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Professional esports teams have been receiving significant investments over the past few years. These pro teams are often referred to as âesports organizations,â and their valuations have continued to climb over the past 36 months. Forbes recently published a piece showing the valuations and revenues of the top 12 esports organizations, many of which are now worth over $100M.
We believe investors are betting that esports organizations are going to grow like tech companies, not sports teams.
Taking a closer look at these esports organizations, their current business models mimic those of traditional sports organizations (valued at ~5x revenue) yet current valuations of esports organizations (valued at ~13x revenue) more closely mimic tech companies (valued at >10x revenue).
Esports Organizations = ~13x revenueTech Companies = ~10x revenueSports Franchises = ~5x revenue
In short, we believe that to sustain these multiples, esports organizations will have to shift their underlying business models away from traditional sports monetization strategies and towards scalable and technology-driven revenue streams.
If they can make that shift, then the top-tier esports organizations will be worth >$1B, ultimately surpassing many traditional sports franchise valuations, and justifying the high valuations they are receiving from this latest wave of investors. If they canât, then we believe there will eventually be a pull-back in valuations over the next 2â3Â years.
Below, we take a deeper dive into the valuations across esports, traditional sports, and tech companies.
Esports Valuations
According to a recent Forbes report, the highest valuation today belongs to Cloud9 at $310M on $22M of revenue (2018e). This implies a 14.1x revenue multiple. As the highest valued esports organization, they rank second in revenue next to Team SoloMid at $25M (2018e). As the chart below shows, the average valuation for a top esports organization today is trading at 13.8x revenue.
Source: Forbes (2018)
Based on the valuations that investors are paying for these teams, it shows a high demand for these assets at premium valuations. This is especially evident with organizations that are valued under $100M where you see revenue multiples at 20x (Immortals), 19x (Envy Gaming), and 18x (100 Thieves).
To avoid investor fatigue & eventual disappointment, the bar is incredibly high on these esports organizations to produce revenue & profits that justify current & future valuations.
But what is their benchmark?
Current investment valuations indicate that investors are looking for these esports organizations to have similar growth trajectories to technology companies (10x+ multiples).
However, we donât see evidence today that their current underlying revenue comes from scalable technology plays.
To date, their business models more closely mimic the revenue streams of traditional sports teams (sponsors, advertising, merchandise, prize pools, franchise revenue, etc) which trade closer to 5x revenue (sports teams), not 13.8x revenue (esports organizations).
Therefore, in order to avoid a situation where investors try to pull out of esports organizations or future investment is discouraged from coming in, we believe that:
Esports organizations need to figure out a way to build their businesses to be globally scalable and driven by recurring revenue streams.
In the esports market today, there are a variety of revenue streams that contribute to the overall industryâs revenue which includes: sponsorships, advertising, media rights, game publisher fees, merchandise, tickets, and more. Esports organizations at present do not make public their revenue structure, though weâre confident that their current sources of revenue are similar to those of traditional professional sports teams.
Source: Forbes
(Disclaimer: we know that every esports organization is unique, yet their revenue sources to date are not too dissimilar to those of traditional sports teams. Our goal here is to point out that esports organizations will need to evolve into tech companies in order to justify their valuation premiums. We are not saying that they are not valuable or wonât be worth billions (quite the contrary, actually). From our perspective, we believe that if esports organizations can be built into scalable tech companies that they will be worth far more than any traditional sports teams (which is very exciting).
Traditional Sports Franchises
Like traditional sports franchises (NBA, NHL, NFL, MLB), esports organizations generate revenue through building teams that attract a loyal fanbase. The main difference is that esports organizations build teams across multiple game titles, unlike traditional franchises that make money through a single sport. In addition, esports organizations attract major followings across the world in numerous regions (Asia, North America, Europe, LatAm, etc) which is much less common for U.S. sports franchises.
Traditional sports franchises make money through a few distinct verticals: ticket revenue, food & beverage, media rights, sponsorships, and merchandising. This mimics the current business model esports organizations use today yet traditional sports franchises trade at less than 50% of the revenue multiples that esports organizations are trading at today.
Investors today are certainly paying for potential growth, which is understandable given the marketâs trajectory, but this raises the bar quite high on these esports organizations. To justify these multiples in the coming years, we fundamentally believe that esports organizations will have to adopt business models that are more similar to scalable tech companies than those of traditional sports franchises.
NHL (National Hockey League)
The NHL has the lowest average valuation of the major professional sports leagues in North America and is likely the first league that esports organizations will surpass over the next 3â5 years. The average valuation of an NHL team is $549M, compared to the average valuation of $143M for top-tier esports organizations. In esports, Cloud9 ($310M) is already more valuable than 2 NHL franchises (Florida Panthers and Arizona Coyotes) with several other esports organizations like TSM ($250M) and Team Liquid ($200M) not far behind (
Disclaimer
The views and opinions expressed in this article are solely those of the authors and do not reflect the views of Bitcoin Insider. Every investment and trading move involves risk - this is especially true for cryptocurrencies given their volatility. We strongly advise our readers to conduct their own research when making a decision.