the pandemic and then continue to grow their DAUs (albeit at a slower pace compared to 2020).

The DAU metrics show that 55.6% of DAUs in the nine months ended Sept 30, 2020 are under the age of 13.

Source: company S-1

DAUs drive spending, and Roblox has seen the average bookings per DAU increase as well. Bookings are defined as “equal to the amount of virtual currency purchased by users in a given period of time” (source: company S-1). Therefore, we can expect bookings to be the most widely watched metric every quarterly earnings release, not revenue. DAUs and average bookings per DAU growth are the primary drivers in our valuation model.

Roblox Cost Profile: The major Roblox operating costs consist of

  • Cost of revenue – 3rd party payment processing such as Apple and Google app stores – 12.5% of Bookings YTD
  • Developer exchange fees – amount earned by developers and creators on the Roblox platform – 16.9% of Bookings YTD
  • Infrastructure – Data centers and technical support – 19.8% of Bookings YTD
  • R&D, G&A, and Sales and marketing – 19.8% of Bookings YTD
Source: Company and our estimates

As you can see from the chart above, the Loss from Operations has widened significantly the past 4 quarters. However, this is slightly misleading because the company is cash flow positive and the company has been generating more cash flow, not less.

Source: Company S-1

The reason for this is the method the company uses to recognize revenue vs bookings. On revenue recognition, “We generally recognize revenue from users ratably over the average lifetime of a paying user, which for the years ending December 31, 2018 and 2019 was 23 months. Therefore, much of the revenue we report in each quarter is the result of purchases of Robux during previous periods” (source: company S-1). And bookings – “Substantially all of our bookings are generated from sales of our virtual currency which we record as deferred revenue and then recognize that revenue over the estimated average lifetime of a paying user” (source: company S-1).

Source: Company S-1

So these accounting losses don’t necessarily matter because the company is free cash flow positive. As we can see in the table of bookings and revenue, revenue as a % of bookings declined from 70% in 2019 to 38.4% and 48.8% in Q2 and Q3 2020 respectively.

Roblox Growth strategy: Roblox is focused on four core strategies in order to achieve growth:

  • Platform extension: Roblox is continually investing in the platform including in avatars, experiences, technology, and other social features. These efforts can further drive bookings per DAU.
  • Age demographic expansion: Roblox and developers are working on building higher quality experiences and content that appeal to an older age demographic. These efforts can drive DAU growth as well as bookings per DAU as older people don’t have to beg mom and dad for their credit card.
  • International growth: The JV with Tencent in China is a testament to Roblox’s ability to grow internationally into new markets.
  • Further monetization: Roblox is working with their developer community actively to help improve monetization. Efforts such as Roblox premium being introduced in August 2019 as well as working with leading brands to build unique marketing opportunities on the Roblox platform can further drive monetization.

Massively Multiplayer Online Gaming Market: The MMO market has increased rapidly and has hit over 16 million total players. (source) We take a look at the market’s growth to get a sense of the growth that Roblox may be able to achieve in the near future and beyond. The total number of players dipped in 2019, but the trend is clear with around a 28.5% CAGR in total MMO players over the past 3 years.


We also take a look at the MMO arguably most similar to Roblox, Minecraft. Minecraft is owned by Microsoft and they have released intermittent data points on the number of active players on the platform. The number of active players on Minecraft has increased from 40 million in June 2016 to 126 million as of May 2020. We have only 5 total data points in this time-frame, but this indicates a 33% CAGR over the period and it has accelerated from October 2018 to May 2020. Can Roblox experience a similar level of growth in active players?

Source: Statista

Roblox Forecast: The basis of our valuation is Bookings per user growth, DAU by region growth, and expenses as a % of Bookings.

Bookings per User have grown 68.6% and 52.5% in Q2 and Q3 y/y, respectively. We think they continue to grow at a high pace in Q4 and Q1 of next year. However, growth will then decelerate as the populations are vaccinated and people start to live their lives as normal once again, thus removing a tailwind for online gaming.

Source: Company S-1

We have Bookings per user growing 20.6% in 2021, 10% in 2022, 7.5% in 2023, and 5% in subsequent years. For example, this deceleration in each DAU spend gives us a quarterly spend on over $20 a quarter in 2024.

