GAIA - Gaiam Inc.

[alwaysdrawing]

 

For whatever it's worth (and the opinion of a stranger on the internet shouldn't be worth very much), I've been trimming my position above $9.50.  Here's my back of the envelope math:

 

Assuming the cash and building are worth $80 million, here's what you're paying for the streaming business:

 

@$6.25/share:  $14 million

@$8/share:  $40 million

@10/share:  $70 million

 

For one way to estimate the steady-state value of the streaming business, see post 41 on this thread.  The "cost" of the streaming business listed above minus your estimate of steady-state value equals what you're paying for growth.  How much you're willing to pay for growth should be correlated with your confidence level that the company will grow profitably in the future.   

 

I agree that as the price increases you are paying more for the streaming business.  That said, a business which is projected to grow so fast can be worth much more.  It was obviously great getting it "for free" at $6/share, but if you think Jirka can actually grow the business at the level he claims, I think there's much more room to grow above $10/share.

[KJP]

 

I agree that as the price increases you are paying more for the streaming business.  That said, a business which is projected to grow so fast can be worth much more.  It was obviously great getting it "for free" at $6/share, but if you think Jirka can actually grow the business at the level he claims, I think there's much more room to grow above $10/share.

 

I agree that the business "can be worth much more."  Post 41 on this thread modeled out the operating leverage inherent in the business model.  But there are many businesses that would be worth much more than their current price if things work out.  So, I try to balance potential upside with an assessment of the likelihood that the business model will work.  The less certain I am, the less I'm willing to pay for growth, knowing that my method will cause me to pass on (or sell far too early on) many companies that are ultimately very successful. 

[alwaysdrawing]

I agree that the business "can be worth much more."  Post 41 on this thread modeled out the operating leverage inherent in the business model.  But there are many businesses that would be worth much more than their current price if things work out.  So, I try to balance potential upside with an assessment of the likelihood that the business model will work.  The less certain I am, the less I'm willing to pay for growth, knowing that my method will cause me to pass on (or sell far too early on) many companies that are ultimately very successful. 

 

No argument here.  Think it's two separate investment considerations.

 

The first, that the business was wildly undervalued on an assets basis, has now been somewhat realized, and I think that it makes sense to sell at $9.50 if you do not believe in the business model, or anyway would not want to bet as much on it as before.

 

The second, and part of what you laid out in post #41, is the actual economics of the streaming business working out (although I think your profitability understates the actual run-rate profitability if you are running the business without a major effort to grow subs).  This has not yet played out at all yet.  I think investors will have a much better idea if the model is working after Q1 2017 results come in next spring, when the site/app re-designs and improvements have been completed, and the seasonal growth of one major growth season (Q4 and Q1) has happened and been reported.

 

I also think that there are not going to be many sellers at $9.50 (yourself excluded).  Jirka especially, but other investors in the stock had an opportunity to leave at 7.75, and will likely want to see how the actual business plays out.  The stock was only at $6/share for a brief period, and most buyers since July 1 want to see how the streaming business can be grown.  With such a small float, and small market cap, any institutional buyer could drive the price much higher. If GAIA can grow at 30-50%/year profitably as Jirka claims, then the business will be worth more, and potentially much more than it is worth today.  Q4 2016 and Q1 2017 will give us a great view into how their growth plans are playing out, and if the numbers look good on subscriber growth, then the stock should do very well.

[KJP]

 

No argument here.  Think it's two separate investment considerations.

 

The first, that the business was wildly undervalued on an assets basis, has now been somewhat realized, and I think that it makes sense to sell at $9.50 if you do not believe in the business model, or anyway would not want to bet as much on it as before.

 

The second, and part of what you laid out in post #41, is the actual economics of the streaming business working out (although I think your profitability understates the actual run-rate profitability if you are running the business without a major effort to grow subs).  This has not yet played out at all yet.  I think investors will have a much better idea if the model is working after Q1 2017 results come in next spring, when the site/app re-designs and improvements have been completed, and the seasonal growth of one major growth season (Q4 and Q1) has happened and been reported.

