A few weeks ago, our friends at Konvoy wrote a fascinating blog post about the valuation of esports teams. Go check it out. They have gathered some great data on sports team valuations, and it is worth a read for anyone interested in esports investing. Their conclusion is that esports teams are valued for growth rates that they can only achieve if they greatly diversify their revenue sources. We like the post, but disagree with the conclusion, or at least have a different angle on the situation.
According to Konvoy, the average esports team is valued at 14x revenue, while the average traditional (i.e. physical) sports team is valued at 5x. The implication being that esports team will need to do grow their revenue a lot. Their implication, and a teaser for their next post, holds that esports teams will need to diversify away from traditional monetization mechanisms to merit those valuations. Simply selling tickets and merchandise will not be sufficient.
Our disagreement stems from that valuation gap. True, esports teams are valued 2.8 times more than traditional teams (14/5), but esports as a category is growing much more than 2.8 times faster than traditional sports. In this argument, we are falling back on that old gem the PEG ratio (PE ratio/growth rate). We readily admit the PEG is the last resort of financial analysts looking to justify edge-case investment theses. That being said, if esports companies just keep dong what they are doing, they should be able to handily to justify their current valuations.
Does this mean Konvoy is wrong? No, and we have to go back to the second part of their thesis which holds that esports companies need to diversify their revenue sources into highly-scalable revenue streams. We agree with this part unreservedly. Esports has the advantage of being software-based, which means they can generate new revenues with zero marginal cost. Done well, these could become massive.
All of which is to say that esports team are actually highly undervalued currently. Konvoy calls into question their valuations, which we think are actually pretty fair (on a PEG basis), but then if you factor in the potential for multiple new, scalable revenue streams, these teams start to look like incredible opportunities.
That being said, no investment note is complete without a warning of the risks. As we have outlined in our past esports notes, the biggest risk by far for esports teams is the fact that the arena of competition is entirely controlled by the game publishers who have and will continue to rewrite the rules in their own favor. However, this is not a one-way power dynamic. The game companies need the active participation of the esports team as major marketing vehicles. Nonetheless, anyone thinking about investing in esports need to be aware of these risks, and not focus solely on the opportunity and all those new revenue streams.
What are these new revenue models? We look forward to Konvoy’s next post outlining their thoughts on this, plus we have a few ideas of our own.