DAUs have grown rapidly during the pandemic, and likewise we expect this growth to decelerate as the pandemic draws to a close. We forecast that Roblox will consolidate its Covid user-base gains, and grow an additional 12.5% in DAUs in 2021, 7.5% in 2022, and 5% every subsequent year. This means that Roblox will pass 50 million DAUs in 2024 and will have close to 60 million in 2030.

We forecast that Roblox’s costs and expenses will increase, but as a result of scaling will decrease as a % of Bookings in the future. We anticipate that Roblox will be able to consolidate its cost profile so far experienced in 2020 and will have a cost profile ~60% of Bookings in the future, with the largest contributors to cost being cost of revenue, developer exchange fees, and infrastructure where it is more difficult to create efficiencies through scale.

Source: our estimates

For some scenario analyses of what the company bookings will be in 2025, we look at different ranges of DAU growth and Bookings per user growth. Roblox currently has averaged 31.1mm DAUs in 2020, and we run scenarios from 22mn to 92mm DAUs in 2025. Likewise, we grow average bookings anywhere from 0% to 17.5% a year. We estimate the likeliest bookings range to be $2.9bn to $5.4bn in 2025, compared to the estimated $1.8bn in bookings for full-year 2020.

Our estimates

Valuation: We value Roblox through a Discounted cash flow model with a weighted average cost of capital (WACC) of 8% and a perpetual growth rate of 4%. With these assumptions, we get an equity value per share of around $26.50. With the rumors of Roblox seeking a valuation of ~$8bn (source), we get 114% upside.

Source: our estimates

Just for fun, we run a scenario where we give Roblox decrease DAUs -5% and give 0% growth in bookings per DAU, while keeping the same cost profile, for the final three quarters of 2021 (when the pandemic winds down). We then grow at an anemic rate in DAUs in the future, 5% in 2022 and 2.5% a year onward, we get a price target of ~$18.30 and an equity value close to $12bn.

Risks to our View:

Younger audience: With 55.6% of DAUs under the age of 13, how likely is it that they stay on the Roblox platform, we don’t have a definitive answer. Kids so young move to the next hottest game very easily and quickly and therefore it is crucial that Roblox continue to capture and keep their attention in order to grow their DAU count.

MMO gaming market competition: An extension of the first risk, the MMO gaming market is incredibly competitive and Roblox will need to continue to innovate and develop its platform to stay ahead of the competition. We aren’t aware of any new releases that directly challenge Roblox’s position as one of the most widely played games in the world, but new video games and revamps of old games happen all the time. We look forward to seeing how Roblox continues to differentiate itself in the gaming market from competitors and whether these efforts will be successful.

Inability to consolidate Covid user-base gains: Once the pandemic ends will the majority of DAUs gained no longer play Roblox or play/spend less? Our model assumes that the company is able to keep the majority of its DAUs and continue to grow, but this is truly a risk without a real precedent.

We share our valuation model here:

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Posts are not investment advice or endorsements.


Palantir Valuation – Opening the Black Box

  • Palantir Technologies was founded in 2003 and the company offers a unique and powerful operating system (OS) to government and commercial clients
  • PLTR has found its stride in providing solutions to the US government, particularly in aiding intelligence, counter-terrorism, and military.
  • PLTR provides anti-money laundering and flight operations solutions to commercial clients
  • With ~125 customers today on lumpy deals and limited visibility into future opportunities, let alone conversion rates, PLTR seems a company with a binary outcome to us. Will they or won’t they bring more customers on the platform, a single customer add changes the company’s outlook, and as a result, valuation, significantly.

Company Background: Palantir’s data / analytics platform is differentiated with its “full stack” approach. For businesses providing a product or service, a full stack approach means addressing the complete value chain from end-to-end, controlling the entire customer experience instead of providing a partial solution that relies on licensing to, or integrating with, existing businesses serving the target market. Palantir technology is a one-stop shop.

Despite having a low number of customers, once PLTR penetrates the customer and becomes a core data platform, thanks to this full-stack approach they are able to expand rapidly. Average revenue per customer has been growing at 30% since 2009, reaching $5.8mm as of 2019. The top 20 customers have a spend even greater at $23.6mm. This sort of revenue per customer growth is indicative of PLTR’s ability to prove and expand into new use cases once a customer is onboard. The PLTR platform addresses a variety of workflows including data management, integration, app development, security, analytics, supply chain, enterprise resource planning (ERP,) and the mythical ~AI~ among others.