 

I also think that there are not going to be many sellers at $9.50 (yourself excluded).  Jirka especially, but other investors in the stock had an opportunity to leave at 7.75, and will likely want to see how the actual business plays out.  The stock was only at $6/share for a brief period, and most buyers since July 1 want to see how the streaming business can be grown.  With such a small float, and small market cap, any institutional buyer could drive the price much higher. If GAIA can grow at 30-50%/year profitably as Jirka claims, then the business will be worth more, and potentially much more than it is worth today.  Q4 2016 and Q1 2017 will give us a great view into how their growth plans are playing out, and if the numbers look good on subscriber growth, then the stock should do very well.

 

I agree with everything you said and, for those reasons, am still holding a significant position. 

[iambagman]

Management just spent two days in NY meeting with investors.  They brought CEO, CFO, and Chief Marketing officer - I think it is possible that a larger investor has gotten more comfortable with the customer acquisition costs - and management's willingness to pull the cord if it is not working.  Jirka owns 38% of company and has sold 5 previous companies - perhaps more investors feel like it is asymmetric (or perhaps it is just a thinly traded stock that is spiking providing a nice selling opportunity) - Not sure - but thought worth putting out there this is on the backs of a fairly large IR effort by the company this week. 

[Homestead31]

 

 

Assuming the cash and building are worth $80 million, here's what you're paying for the streaming business:

 

@$6.25/share:  $14 million

@$8/share:  $40 million

@10/share:  $70 million

 

 

KJP - I understand your reasoning, but lets not forget the $10M investment that the company just made.  At a minimum it should be worth $10M...  an investment made by someone with a track record like the CEO could arguably be worth more.

 

 

 

[KJP]

Bagman -- Thanks for the color.

 

Homestead -- yes, my numbers assign no value to the $10 million investment.  They can be adjusted to reflect whatever you think the value of that investment is.

[Homestead31]

Management just spent two days in NY meeting with investors. 

 

I think there are a few things happening here... first, obviously some small cap investors read the greenhaven rd piece, the blog piece, and the seeking alpha piece... second, the new balance sheet hit, so all the black box investors out there that just scrape the filings looking for things like high cash balance vs market cap just woke up to GAIA.  Even with the recent move higher, cash and investments are still almost 50% of the market cap.  Third, management is apparently out talking to institutional investors, and given the limited float and small size, it only takes one true believer to move the stock significantly higher.  Fourth - the momentum types have surely taken notice lately. 

 

thats a lot of reasons for people (or machines) to be buying, and given that most of the people that wanted out got out during the tender or in the recent sell off, it seems like there won't be many sellers around except for maybe some people that bought below 7 and are looking for a quick flip and the momentum types.

 

 

[Guest roark33]

One thing I don't understand about this investment is the idea that you are betting on the horse (CEO) with a pile of cash.  If you look at the history of GAIA....I am just not seeing a lot of value creation over the past 17 years (it went public in 1999).  The guy scored an absolute home run with his office products business, but to me, this feels more like a hobby for him that for outside shareholders has basically been a treadmill running in place.  My two cents.

[alwaysdrawing]

One thing I don't understand about this investment is the idea that you are betting on the horse (CEO) with a pile of cash.  If you look at the history of GAIA....I am just not seeing a lot of value creation over the past 17 years (it went public in 1999).  The guy scored an absolute home run with his office products business, but to me, this feels more like a hobby for him that for outside shareholders has basically been a treadmill running in place.  My two cents.

 

You could be right, but he doubled down by selling the low margin, low growth branded products division and used the proceeds on a tender without selling any of his shares.  If it's a hobby, I would have expected him to distribute the profits with a special dividend instead.  The tender was essentially a way of saying that he believes the business will be worth much more than $7.75/share.

