Technology, media and telecom industry outlook
Volume 6, Winter 2021
The technology, media and telecom sectors continue to surge forward and investors are eager to grab a piece of these growing markets. A new administration and a recent high-profile breach are generating new cybersecurity investments, video gaming and esports interest is soaring due to the pandemic and expanding platform capabilities, and accelerated connectivity capabilities are on the horizon with expanded 5G infrastructure and high-speed satellite internet. Significant opportunities are available for companies that are prepared and ready to capitalize.
Key takeaways from the winter 2021 technology industry outlook
- Recent data breaches increase momentum for cybersecurity providers
- Capital opportunities remain plentiful for technology companies
- Roblox direct listing IPO likely for early 2021 after potentially well-timed delays
- The appetite for investments in video games and esports continues to build with no end in sight
- After a year of reduced 5G CAPEX spending, a significant rebound is projected for 2021
- Initial Starlink results and expansion plans could signal a bright future for high-speed rural internet
Recent widespread breach provides tail winds for cybersecurity companies
The coordinated cyberattack on thousands of companies and multiple U.S. government agencies in December 2020, coupled with President Biden’s cybersecurity agenda in a year beginning with a continuing COVID-19 pandemic, should provide nice tail winds for the cybersecurity industry. Fairly sophisticated hackers perpetuated the hack—once they were in the front door through a network management tool, they were able to able to gain access to—and install harmful malware within—numerous organizations.
To date, approximately 80% of cybersecurity workloads are on-premises, but the recent hack was a cloud hack, where only 20% of cybersecurity workloads are focused today. Cybersecurity companies will continue to migrate their solutions to the cloud in 2021 to help their clients mitigate against breach risks.
MIDDLE MARKET INSIGHT
Cybersecurity companies such as Palo Alto will pursue a buy-and-build strategy to obtain cloud solutions, which will cause increased consolidation within the industry. Middle market tech companies with a market cap of $0.5 billion to $3 billion could be targets for the next deal in this space.
Access to capital remains high for the technology sector
There are no two ways about it, the technology sector is hot, and a wide range of organizations want to get involved. The amount of money invested in the industry continues to climb, and companies have an increasing amount of avenues to make deals and generate capital, especially in the following:
- Venture capital: In 2020, venture capital firms deployed approximately $150 billion in capital, posting a record for the last decade according to PitchBook. Venture capital-backed technology companies have been resilient in 2020, amidst the COVID-19 pandemic, with particular technology verticals such as cybersecurity and health tech that received tail winds as a result of the pandemic. Late-stage investing (series C and beyond) performed particularly well in 2020, and we anticipate that will continue into the new year. According to CB Insights, there are 515 unicorns globally, many of which will be prime target for exits in the coming year. Some unicorns will choose to exit through IPOs, where they hope to achieve success similar to the exits we saw from companies like Snowflake, Airbnb and DoorDash in 2020.
- Private equity: Private equity has had an increased appetite for doing deals in the information technology sector. According to PitchBook, more than one in five private equity deals in 2020 was in the information technology sector, representing the greatest percentage in the last decade and an increase from 17.5% in 2019. Thoma Bravo continued to be very active in the technology sector, completing over three dozen deals during 2020, four of which were deals in excess of $2 billion. We expect an increasing number of private equity groups to be active in the information technology sector, as the asset class continues to perform well during the COVID-19 pandemic.
- M&A: The largest cloud M&A deal in 2020 was the Salesforce acquisition of Slack at a purchase price which approximately 25 times forward revenue. In 2021, we expect there to be increased regulation by the U.S. Department of Justice over the acquisitions of middle market technology companies. For M&A deals receiving regulatory approval, healthy valuations coupled with the low cost of credit will enable technology companies to structure deals with a combination of stock and debt. According to Bloomberg, a record number of M&A deals were announced in the last two weeks of December, and we expect that the technology sector will continue to be a target for M&A in the first quarter of 2021.