Source: Company Q3 presentation
Source: Company

The revenue growth is impressive, with Q3 growth at 52% y/y and full year 2020 revenue to be 44% year-over-year. However, is this revenue growth sustainable? There are signs of lower confidence in growth – mainly customer count going down from 133 at the end of 2019 to 131 at the end of Q3, weak headcount increase of +2-3% y/y in FY21, and operating expense decreasing 28% y/y which is a huge number and unusual for a company in high growth mode.

Palantir’s Business Model: PLTR goes to market with a direct sales force, with heavy involvement from senior management in the early stages. Sales cycles can be long, with heavy implementation services required to get customers running. Sale engineering and pricing vary on the scope and scale of the project. PLTR’s business model has three phases: Acquire, Expand, and Scale.

Source: Company Q3 Presentation

Acquire – PLTR offers short-term pilot deployments of their software at little to no cost to attract new customers and further monetize existing ones. These pilots lead to initial losses. Customers in the Acquire phase are defined as customers who contribute less than $100k in revenue in a calendar year.

Expand – This is the phase where PLTR would begin to see an inflection in revenue and margin. Customers in this phase are defined as those generating more than $100k in revenue in a calendar year, while having negative contribution margin throughout the same period.

Scale – With 95% of revenue coming from existing customers, the company’s ability to scale within its base is crucial for its growth strategy. Palantir’s system is very sticky, once the software is installed and configured, the customer can develop further apps and software to use on top of the platform, contributing to further usage.

Total Addressable Market (TAM) opportunity: Palantir estimates their TAM to be $120bn based on their bottoms-up analysis on customer spending levels across the commercial and government sectors.

Company management believes the core product is applicable to commercial customers with more than $500mm in revenue, roughly 6,000 commercial companies. The management estimated commercial TAM of $56bn, implying $9mm per commercial customer. This sort of TAM calculation signifies PLTR has penetrated less than 1% of their potential commercial market.

For government customers, management estimated a $63bn TAM based on their assumptions around software and consulting services penetration of US and US allied governments. We use Goldman’s estimation of government spend based on NATO members for U.S. allies and the spend based on Gartner FY24 IT spend estimates. This sort of TAM calculation signifies PLTR has penetrated once again less than 1% of their potential government market.

Source: Company estimates, Goldman Sachs Global Investment, Gartner, Our estimates

Sell-side estimates vary from $55bn at Citi, who utilized a top-down methodology, and $105bn at Goldman based on similar methodology to Palantir’s estimates. Regardless of methodology, these sort of TAM levels imply PLTR has penetrated less than 0.8% – 1.8% of their total market opportunity. Clearly, there is room to run if management is able to execute effectively and grab more market share.

Government services: Recent strength in the government segment was primarily due to the results of a recent lawsuit – specifically a lawsuit in 2016 against the US Army that allowed the army to consider commercially available products instead of using strictly custom built software solutions. In 1H20, the US Army represented 31% of total government revenue vs 16% in FY 2019. While PLTR has worked with other government agencies such as the Dept of Defense, US FDA, CDC, and NIH, there is still a large customer concentration within the US Army. While PLTR has signaled its attempts to broaden into other western-allied governments, it is unclear how much traction, if any, the company has outside the US government. Some government customers have begun to expand into commercially focused product such as Foundry, which is a positive theme for future cross-selling opportunities.

Government contract backlog provides some visibility into future revenue, at least more visibility when compared to the commercial segment. PLTR has indefinite delivery, indefinite quantity (IDIQ) government contracts totaling $2.6bn as of 2Q 2020. These are awarded contracts, but the funding has yet to be determined and is not guaranteed. With little certainty surrounding funding and timing, these contracts represent potential upside to our estimates.

Commercial services: In 2016, Palantir launched its Foundry platform – a centralized data OS for commercial customers. Customers can leverage the platform to manage, filter, and visualize large datasets. Sustainable growth in the commercial segment will hinge on efforts to broaden use cases and leveraging sales reps to drive top line growth.

With ARPC at $5.8mn as of the last 9 months of 2020, PLTR has a meaningful opportunity to expand via new use workflows and growth in users. Sales cycles and implementation times can be long given PLTR’s complexity, but once commercial orgs see and realize the value, spending growth can grow at a rapid rate. It is critical that PLTR reduce sales times and becomes more efficient in implementation in order to diversify its customer base as its largest commercial customer represents greater than 20% of total commercial revenue.

