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What’s the best way to quiet noisy shareholders clamoring to exit their investment when a high-growth company has no imminent plans for an IPO a decade after its founding? If your name is ByteDance Ltd., (BDNCE) the answer appears to be offering to buy out some of those investors by drawing on your own large cash store.
Arguably the world’s biggest tech company that no one has ever heard of, ByteDance, best known globally for its TikTok short video service, has been the subject of numerous IPO rumors in the last few years. But after those plans repeatedly stalled, the company has reportedly made a recent proposal to its existing shareholders to buy back its shares at up to $177 each over the next two to three months – a price that values ByteDance at about $300 billion.
Such an eye-popping figure isn’t new. Last year the company was valued at $300 billion to $400 billion based on trades in the secondary market. While the new buyout price is at the low end of that range, the figure has firmly cemented the social media platform with more than 1 billion users as the world’s undisputed biggest “unicorn” – generally defined as young companies worth more than $1 billion. The next biggest company in that class is SpaceX, the space exploration technology startup founded by the world’s richest man Elon Musk, which was worth “just” $127 billion at the time of its latest funding in May.
Founded in China in 2012, ByteDance is best known for nurturing short-video sharing sensation TikTok and its domestic counterpart Douyin, which have become massively popular among young people around the world. The company’s valuation has grown explosively as advertising revenue boomed for those two money spinners. Even the $300 billion valuation would still make ByteDance China’s second-largest internet company, behind only the $380 billion for tech giant Tencent Holdings (OTCPK:TCEHY) and way ahead of Alibaba’s (BABA) $210 billion.
Revenue growth leader
ByteDance’s skyrocketing valuation owes in no small part to its ability to find strong revenue growth despite its large size, even as its peers falter. Whereas Tencent and Alibaba only managed to post low double-digit growth in the teens last year, ByteDance’s revenue grew by 70% to $58 billion. And as China’s most successful internet company outside its home market to date, ByteDance also appears to have much better future overall growth potential than the other two.
The company was already valued at $140 billion when it raised its Series-C funding in March 2020, and the figure rose to $180 billion in December that year. Another three smaller equity deals early last year took its valuation to an all-time high of $425 billion. While the new buyback offer was below that peak, it was still enough to provide sizable returns for early private equity investors such as Sequoia Capital and Susquehanna International Group.
With an algorithm that accurately predicts user preferences, ByteDance has not only become the king of short video apps but is also considered the king among all apps fighting for advertising dollars due to its huge popularity and young demographics. The industry commonly agrees that TikTok is nearly invincible in terms of its business. But it’s a different story when it comes to politics, which ByteDance discovered the hard way.
As early as during the administration of former U.S. President Donald Trump, TikTok was questioned about sharing its user data with the Chinese government, which the U.S. worried could pose a national security threat. Trump even tried to force ByteDance to sell a controlling stake in TikTok to a consortium led by Oracle Corp. (ORCL) in 2020, which ultimately failed and was aborted after Trump lost the 2020 U.S. presidential election. But national security concerns surrounding TikTok’s Chinese ownership were never resolved and have become a long-term headache for the company.
Overseas business under siege
The hot potato of how to deal with ByteDance was passed to current President Joe Biden. That tussle bounced back into the headlines in April last year when ByteDance CFO Chew Shouzi was named CEO of TikTok, drawing new congressional scrutiny.
In a letter from Chew to the U.S. Congress in June, he stressed that he is a Singaporean who lives and works in Singapore, hoping to quiet concerns that TikTok’s day-to-day operations are subject to Chinese government interference. But some former TikTok and ByteDance employees have pointed out that Chew’s decision-making powers at TikTok are limited, and in recent months TikTok executives have admitted that Chinese employees had access to foreign user data.
In another move to placate U.S. concerns, TikTok announced in June that it would host traffic for its U.S. business on Oracle’s servers. It also said that TikTok’s content algorithms would be reviewed by Oracle, ensuring the independent operation of its U.S. platform without manipulation by Beijing.
The tight U.S. scrutiny is just one of the many overseas hurdles for TikTok. The app has also been banned in India for two years and has been accused by the European Consumer Organisation (BEUC) of failing to protect children and teens from potentially harmful content and to clearly inform users of what data it collects. Meantime Beijing’s concerns about the company’s ability to protect its vast troves of data on young Chinese have also delayed ByteDance’s plans for an overseas IPO that might make such data accessible to foreign governments. Its CFO Julie Gao revealed in late August that there are no concrete plans or timelines for the listing at this point.
ByteDance hasn’t disclosed whether it was profitable last year, making it impossible to compare the company with peers on a price-to-earnings (P/E) ratio basis. But its revenue of $58 billion last year and the $300 billion valuation give it a price-to-sales (P/S) 5.17 times. That’s ahead of other major internet firms like Google parent Alphabet (GOOG, GOOGL), Facebook parent Meta (META) and Tencent, which had ratios of 4.8 times, 3.4 times and 4.7 times, respectively. It is likely to maintain that high multiple as long as it continues to outperform its peers in terms of revenue growth.
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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