- Special purpose acquisition companies (SPACs), IPOs and direct listings: SPAC IPOs were the most popular IPO vehicle in 2020. Many of the SPAC IPO registrations are expected to target technology companies in 2021. We also expect more direct listings in 2021. The success of the Palantir and Asana direct listings will have far reaching implications for the future of how technology companies will look to debut as public companies. In addition, many technology companies will continue choose an exit through a traditional IPO. Some companies that are reportedly eyeing a 2021 IPO are Robinhood, ZipRecruiter, Instacart, UiPath, Roblox and Bumble.
More than one in five private equity deals in 2020 was in the information technology sector, representing the greatest percentage in the last decade and an increase from 17.5% in 2019.
Roblox IPO will set new wave of video gaming IPOs and trends for 2021
The highly anticipated Roblox IPO was postponed twice in 2020—but for good reasons—and is likely to debut a direct listing IPO in early 2021. Who’s to blame them for a delay, especially after seeing Airbnb shares more than double on day one, and Doordash nearly meeting that milestone by spiking 86%?
After recent explosive IPO hits, Roblox management concluded that they could be leaving money on the table if they pulled the IPO trigger too quickly. Earlier in 2020, analysts forecasted that if Roblox went public, it could easily reach an $8 billion valuation, twice what investors valued the company in private fundraising rounds according to PitchBook. However, the “wait and see until 2021” strategy could garner even larger investments at a higher valuation, which could fuel a series of video gaming IPOs in the near term.
In fact, in early January, Roblox raised $520 million in Series H funding at a purchase price of $45 per share, putting the gaming platform at a $29.5 billion valuation. To put that in perspective, Fortnite creator Epic Games is valued at only $17.5 billion.
Unless you have kids, it’s hard to understand the phenomena behind the Roblox craze or what it really is. The online gaming platform has literally created its own marketplace in which even kids themselves can develop games using pre-fabricated blocks (rather than code), and easily share or distribute them among friends. In other words, it’s so easy a kid can do it. If these kids are as wildly successful as “Adopt Me!” (a virtual pet adoption game which has tallied 11.6 billion play hours since inception) not only will your child’s education fund be taken care of, but they can pay off your home and start preparing your early retirement plans. Note to parents: start your kids in Roblox programming classes.
While most games within the platform are essentially free, Roblox earns a majority of its revenues by having consumers purchase Robux (its own virtual currency) which are then used to enhance their gaming experience. One could argue whether purchasing “skins” or articles of clothing for your avatar is enhancing, but it’s a small price to pay to avoid being labeled as a “newbie,” “noob,” or “n00b” in the gaming world (i.e., a new player or beginner).
"The pandemic created a tidal wave of new and more frequent gamers to push the industry to $175 billion in revenue, representing an astounding 20% year-over-year increase."
Gaming during the pandemic: According to Newzoo, video gaming and esports were originally forecasted to bring in $159 billion in global revenues for 2020. However, the pandemic created a tidal wave of new and more frequent gamers to push the industry to $175 billion in revenue, representing an astounding 20% year-over-year increase.
As the quarantine started to unfold, many resorted to gaming, and video gaming internet traffic nearly doubled according to Verizon Media. Twitch’s hours watched grew 63% quarter over quarter, to 5.1 billion hours during Q2; Roblox saw similar increases, as daily active users jumped 42% and hours of engagement increased 76% quarter over quarter to 8.6 billion hours.
Despite the pandemic, the S&P 500 managed to increase nearly 16%. However, the growth in the video gaming market and indices has been even more astounding. The Bloomberg Intelligence index for global video gaming and Wedbush’s video gaming exchange traded fund saw returns of nearly 60% and 80% respectively.
What’s in store for 2021? So far there’s nothing in sight to slow down this freight train. Even as the pandemic lifts, video gaming has created newly minted hobbies for those who never played and opened up ecosystems and revenue channels never seen before. When Sony announced a $250 million investment in Epic Games, giving them a mere 1.4% interest in the game development studio at a valuation of $17.86 billion, it wasn’t because the company had too much money with nowhere else to put it. Leveraging gaming platforms for virtual events such as the Marshmello and Travis Scott concert on Epic’s Fortnite created surprising successes. Try fitting 33 million people in Madison Square Garden to watch a Lil Naz X concert. Roblox did it, and Sony wants a space on this old town road.