While the company has expanded into various industries and use cases over the last several years, its customer count remains among the lowest in growth software – 131 (including government entities). Today, product market fit remains narrow and tailored to specific scenarios or one-off situations (table below). The use cases also tend to be concentrated around a few industries such as energy, transportation, financial services, and healthcare. Near-term visibility in the commercial segment remains low and hinges entirely on the execution and size of a few contracts per quarter and year.

Quarterly Earnings recap: Palantir put up a strong 3rd quarter in its first quarter as a public company. There was ongoing momentum for the government business, as revenue growth accelerated from 56% last quarter to 68%. Most impressive, the commercial business grew 35% y/y, up from 17% in 2019. Total revenue growth accelerated to 52% y/y, up from 43% last quarter.

The company also announced efforts to modularize (flexibility around the full-stack solution) its Foundry product and to accelerate the pace of app development, efforts which will help drive broader product market fit in the commercial segment and drive more sales. We like these solutions as it shows Palantir is adapting to the needs of its customers in order to gain more customers. The full-stack or perhaps a not-so-full-but-fuller-stack solution capability can be expanded once a customer is up and running on Foundry. These sorts of efforts will be crucial in diversifying the customer base.

Adjusted operating margins improved and were a positive 25%, up from -49% a year ago. This healthy margin expansion was primarily due to greater efficiencies in acquiring and scaling customers. We expect PLTR to generate further operating leverage with a more experienced sales force and account management teams.

Source: Company Q3 Earnings

PLTR Comparables Trading Multiples: Shares are currently trading 28x/21.3x CY20/CY21 sales estimates.

This was post-IPO and no longer relevant

For core comparable companies, we use software companies with high growth estimates. For the broader comparable companies, we use a wider range of software companies. High growth software companies are currently trading at an average of 18.5x 2021 sales and the broader comparables market is trading at 18.8x 2021 sales. Palantir is currently trading at 21.3x 2021 sales. Across every EV / Sales metric for every year, PLTR is trading at a significant premium over the core comparables, the wider broad comparables, and the total of both trading multiples.

However, this premium can be justified, because as we can see PLTR’s forecasted revenue growth is higher than the comparables estimates. However, PLTR also has higher customer concentration and lower revenue visibility than most of the comparable companies, so this premium is especially risky at current valuation levels.

Source: Bloomberg Consensus Estimates

These two factors combined: customer concentration + lack of revenue visibility (negative) and higher forecasted revenues (positive), does the stock deserve its premium?

Valuation: We use an Enterprise Value / Free Cash Flow valuation for this company. We get a $20 target price which is based on 37.5x EV/FCF multiple on 2025E Free Cash Flow of $1.165bn. We also get $4.44 bn in 2025E revenues.

We lay out a range of Bear/Base/Bull cases with the main drivers of the valuation and our Base Case assumptions being:

  • Number of net customer adds – 5 per year from current 131 number
  • Avg. Revenue per Customer (ARC) growth – 18.8% CAGR in avg. revenue per customer
  • Gross Margin % – a hefty 82%
  • Opex Margin % – a hefty 45%
  • Capital Expenditures – continuation of historical and very low
  • Free Cash Flow Multiple – 37.5x which is consistent with other high growth software data / analytics companies
Source: our estimates

For purposes of establishing a trading range for the stock, here is a grid of 2025E revenue scenarios given total customer count and ARC CAGR. As you can see, the amount of revenue PLTR is able to squeeze from customers has a very large effect on the calculation.

Source: Our estimates

The depending on each of these future revenue scenarios, based on different free Cash Flow margins and valuation multiples, we get a range of stock prices. As you can see, for purposes of our Base Case, the FCF margin is 26.2%.

Source: Our estimates

Key Risks: Simply put, there are a lot of unknowns with this company. This is one of the most binary companies I have come across, it will either be a massive hit or a dud and I attempt to value it accordingly. This binary opportunity is primarily because of limited visibility into this company’s sales. Palantir targets large-scale opportunities within large governments and commercial entities. These projects have high costs, long sales cycles, and are incredibly complex. A quarter’s earnings hit or miss and yearly growth can depend on a few contracts.

Customer concentration and a small base is another risk. Although PLTR has made some progress and decreased their total revenue attributable to the largest 20 customers from 68% the first 9 months of 2019, to 61% the first 9 months of 2020, PLTR has the highest customer concentration among public growth software providers. A significant decrease in revenue from a top customer can have an adversely large impact on the company.

