Bear Case for Discord: Under Monetized, Mispriced, and Does Not Go Public
There are 3 reasons that support the bear case here:
1) Discord monetizes poorly: their paid subscription (“Nitro”) is $9.99/mo or $99/year. On the high end (assuming just monthly subs), they have ~834k paid users. This is only 0.6% of their 140M MAUs. This is extremely poor paid conversion versus the user bases of Slack (~10% of MAUs pay). Even though Discord is more focused on being a consumer app than an enterprise focused solution (Slack, Zoom, Teams, etc), it still dramatically underperforms paid conversion rates for consumer desktop or mobile apps (2-5%).
2) Discord is not more valuable than Unity: at ~$7B valuation, Discord is trading at ~70x 2020 revenue. For context, Unity trades at 53x LTM revenue and Snowflake at 153x LTM revenue. To assume that their revenue triples (again) this upcoming year to $300M, that means they are currently trading at 23x NTM revenue. For context, Slack trades at 22x NTM revenue and has a paid conversion rate (~10%) that is ~16x higher than Discord’s (0.6%). In short, Discord is mis-priced in the private markets and this will keep them from wanting to be publicly traded (disclosing this in full to the public and watching their stock get crushed by short-sellers).
3) Limited # of suitable acquirers: given that Discord does not monetize well and is unlikely to want public market attention to its struggling monetization metrics, their only path to exit is through acquisition. The list of potential acquirers includes Facebook, Amazon, Google, Microsoft, Nintendo, Sony, or maybe Zoom. We think the most likely acquirer is Facebook, mimicking their prior acquisitions of social platforms like WhatsApp and Instagram. The next two would include Amazon (who own Twitch) or Google (who own YouTube), as both could see this chat platform as complimentary to their live-streaming businesses. We think it is unlikely that any of the others will make an offer.
Takeaway: the bear case for Discord revolves around a poorly monetized asset that is mis-priced in a world of limited strategic acquirers. Even when it is acquired, it would likely come at a discount to its last valuation.
Bull Case for Discord: Communities-as-a-Service, Files Their S-1 in 2021
Discord has built one of the fastest-growing community platforms in the world. At 140M MAUs and an estimated $100M+ in revenue in 2020, it has proven to be a valuable platform for its users. With this enormous user base, Discord has the potential to capitalize on its growing popularity by becoming a “community-as-a-service” platform. Currently, Discord monetizes through its Nitro subscription packages, server boosting, and game distribution.
1) Game Distribution: the biggest current revenue opportunity for Discord is game distribution. Unlike traditional game distribution platforms, Discord offers game developers a unique opportunity to build a community while they are building out their game. This then allows them to sell directly to the community they built while in development. On top of that, Discord offers a suite of commerce tools with attractive developer economics (90/10), similar to how Shopify’s suite of tools help online businesses. The game studios can track their community in these servers with daily metrics, analytics, and attribution tracking as well as tools to run private alphas or betas directly through Discord. Discord is well-positioned to be a market leader in game distribution in the future.
2) Community-as-a-Service: Community monetization expands outside of game development. Discord is traditionally viewed as a gaming-focused platform but if you explore the public servers you will see categories like Music, Education, Science & Tech, and Entertainment. These non-gaming categories have servers with hundreds of thousands of members. The opportunity to create monetized communities could allow server creators to build communities and charge for their services. Right now this is being done through 3rd party providers like Patreon but if brought internally with a suite of tools (potentially through bots), creators will be more incentivized to bring their community to Discord. There is no platform better positioned for content creators to build monetizable communities.
Takeaway: the bull case for Discord is centered around them offering their platform as a way for people to build communities, monetize those communities, and distribute games. They would be the centralized platform for communities and core to the infrastructure of the creator economy.
