Epic Games raises $750m at $17B valuation

Epic Games worths more than Take-Two Interactive, the studio behind GTA franchise

💵 VC later stage

• American video game giant Epic Games is raising $0.75B at a post-money valuation of $17B — it is more than the current market cap $14.7B of Take-Two Interactive, the company behind GTA V and RDR 2
• According to Bloomberg, several newcomers (T. Rowe Price Group, Baillie Gifford) and existing investors (KKR & Co.) will participate in the current round
• Founded in 1991, Epic Games has raised $1.6B to date, including
  i) $1.25B raised from private equity group KKR and other financial investors in 2018
  ii) $330m raised from video game strategic investor Tencent in 2012

💰 Valuation 2012 [$0.7B valuation]

• In June 2012, Tencent invested $330m in Epic Games in exchange for 48% stake bringing the company’s valuation to $0.7B

💰 Valuation 2018 [$15B valuation]

• In October 2018, Epic Games demonstrated an annual revenue of $5.6B and raised $1.25B in 2018 at the company’s post-money valuation of about $15B resulting in the valuation multiple EV/Revenue of 2.7x
• Epic Game’s valuation in 2018 was 22 times higher than valuation in 2012 — such impressive growth is mainly driven by shifting business model to GaaS with consecutive relicensing of Unreal Engine 4 (free with 5% royalty) and Fortnite (F2P game) release in 2017

💰 Expected Valuation 2020 [$17B valuation]

• The company’s expected post-money valuation of about $17B — a slight increase of 13% compared to the previous fundraising round’s valuation despite the revenue decline of 25%
• In 2019, annual revenue declined by 25% (vs 2018) accounting for $4.2B, while EBITDA constituted $730m resulting in 17% EBITDA margin
• Valuation multiples based on 2019 financial results are EV/Revenue’19 = 4.0x and EV/EBITDA’19 = 23.0x
• As can be observed, Epic Games’ valuation is in line with the valuation multiples of the mature gaming businesses. Looking at the current public peers’ valuation multiples, we observe a discount of 22% in EV/EBITDA mult (23.0x vs 29.4x) for private company’s valuation of Epic Games

Source: Capital IQ. Note: only American and European companies, small-cap and outlier gaming companies are excluded

📈 What’s Next?

• While 2019 was a tough financial year for Epic Games, the company forecasts to reach annual revenue of $5B and EBITDA of $1B at the end of 2020
• Indeed, the positive COVID-19 effect, the impressive success of the virtual Travis Scott concert (12.3 million concurrent attendees), the recent announcement and impressive demo of the new game engine Unreal Engine 5, as well as the growing popularity of Epic Games Store will improve financial performance for 2020, while also building a strong foundation for the years to come
• However, the purposes of raising funds remain unclear. Epic Games is a profitable business generating about $730m in EBITDA annually. In 2018, Epic Games raised financing from well-established private equity group KKR (which also backed AppLovin), and since that time Epic Games has acquired 8+ companies and launched its own digital games store
• Our best guess is that the new financing will be used to substantially expand the business by continuing investments in new expertise (M&As) and new content (digital store). It will eventually increase Epic Games’ valuation and prepare the company for either the consecutive IPO or sale to Tencent as most relevant exit choices for financial investors.
  We’ll see, of course.

⚙️ About Epic Games

- Established in 1991
- Headquarters — Cary, North Carolina, United States
- Founded by Tim Sweeney (CEO)
- Team of 2,000+ employees
- Leading video game software developer (Unreal Engine, EGS, etc.), game developer (Fortnite, Gears of War franchise, etc.) and publisher