Competition is significant. PLTR’s full-stack approach may be abrasive and put it at odds with other tech vendors in the data / analytics space. Some organizations may see a relationship with PLTR as too limiting and would prefer more flexibility to use some of the best of breed tools from other software companies outside of PLTR.

r/wallstreetbets - Palantir Valuation - Opening the Black Box

Recent and near-term expected hiring doesn’t inspire confidence in significant growth. Palantir expects to only grow headcount 4% in FY20 and operating expenses have notably declined, with guidance continuing this decline.

r/wallstreetbets - Palantir Valuation - Opening the Black Box

Palantir is not a young company, it was founded in 2003. Although PLTR is now hitting it’s stride and making significant progress and growth, the company has historically generated operating losses and negative cash flow. This also ties in with the lack of detailed disclosures from the company. In its S-1 (IPO filing) the company provided 6 historical quarters, but only included the income statement. Without more information, it is difficult to understand or predict the seasonality of the business appropriately.

Key catalysts: Increased commercial adoption is a massive catalyst for PLTR. If the company is able to improve adoption by introducing more flexible workflow solutions that meet a larger segment of the commercial market, the addressable market opportunity is incredible and can be swift. In addition, improving sales efficiency could drive higher profitability than we have currently modeled.

The company is currently profitable with 25% adjusted operating margins in Q3 2020. Management highlights the release of Apollo, the continuous delivery software that powers the Foundry and Gotham platforms, as the main driver in these efficiency gains. The efficiencies generated by Apollo and more ‘productized’ offering have resulted a lowered average implementation time and decrease in the days it takes to ERP integration going.

Here is the model for download:

Thanks for reading. If you like this post, I do weekly valuations, let me know what company you want to see next. Follow this blog and @millennial_mkts on twitter for future valuations.

This post is not investment advice.


DraftKings Updated Model – Dependent on Betting Market Growth

  • DKNG reported earnings and gave guidance for 2021 above consensus estimates
  • We believe DKNG is fully valued at these levels and would look for proof of increased total market opportunity or DraftKings outsized market share

What’s new: DKNG reported Quarterly adjusted revenues of $133mn (+42% year-over-year (y/y)), which was at the high-end of the pre-announced $131mn-$133mn range. (link) DKNG also reported adjusted EBITDA of -$197mn, better than Wall St. Consensus expectation of -$203mn.

Also with the earnings release, management increased revenue guidance to $540mn to $560mn, and introduced 2021 revenue guidance of $750mn-$850mn (+45% y/y at the midpoint), the consensus estimate was $776mn. This range doesn’t include contributions from Michigan or Virginia, which could both launch online sports betting late this year or early next. Management’s guidance assumes that they continue to operate in all states where they are currently live and announced sport calendars aren’t disrupted.

Valuation Methodology: I continue from my initial valuation of DKNG last week – What’s clear is that more states will legalize betting and more Americans will be exposed to sports betting and online gambling avenues and the market will grow overall. What is less clear, however, is how fast this market will grow. I approach this valuation by starting high level, focusing on the growth of online betting markets, and then following with DKNG’s market share of the future betting markets. I believe DKNG is simply a beneficiary of overall online betting market growth, not some standalone idiosyncratic tech pioneer, therefore I believe starting with Total Available Market (TAM) is the best approach for a valuation here. From Deutsche Bank in their updated Note on DKNG ‘Limited Changes to Forecasts’ “We expect the market to continue to trade shares around TAM and growth trajectory views, much of which will be dictated by the pace of legalization and investors garnering a better understanding of how [that] ultimately flows to net revenue and, down the road, EBITDA.” (Sell-side Research Link – sub req.) We use 2025 EBITDA as anything beyond five years is simply impossible to predict. Feel free to disagree with me in the comments and tell me why you disagree.

I try to keep this analysis high level so we can plug and play growth figures for both the market and DKNG’s share of that future market because analyzing line items or on modelling on revenue multiples, is a pointless exercise for growth companies because appreciating from $500M to $5B is way more likely than $100B to $1trn. This is a rapidly changing company in a disruptive industry and it’s stock price reflects expectations of the future of American online gambling and DraftKings’ ability to capture an increasing share of that market growth.