 

He also was previously looking to spin off the streaming business and run that instead--the economics are much stronger in the streaming business.

 

You certainly could be right that it is a hobby, but Jirka's actions suggest there is a profit motive to me.

[Homestead31]

also worth mentioning that he was not CEO of the old GAIA with the branded products.

 

Following the isolation of the VOD business he chose to return to an operating role and became CEO, which suggests that he is going to be very hands on.

[Guest roark33]

He was originally the founder and CEO of the whole unit when he founded it....

[eclecticvalue]

The key question imo is there a community around the streaming service?

[KJP]

The key question imo is there a community around the streaming service?

 

If there is, then it should show up in lower churn over time in the Seeking Truth segment.  But until the data is disclosed, is the answer to your question knowable?

[KJP]

Q4 results:  http://ir.gaia.com/press-releases/detail/230/gaia-reports-fourth-quarter-and-full-year-2016-results

 

They ended the year with 202,000 subs.  The simple model I posted in post #96 suggests quarterly customer acquisition spend of $4.35 million.  On the call, they said actual CAC was $4.5 million, so the model looks like a good proxy for underlying economics of the business. 

 

Also, that model used “Yoga” LTVs of $136 and “Spiritual Growth” (which I use to describe all other subs) LTVs of $306.  During the call, Rysavy confirmed that Yoga LTVs were "something like" $125-$175 and that Spiritual Growth LTV was "$300+."

[alwaysdrawing]

Q4 results:  http://ir.gaia.com/press-releases/detail/230/gaia-reports-fourth-quarter-and-full-year-2016-results

 

They ended the year with 202,000 subs.  The simple model I posted in post #96 suggests quarterly customer acquisition spend of $4.35 million.  On the call, they said actual CAC was $4.5 million, so the model looks like a good proxy for underlying economics of the business. 

 

Also, that model used “Yoga” LTVs of $136 and “Spiritual Growth” (which I use to describe all other subs) LTVs of $306.  During the call, Rysavy confirmed that Yoga LTVs were "something like" $125-$175 and that Spiritual Growth LTV was "$300+."

 

Yes, the LTVs disclosed in the call were new--that was nice to confirm.

 

Overall it looks like growth is going according to plan.  The acceleration of growth up to 80% by Q4 seems ambitious, however it is at least encouraging that Jirka has a disciplined approach to acquisition costs.  With revenues expanding to $25-30 million in 2017, it will be interesting what type of cash burn rate they have.  Certainly with no debt, and $54 million in cash (plus the building worth $20+ with no note), they have a fair bit of room to push the growth rate.

 

Still seems like a bargain at $8.50 ($130MM market cap) for a company with $74 million in cash and building and an existing subscriber base of 200,000 with 50+% growth rate.

[valcont]

Q4 results:  http://ir.gaia.com/press-releases/detail/230/gaia-reports-fourth-quarter-and-full-year-2016-results

 

They ended the year with 202,000 subs.  The simple model I posted in post #96 suggests quarterly customer acquisition spend of $4.35 million.  On the call, they said actual CAC was $4.5 million, so the model looks like a good proxy for underlying economics of the business. 

 

Also, that model used “Yoga” LTVs of $136 and “Spiritual Growth” (which I use to describe all other subs) LTVs of $306.  During the call, Rysavy confirmed that Yoga LTVs were "something like" $125-$175 and that Spiritual Growth LTV was "$300+."

 

KJP,

  Not trying to troll you but I posted this on SA comment when Greenhaven piece came out and the price was around today's prices. Would love to know your thoughts on this. If you guys already discussed it , let me know and I'll read this thread.

 

I am looking at their subs growth mentioned in the Greenhaven letter. He has them at 80% for 2017 and '18 and then tapering off to 50% in '19. The growth in the '14,'15,'16 was 100%,40%,50%. I can understand growing 100% from a low base but the 40-50% growth in the last two years is more likely or maybe lower than that. That takes me to ~1m subs in '20 at a staggering growth of 50%. And the pretax profit would be $5m!!