The appetite for investments in the technology industry has grown stronger than ever, and the amount of dry powder within this sector continues to increase—meaning the demand for capital investments is out there. In addition, new avenues of investments—such as SPACs—have grown in popularity. These blank-check companies are accumulating investments through IPOs and acquiring companies to reverse merge into their shell companies. Recently, SPAC fund Flying Eagle Acquisition, headed by Hollywood veteran Harry Sloan, raised $690 million to acquire mobile gaming and tournament platform Skillz Inc. to put it in a fast-path IPO of a valuation over $3.5 billion.
MIDDLE MARKET INSIGHT
With strong opportunities in private equity, venture capital and the broader public market via IPO, the momentum in 2020 within video gaming and esports will continue in 2021. With more transparency within video gaming activities in the public market, investor confidence will only increase in this relatively new market.
5G and the year ahead
In 2020, the COVID-19 pandemic temporarily affected 5G CAPEX spending for many operators. An Analysys Mason report expects 2020 spending will be down 7% from its original forecast. However, it expects CAPEX spend will have begun to bounce back in Q4 of 2020 and to continue that momentum into 2021. A revised spending forecast for 2021 includes a 9.7% increase, with total CAPEX spending globally projected to increase to nearly $24 billion, more than double the previous year.
Average 5G speed is already reportedly 10 times faster than 4G. Once the network is fully built, 5G devices will theoretically be able to reach speeds up to 100 times faster than 4G. From a consumer perspective, this means instantaneous streaming and downloading. It also gives consumers the bandwidth and ability to establish hot spots so they can enjoy high-speed internet across an array of devices. Additionally, in the years ahead, it will make augmented and virtual reality ubiquitous.
For enterprises, the emergence of 5G services is just beginning. 5G provides the speed and bandwidth necessary for edge computing. Edge computing allows organizations to move computational resources away from data centers and closer to the end users, increasing speed and operational efficiency significantly. An Ericsson study conducted in June 2019 estimates that between 2020 and 2024, the 5G revenue potential for operators will grow from $14 billion to $129 billion. Organizations across various industries have already begun planning and optimizing for this eventual shift. We expect this trend will continue accelerating throughout 2021 as 5G commercial service continues its ramp up.
High-speed satellite internet begins public rollout
In October 2020, SpaceX began public beta testing of Starlink, its new high-speed satellite internet service. Since rollout, access has expanded quickly to thousands across the United States, Canada and most recently the United Kingdom. Germany and Australia have also recently approved Starlink services with beta testing in these countries expected to begin soon. Additionally, the company is seeking approval in more than a dozen more countries. We expect this number will grow rapidly as the company continues to expand its network and service capability.
Initial Starlink results appear promising. In places like rural Montana, download speeds in excess of 200Mbps have been reported. A recent Forbes report details that these speeds are faster than 95% of U.S. connections, according to the speed-tester provider Ookla. Nearly 20 million Americans and a much greater number of people globally do not have access to high-speed internet. Realizing the opportunity, Starlink has already filed an application to add an additional 30,000 satellites to its currently approved 12,000-satellite constellation. Today the constellation is nearing 1,000 satellites but that figure is expected to more than double by year-end as the company continues to ramp up satellite production and launch frequency.
MIDDLE MARKET INSIGHT
The many recent failures of other low-earth satellite projects show that this is a high-risk market. However, the rewards are significant if Starlink can achieve its goal of providing high-speed, low-latency internet to anywhere in the world.
Beyond consumer services, Starlink has the ability to create an entirely new market of enterprise services including high-speed connectivity for airlines, ships, remote facilities, corporate networks and broadcast services.
Get data-driven economic insights and outlooks on a variety of middle market industries provided by RSM US LLP senior analysts.