How is the Street valuing DKNG?: Goldman is Neutral rated with a 12-month price target of $53 based on equal parts 2030 EV/EBITDA (discounted), 21.3X 2024 Sales, and a Discounted Cash Flow mode. (GS Research portal – sub req)

Morgan Stanley is in-line and equal-weighted with a price target of $37 valuing DKNG on a 18.5x 2025 EBITDA model. 18.5X is a comparable tech multiple. (MS Research portal – sub req)

Deutsche Bank models DKNG at a price target of $48 on a multiples of 25x 2027 EBITDA, discounted at 5% for 5 years. They note that every 10% move in EBITDA from their current forecast is worth ~$4 to their Price Target and every multiple point is ~$2. (Sell-side Research Link – sub req.)

Our Model: I start off with management’s 45% y/y growth figure for 2021. I credit DKNG with this growth next year, then crucially, I decrease the growth rate by 5% every year forward, so 40% growth in 22, 35% in 23, etc. because DKNG is starting from a smaller revenue base so 45% will be easier to achieve in 21 than it will be from a higher base in 23.

If the online sports betting and gambling markets grow at these rates from 2020-2025 (about a 35% annual growth rate), and DKNG is able to capture a 23% blended total market share of these markets, at a 30% EBITDA margin and 18.5x EBITDA multiplier (we borrow this from MS), I get a valuation of around $39, implying ~9% downside. Let’s look closer:

I start off by estimating the online sports betting and gambling market size below. I go off the estimated 2020 figure of around $3.14bn – $1.33bn from sports gambling, $1.5bn from iGaming, and $286mm from Daily Fantasy. Next I grow them by the CAGR’s in the previous paragraph and you see the results. For purposes of this valuation I designate this growth profile as my Base case. I don’t want you to stay fixated on the ~35% CAGR but rather to see the effects of the rate on overall market size come 2025. We can argue all day about the numbers, but trying to estimate the growth of the market to the decimal for 5 years out is not an efficient exercise. This is still a nascent market experiencing a lot of disruption with no clear predecessor case studies.

We get a TAM of over $14bn in 2025 with our estimates

Is this a reasonable TAM: Deutsche Bank is a noted Bear on this sort of sports betting TAM Share argument in the 20bn to 25bn range for sports betting. They say in their “A Lot of Unfounded “Expectations” at a Lofty Price; Remain Sell” Note on Penn National, “Said simply, in the period from March 2019 through February 2020, prior to the pandemic, the per adult spend on sports betting (GGR/NJ adult population) was $51. Given there are 240 mm adults in the US, to arrive at even a $20bn TAM, implied that not only does every state legalize and all 240 mm adults can bet sports on their mobile phones, but that … the adult spend grows by ~65% from this $51 level”. (DB portal -sub req) I look at the idea of full legalization and spend per adult in the table below.

This image has an empty alt attribute; its file name is image-5.png
Our estimates

To get to our $20bn TAM, indeed every US adult would need to be spending $84 a year on sports betting and online gambling. This ties out with DB’s 65% figure.

Next I estimate the DraftKings’ EBITDA based on the market size and their share of this future market. An important point is DKNG’s promotions and how much it subtracts from top-line revenue. We use 20% here, but management has stated in the past that promotions are generally in the high 20%’s. We give DKNG credit for being able to continue to decrease promotional activity in the future, so for our 2025 EBITDA analysis we settle on 20%. Just for reference, promotions were ~26% in Q1 and Q2 of this year.

I use a healthy 30% EBITDA margin across all levels of market share and market size. As you can see, our Base Case is $785 mm in EBITDA for 2025. Not bad for a company expected to have over negative $400mm in EBITDA for 2020.

Our estimates

Finally, given the current stock price of $42.84 at close on 11/13, what is the implied 2025E EBITDA multiple for all these scenarios? Here’s a table summarizing that below:

At the close of 11/13 DKNG is valued at 20.38x our 2025 estimated EBITDA based on our model assumptions and estimates

Every additional turn in the EBITDA multiple adds ~$2 to our price and every additional $100 mm in 2025 EBITDA adds ~$5. If the market grows by only 15%/ year with lower market share and EBITDA margins in our Bear Case, we get a valuation of $14. Likewise, if the market grows at 45%/year with higher market share and EBITDA margins in our Bull Case, we get a $75 valuation.