Another mistake in Greenhaven's model is to back out the growth capex to show profit ex growth spend. Well if you back out growth capex than you can't slap a 10X multiple on it. Its not a growth story anymore.

And that cash of $60m today is not free cash, it is a preallocated growth spend. Without it this company is an asset play and priced more than its assets currently.

So at the least I will wait until end of 2017 to see if they can show me 80% subs growth with the sales/advertising/cgs spend that they are modeling today. If it is proven than its a buy.

The problem with online subs in a niche market is it that it gets progressively worse because of the free offerings. The content, as the Greenhaven piece says, is not that special and cost only 20%. That tells me that its relatively cheaper to create it.

[KJP]

 

KJP,

  Not trying to troll you but I posted this on SA comment when Greenhaven piece came out and the price was around today's prices. Would love to know your thoughts on this. If you guys already discussed it , let me know and I'll read this thread.

 

 

I would distill your concerns into four points:  (i) growth projections are unrealistically high; (ii) even if they ramped to 1 million subs they wouldn't be particularly profitable; (iii) anyone who adds current balance sheet cash to future projected subs is double-counting; and (iv) the economics of the business will deteriorate due to low barriers to entry, increased competition and saturation of a niche market driving up growth CACs.

 

I think your concerns are the rights ones.  The only one I disagree with is (ii).  (III) is correct to some degree; I don't know about (i) and (iv), and I don't think anyone else does either. 

 

I'm going to number the steps of my thought process (more like a stream of consciousness) so it's easier to identify the specific point or points that you (or anyone else reading) disagree with.  I did the numbers very quickly, so forgive any blatant errors:

 

1) In a high fixed cost, high gross margin business, increased volume creates a lot of value, so long as it is obtained at a reasonable cost/ROI.

 

2) Gaia is a high fixed cost, high gross margin business.  Therefore, the critical question is whether they can obtain more subscribers at reasonable costs.  Put in the language Gaia uses, can it obtain a large number of incremental subscribers at a customer acquisition cost that is substantially below their lifetime value?

 

3) The answer to the question posed in (2) requires knowing how many people would pay for this service and what it would cost to locate them and convince them to buy.  I don't believe anyone really knows how big the market is/will be or what the CAC curve will be over time, though I believe Gaia management has a better sense of it than the outside world.

 

4) Because the answer to question posed in (2) is not knowable, one reasonable approach is just to stay away from this company.  If you're going to dig deeper, I would look at what the current, steady-state profitability is and the recent trends in CACs.

 

5) In post #96 I laid out several assumptions about LTVs and CACs that have held up so far, so I'll use them here.  With 202,000 subs and those assumptions, I get annual customer acquisition spend of ~$8.5 million to keep the subs constant.

 

6) Q4 selling and operating was ~$8 million and customer acquisition spend was $4.5 million.  So, there was $3.5 million in non-customer acquisition OpEx.  Annualize that and you get $14 million.

 

7) For the last two quarters, corporate G&A has been about $1.5 million.  Annualize that and you get $6 million.

 

8. If you add up the numbers the steady-state CAC, and annualized other OpEx and corporate, you get $28 million annually (8 + 14 + 6).  But if you were going to no growth mode, you'd cut a fair amount of that.

 

9) Annual streaming revenue (let's ignore the building rent and DVD) at 202,000 subs would be 202,000*9.5*12 = $23 million. At 85% gross margin, that's ~$20 million in gross profit.

 

10) Given the likely cuts of overhead described above in 8, I think it's fair to say that the current business is around breakeven and the GAAP losses reflect growth investments.

 

11) As illustrated in my prior post and post 96, management has met its aggressive sub growth targets while maintaining very profitable CAC to LTV -- so long as the LTVs hold up in the long term[!!]

