1/ It’s time for a thread on the complete insanity of this #BTS Big Hit Entertainment IPO. BTS is an awesome Korean Pop boy band that has crossed over globally. But from every angle, this IPO looks like a blatant exploitation of one of the world’s most passionate music fan bases. https://twitter.com/business/status/1310581300273741825

2/ The stock is set to go public shortly, selling ~20% of the company for ~$800M, at a value of ~$4 Billion. Yes, Billion. What is happening here? Let’s take a look:

3/ Big Hit Entertainment is the management company for the band, and the umbrella entity that captures all their revenue. It’s profit this year is projected to be ~$80M. The band is at the absolute peak of its powers right now. But that’s why a $4B valuation is so problematic.

4/ Valuing *any* company at 50 times current earnings is hugely problematic, but it becomes bonkers when you consider that the product (7 dudes) cannot scale in any meaningful way. And 97% of the company’s revenues last year came from BTS. They’re HEAVILY dependent on the guys.

5/ Companies are valued based on a discounted estimate of the total earnings it will have during its lifespan. The guys in BTS are all 24-27ish years old. So hey, maybe they could stick around for 50 years as the biggest band on earth! But...you intuitively know better. Check it:

6/ One Direction, which broke all kinds of records as a boy band, started in 2010, and took an “indefinite hiatus” 5 years later. The boys are off doing their (terrific) solo work, but they’re all managed by different people, signed to different companies. Same goes for others:

7/*NSYNC was founded in 1995 and over by 2002. Timberlake was the star ascendant, and his band mates and the creeper who managed them back then aren’t touching his income. Spice Girls formed in 1994, and went on “indefinite hiatus” in 2002.

Sensing a trend here?

8/ The lifecycle of successful pop groups averages about 5-7 years, with peak earnings averaging a period of no more than 5 years.

That means you’d be highly speculative as an investor to value a pop group at an earnings multiple of more than 5x.

The BTS IPO values them at 50x!

9/ (There are of course residual earnings down the road for these artists, and diversification opportunities, but almost all revenue in the modern music biz comes from touring and merchandise sales. Stardom is rare and fleeting. You’ve gotta be active to make money.)

10/ Now the hard part to hear for the BTS Army (their incredible fan base): BTS was formed in 2013. Okay, okay you’re gonna argue that they didn’t enter the Billboard 200 until 2015. And that they only became the first KPOP band to reach #1 in 2018. Fine.

11/ That means we are already 40% of the way through their peak earnings period. We are 2-5 years into a lifespan that averages 5-7 years. Not one hugely successful pop band has ever stayed together. Not one. Egos, drugs, sycophants, mental health, money - it takes its toll.

12/ Did I mention that each of the guys have yet to fulfill their mandatory conscription obligations to the Korean military? It’s a year and a half requirement, minimum.

13/ But because BTS have an out of their mind loyal fan base - one that upvotes them in every digital poll, swarms them across social media and video platforms - they’re being led to believe that they should pay ~$120 for something that you could argue is realistically worth $12.

14/Read the forums - it’s retail, Robinhood fueled fans driving the price. By selling only 20%, Big Hit has created scarcity akin to the front rows of their concerts. Everybody wants in, and prices are through the roof. BTS is scalping their own tickets for shows they won’t play!

15/ @bgurley has eloquently made the case for why IPOs are a dumb vehicle for optimizing return to the selling investors, because they usually leave a ton of on the table. But here the IPO is being used to extract irrational rent from a fan base under the guise of scarcity.

16/ What is scarce, of course, is years of peak earnings left for BTS. And the combination of cash infusion to Korean citizens to counter coronavirus, easy access to stock trading for individuals, and the swarm herd mentality of the BTS Army is about to leave that army stranded.

Coda/ A member of BTS said something about the Korean War that was upsetting to China, and now all BTS products have been pulled from Taobao, http://JD.com , etc, effectively closing the Chinese market to BTS goods. But the stock IPO’d today and immediately doubled.