I layout some clearer Bear/Base/Bull Case scenarios at the bottom as well in more detail:

Upside Risks to Valuation:

  1. Stronger than expected performance in 2021, which could accelerate growth in TAM realizations
  2. Better-than expected margin performance, especially less promotion activity that eats into top-line revenue
  3. DKNG is able to take outsized market share
  4. Favorable regulatory events and large states making progress toward sports betting

Downside Risks to Valuation:

  1. Considerable stock unloaded coming off management lockup agreements from the IPO
  2. TAM expectations becoming more muted, leaving far-out forecasts like the 2025 EBITDA we use being especially vulnerable
  3. Promotional activity could last longer than we think and be a drag on revenue
  4. Greater impact from competitors, leading to decreased market share and/or further necessitated promotional spend
  5. Negative legislative outcomes

Model for download here:

Posts are not investment advice or endorsements.


DraftKings (DKNG) Valuation

The Dangers Of Betting On Illegal Bookies - ItSportsHub
As sports gambling and iCasinos show promise to become more mainstream in the US, does the valuation of DKNG make sense?

We start off with a valuation of DraftKings Inc. A company with a $16bn market cap at the close of 11/5/2020, with only $188 million in revenue in the past 6 months this is clearly a stock price for future growth. But what kind of future growth is expected?

What’s clear is that more states will legalize betting and more Americans will be exposed to sports betting and online gambling avenues and the market will grow overall. What is less clear, however, is how fast this market will grow. I approach this valuation by starting high level, focusing on the growth of online betting markets, and then following with DKNG’s market share of the future betting markets. I try to keep this analysis high level so we can plug and play growth figures for both the market and DKNG’s share of that future market because analyzing expense line items really is a waste of time here. This is a rapidly changing company in a disruptive industry and it’s stock price reflects expectations of the future of American online gambling and DraftKings’ ability to capture an increasing share of that growth.

If the online sports betting and gambling markets grow at an annual rate of 25% from 2020-2025, and DKNG is able to capture a 23% blended total market share of these markets, at a 30% EBITDA margin and 17.5x EBITDA multiplier (on the higher end but this is a growth company with no earnings yet), I get a valuation of around $28. Let’s look closer:

I start off by estimating the online sports betting and gambling market size below. I go off the estimated 2020 figure of around $3.14bn – $1.33bn from sports gambling, $1.5bn from iGaming, and $286mm from Daily Fantasy. Next I grow them by a CAGR of 10% to 45% and you see the results. For purposes of this valuation I designate a 25% CAGR as my Base Case. I don’t want you to stay fixated on the 25% CAGR but rather to see the effects of the rate on overall market size come 2025. We can argue all day about the numbers, but trying to estimate the growth of the market to the decimal for 5 years out is not an efficient exercise. This is still a nascent market experiencing a lot of disruption with no clear predecessor case studies.

Deutsche Bank is a noted Bear on this sort of Total Available Market (TAM) Share argument in the 20bn to 25bn range. They say, “To arrive at even a $20bn TAM, implied that not only does every state legalize and all 240 mm adults can bet sports on their mobile phones, but that … the adult spend grows by ~65% from this $51 level (referring to the per adult spend on sports betting in NJ from March 2019 thru Feb 2020). I look at the idea of full legalization and spend per adult in the table below.

To get to our $20bn TAM, indeed every US adult would need to be spending $84 a year on sports betting and online gambling. This ties out with DB’s 65% figure.

Next I estimate the DraftKings’ EBITDA based on the market size and their share of it. I use a healthy 30% EBITDA margin across all levels of market share and market size. As you can see, our Base Case is $672 mm in EBITDA for 2025. Not bad for a company expected to have over negative $400mm in EBITDA for 2020.

Finally, given the current stock price of $42.32, what is the implied EBITDA multiple for all these scenarios? Here’s a table summarizing that below:

So in order to justify this stock price for our Base Case, we have to be using a ~23x EBITDA multiple. That’s pretty high, however you can see the rest of the cases in the table ranging from over 120x to 5.88x multiples.

I layout some clearer Bear/Base/Bull Case scenarios at the bottom as well in more detail:

The valuation is clearly rich here, but it can be justified if one believes that 45% CAGR for the sports betting and online gambling industry and/or a greater than 23% market share for DKNG is possible. Perhaps also DKNG is able to squeeze more juice and scale efficiently/cut back on marketing and overhead/etc. and get their EBITDA margins over 30%. Let me know your thoughts and thanks for reading.

Here is the link to download the excel workbook, I try to keep it as simple as possible so anyone can plug and play their own ideas and see how it affects the valuation.

  • Daniel J.