 

12) The numbers above are already out of date.  I didn't catch the exact expected sub growth for Q1, but the company will almost certainly meet its projection because we're already two months into Q1 and they know what the numbers are so far. 

 

13) 50-80% annual growth seems silly in light of past growth, but management has said that they deliberately scaled down CAC spending in order to reach breakeven in preparation for a spin that ultimately didn't happen.  So, there is a plausible story why historical growth numbers aren't indicative of what can be achieved with the higher spend.

 

14) At 1 million subs and current CAC/LTVs, the business would be very profitable.  Revenue = 1,000,000*9.5*12=$114 million.  At 85% gross margin, that's $97 million in gross profit.  I get steady state CAC at ~$42 million.  So, that's $55 million before fixed overhead.  As discussed above, there should be very high operating leverage on the existing $20 million in overhead.  You can make your own assessment of how much overhead would increase by then, but I think the underlying business would make much more than $5 million/year.   

 

15) In addition to the business's standalone profitability at 1 million subs, I think it would be very valuable to an acquiror.

 

16) So, I think the economics of the business as it currently is operating are sound, I just don't know whether they can maintain their CAC/LTVs.  Because I think CAC/LTV is the key variable here, the model I posted and my recent posts have focused on that. 

 

17) There are good reasons to be skeptical that CAC/LTV can be maintained, such as potentially a small market size and a relatively low-quality, no-barrier yoga offering.

 

18) The Seeking Truth segment may have more of a barrier to entry than you think.  In one of the recent calls, management explained that they initially came up with a list of 3,000 or so classic titles in the genre and then went out and bought the rights to them.  The suggestion is that this is unique content that people will pay for, not something that can be replicated simply by sticking a camera in a yoga studio.  I don't know whether that's true or not.

 

19) Given my uncertainty over whether CAC/LTV can hold up as the business expands, I was buying below $6.50, when the streaming business was being given almost no value, and selling when the stock shot up above $9.50, implying a value of ~$70 million for the streaming business. 

 

20) As long as CAC to LTV appears to be holding up, I would continue to be a buyer if the price implies no/very low value for the streaming business, but will not be buying (but will continue to hold) if the market is already assigning $70 million+ to the business. 

 

 

 

[Guest roark33]

KJP--that's a very thoughtful description of your approach and analysis, thanks for sharing. 

[valcont]

I would distill your concerns into four points:  (i) growth projections are unrealistically high; (ii) even if they ramped to 1 million subs they wouldn't be particularly profitable; (iii) anyone who adds current balance sheet cash to future projected subs is double-counting; and (iv) the economics of the business will deteriorate due to low barriers to entry, increased competition and saturation of a niche market driving up growth CACs.

 

I think your concerns are the rights ones.  The only one I disagree with is (ii).  (III) is correct to some degree; I don't know about (i) and (iv), and I don't think anyone else does either. 

 

I'm going to number the steps of my thought process (more like a stream of consciousness) so it's easier to identify the specific point or points that you (or anyone else reading) disagree with.  I did the numbers very quickly, so forgive any blatant errors:

 

1) In a high fixed cost, high gross margin business, increased volume creates a lot of value, so long as it is obtained at a reasonable cost/ROI.

 

2) Gaia is a high fixed cost, high gross margin business.  Therefore, the critical question is whether they can obtain more subscribers at reasonable costs.  Put in the language Gaia uses, can it obtain a large number of incremental subscribers at a customer acquisition cost that is substantially below their lifetime value?

 

3) The answer to the question posed in (2) requires knowing how many people would pay for this service and what it would cost to locate them and convince them to buy.  I don't believe anyone really knows how big the market is/will be or what the CAC curve will be over time, though I believe Gaia management has a better sense of it than the outside world.

 

4) Because the answer to question posed in (2) is not knowable, one reasonable approach is just to stay away from this company.  If you're going to dig deeper, I would look at what the current, steady-state profitability is and the recent trends in CACs.

 

5) In post #96 I laid out several assumptions about LTVs and CACs that have held up so far, so I'll use them here.  With 202,000 subs and those assumptions, I get annual customer acquisition spend of ~$8.5 million to keep the subs constant.

 

6) Q4 selling and operating was ~$8 million and customer acquisition spend was $4.5 million.  So, there was $3.5 million in non-customer acquisition OpEx.  Annualize that and you get $14 million.

 

7) For the last two quarters, corporate G&A has been about $1.5 million.  Annualize that and you get $6 million.

 

8. If you add up the numbers the steady-state CAC, and annualized other OpEx and corporate, you get $28 million annually (8 + 14 + 6).  But if you were going to no growth mode, you'd cut a fair amount of that.

 

9) Annual streaming revenue (let's ignore the building rent and DVD) at 202,000 subs would be 202,000*9.5*12 = $23 million. At 85% gross margin, that's ~$20 million in gross profit.

 

10) Given the likely cuts of overhead described above in 8, I think it's fair to say that the current business is around breakeven and the GAAP losses reflect growth investments.

 

11) As illustrated in my prior post and post 96, management has met its aggressive sub growth targets while maintaining very profitable CAC to LTV -- so long as the LTVs hold up in the long term[!!]

 

12) The numbers above are already out of date.  I didn't catch the exact expected sub growth for Q1, but the company will almost certainly meet its projection because we're already two months into Q1 and they know what the numbers are so far. 

 

13) 50-80% annual growth seems silly in light of past growth, but management has said that they deliberately scaled down CAC spending in order to reach breakeven in preparation for a spin that ultimately didn't happen.  So, there is a plausible story why historical growth numbers aren't indicative of what can be achieved with the higher spend.

 

14) At 1 million subs and current CAC/LTVs, the business would be very profitable.  Revenue = 1,000,000*9.5*12=$114 million.  At 85% gross margin, that's $97 million in gross profit.  I get steady state CAC at ~$42 million.  So, that's $55 million before fixed overhead.  As discussed above, there should be very high operating leverage on the existing $20 million in overhead.  You can make your own assessment of how much overhead would increase by then, but I think the underlying business would make much more than $5 million/year.   

 

15) In addition to the business's standalone profitability at 1 million subs, I think it would be very valuable to an acquiror.

 

 

 

16) So, I think the economics of the business as it currently is operating are sound, I just don't know whether they can maintain their CAC/LTVs.  Because I think CAC/LTV is the key variable here, the model I posted and my recent posts have focused on that. 

 

17) There are good reasons to be skeptical that CAC/LTV can be maintained, such as potentially a small market size and a relatively low-quality, no-barrier yoga offering.

 

18) The Seeking Truth segment may have more of a barrier to entry than you think.  In one of the recent calls, management explained that they initially came up with a list of 3,000 or so classic titles in the genre and then went out and bought the rights to them.  The suggestion is that this is unique content that people will pay for, not something that can be replicated simply by sticking a camera in a yoga studio.  I don't know whether that's true or not.

 

19) Given my uncertainty over whether CAC/LTV can hold up as the business expands, I was buying below $6.50, when the streaming business was being given almost no value, and selling when the stock shot up above $9.50, implying a value of ~$70 million for the streaming business. 

 

20) As long as CAC to LTV appears to be holding up, I would continue to be a buyer if the price implies no/very low value for the streaming business, but will not be buying (but will continue to hold) if the market is already assigning $70 million+ to the business.

 

 

KJP,

  Thanks a lot. That was a very helpful explanation of your thesis. So lets just try to value the 1m subs and no growth after that. It took crunchy roll about 4 years to grow their paid user base from 200K to 1M. I'm not convinced that this is a close comp to GAIA since anime is a much more widely viewed genre than paid yoga/alternative theory so may be assume it'll take 5 years for GAIA to grow to 1m subs. You have their earnings at 55m but its highly likely that CAC will grow more once you get the low hanging fruit. Lets just say that they'll make 40m in 2022 with no growth spend. At a 10% discount rate and 10m shares, that amounts to about $24.50 share price. Discount it to present value and you get $15. And I haven't even considered the churn rate that the Greenhaven has kept constant at 35%.

 

I agree with you that this may be a buy at $6 but at $8.75, I'm not sure how much MOS is there.

 

I do think this is critical year for GAIA story. If they can show 80% subs growth keeping the same churn rate, cgs spend, they maybe on to something.

[KJP]

 

KJP,

  Thanks a lot. That was a very helpful explanation of your thesis. So lets just try to value the 1m subs and no growth after that. It took crunchy roll about 4 years to grow their paid user base from 200K to 1M. I'm not convinced that this is a close comp to GAIA since anime is a much more widely viewed genre than paid yoga/alternative theory so may be assume it'll take 5 years for GAIA to grow to 1m subs. You have their earnings at 55m but its highly likely that CAC will grow more once you get the low hanging fruit. Lets just say that they'll make 40m in 2022 with no growth spend. At a 10% discount rate and 10m shares, that amounts to about $24.50 share price. Discount it to present value and you get $15. And I haven't even considered the churn rate that the Greenhaven has kept constant at 35%.

 

I agree with you that this may be a buy at $6 but at $8.75, I'm not sure how much MOS is there.

 

I do think this is critical year for GAIA story. If they can show 80% subs growth keeping the same churn rate, cgs spend, they maybe on to something.

 

Just to clarify, my $55 million was gross profit less advertising cost necessary to keep subs constant at current CAC to LTV.  From there, you'd still have to deduct other operating costs and corporate. 

 

You say:  "Lets just say that they'll make 40m in 2022 with no growth spend. At a 10% discount rate and 10m shares, that amounts to about $24.50 share price."  I don't follow your math here.  What does your $40 million number represent? 

 

Also, I think the endgame is to sell the company once it scales more.  So, in addition to looking at its standalone value, I would consider what the company you describe would be worth to strategic buyer, assuming you believe any would exist.  One view expressed earlier in the thread is that there will be no strategic buyers because the underlying business doesn't work.  But I think you're assuming a scenario in which the underlying business does work, so a sale of the business to a strategic buyer should be considered. 

[valcont]

 

KJP,

  Thanks a lot. That was a very helpful explanation of your thesis. So lets just try to value the 1m subs and no growth after that. It took crunchy roll about 4 years to grow their paid user base from 200K to 1M. I'm not convinced that this is a close comp to GAIA since anime is a much more widely viewed genre than paid yoga/alternative theory so may be assume it'll take 5 years for GAIA to grow to 1m subs. You have their earnings at 55m but its highly likely that CAC will grow more once you get the low hanging fruit. Lets just say that they'll make 40m in 2022 with no growth spend. At a 10% discount rate and 10m shares, that amounts to about $24.50 share price. Discount it to present value and you get $15. And I haven't even considered the churn rate that the Greenhaven has kept constant at 35%.

 

I agree with you that this may be a buy at $6 but at $8.75, I'm not sure how much MOS is there.

 

I do think this is critical year for GAIA story. If they can show 80% subs growth keeping the same churn rate, cgs spend, they maybe on to something.

 

Just to clarify, my $55 million was gross profit less advertising cost necessary to keep subs constant at current CAC to LTV.  From there, you'd still have to deduct other operating costs and corporate. 

 

You say:  "Lets just say that they'll make 40m in 2022 with no growth spend. At a 10% discount rate and 10m shares, that amounts to about $24.50 share price."  I don't follow your math here.  What does your $40 million number represent? 

 

Also, I think the endgame is to sell the company once it scales more.  So, in addition to looking at its standalone value, I would consider what the company you describe would be worth to strategic buyer, assuming you believe any would exist.  One view expressed earlier in the thread is that there will be no strategic buyers because the underlying business doesn't work.  But I think you're assuming a scenario in which the underlying business does work, so a sale of the business to a strategic buyer should be considered.

 

It means pretax profit ex growth spend. Greenhaven has it at $30m when subs reached 1m in 2019. I have it  at $40m in 2022.

 

I am not assuming that this business model is sustainable. I am just taking the assumptions in the Greenhaven's model and calculating the upside. On the other hand, the CEO's past success in deal making should be given some weighting. I am sure he can convince some dot com billionaire in the viability of this business. I just can't figure out the odds of that.

 

[KJP]

 

It means pretax profit ex growth spend. Greenhaven has it at $30m when subs reached 1m in 2019. I have it  at $40m in 2022.

 

I am not assuming that this business model is sustainable. I am just taking the assumptions in the Greenhaven's model and calculating the upside. On the other hand, the CEO's past success in deal making should be given some weighting. I am sure he can convince some dot com billionaire in the viability of this business. I just can't figure out the odds of that.

 

I see.  My estimate would be closer to Greenhaven's $30 million, because I think they'll probably be around $25 million of "fixed" costs by then, if there is a "then". 

 

I wasn't as precise as I should have been when I said you're "assuming the model is sustainable."  What I meant was if you consider this business at a very high level, there are two potential paths:  (i) the business model doesn't work and you end up with building, cash and something like a run-off value of the sub base plus some value for the content library when management finally pulls the plug; or (ii) the business model is successful in the sense that CAC-LTVs hold up as the company scales to around 1,000,000 subs, in which case the endgame is likely a sale to a strategic acquiror and a value that would be higher than what you might otherwise assign to the standalone business with its run-rate corporate overhead.  So, path (ii) assumes a successful underlying business for the purpose of potential upside, rather than because you have a firm view that it will actually happen.

 

[Yes, my two-event path description is oversimplified and there is room in between, but the critical question is still does the business model work at substantially higher subscriber numbers.]

[sae85400]

http://www.cnbc.com/2017/03/03/the-netflix-for-fitness-company-raging-with-millennials--with-zero-competition.html

 

Similar private company offers online cycling classes, even sends you the stationary bike.

 

"It streams 12 hours of live cycling classes, and connects riders with more than 4,000 on-demand classes."

 

"the company now has over 200,000 riders around the world, and zero competition."

 

"$39/month"

 

Beachbody(p90x, etc) now has a streaming service where you get access to their entire library of workout videos and nutrition planning for $99.99/year

[KJP]

 

For whatever it's worth (and the opinion of a stranger on the internet shouldn't be worth very much), I've been trimming my position above $9.50.  Here's my back of the envelope math:

 

Assuming the cash and building are worth $80 million, here's what you're paying for the streaming business:

 

@$6.25/share:  $14 million

@$8/share:  $40 million

@10/share:  $70 million

 

For one way to estimate the steady-state value of the streaming business, see post 41 on this thread.  The "cost" of the streaming business listed above minus your estimate of steady-state value equals what you're paying for growth.  How much you're willing to pay for growth should be correlated with your confidence level that the company will grow profitably in the future.   

 

I agree that as the price increases you are paying more for the streaming business.  That said, a business which is projected to grow so fast can be worth much more.  It was obviously great getting it "for free" at $6/share, but if you think Jirka can actually grow the business at the level he claims, I think there's much more room to grow above $10/share.

 

Well, you've been right so far.  Counting the outstanding options and RSUs, there are about 15.9 million shares outstanding. At this morning's high of $12.40, the market cap is ~$200 million.  So, it appears that this morning the market was valuing the streaming business at ~$120 million.  That's quite a change from six months ago when it was was being valued close to zero.