GAIA - Gaiam Inc.

[Homestead31]

seems like maybe the day trading / momentum crowd got a little carried away yesterday morning...

 

that being said, at the closing price of $11.30 and based on management's 2021 guidance and a reasonable set of multiples for a fast growing, negative working capital, recurring revenue business, the market is discounting success at about 40% on the low end of the multiple range.

 

2021 earnings $2.50 

multiple 17.5x 20.0x 22.5x 25.0x

Stock Price $43.75  $50.00  $56.25  $62.50 

Discount Rate 40% 40% 40% 40%

2020 31.25 35.71 40.18 44.64

2019 22.32 25.51 28.70 31.89

2018 15.94 18.22 20.50 22.78

2017 11.39 13.02 14.64 16.27

 

There is obviously no guarantee this will work and this valuation method is crude and simplistic, but thus far they are doing everything right, have clear momentum in subscribers, an excellent capital allocator, and the business model is fully funded.... i would argue that a 40% discount rate is overly punitive.

 

with a 30% discount rate - which still provides a margin of safety in my mind - and at the middle of the multiple range, this is an $18 stock today.

 

2021 earnings $2.50 

multiple 17.5x 20.0x 22.5x 25.0x

Stock Price $43.75  $50.00  $56.25  $62.50 

Discount Rate 30% 30% 30% 30%

2020 33.65 38.46 43.27 48.08

2019 25.89 29.59 33.28 36.98

2018 19.91 22.76 25.60 28.45

2017 15.32 17.51 19.69 21.88

 

[KJP]

seems like maybe the day trading / momentum crowd got a little carried away yesterday morning...

 

that being said, at the closing price of $11.30 and based on management's 2021 guidance and a reasonable set of multiples for a fast growing, negative working capital, recurring revenue business, the market is discounting success at about 40% on the low end of the multiple range.

 

2021 earnings $2.50

multiple 17.5x 20.0x 22.5x 25.0x

Stock Price $43.75 $50.00 $56.25 $62.50

Discount Rate 40% 40% 40% 40%

2020 31.25 35.71 40.18 44.64

2019 22.32 25.51 28.70 31.89

2018 15.94 18.22 20.50 22.78

2017 11.39 13.02 14.64 16.27

 

There is obviously no guarantee this will work and this valuation method is crude and simplistic, but thus far they are doing everything right, have clear momentum in subscribers, an excellent capital allocator, and the business model is fully funded.... i would argue that a 40% discount rate is overly punitive.

 

with a 30% discount rate - which still provides a margin of safety in my mind - and at the middle of the multiple range, this is an $18 stock today.

 

2021 earnings $2.50

multiple 17.5x 20.0x 22.5x 25.0x

Stock Price $43.75 $50.00 $56.25 $62.50

Discount Rate 30% 30% 30% 30%

2020 33.65 38.46 43.27 48.08

2019 25.89 29.59 33.28 36.98

2018 19.91 22.76 25.60 28.45

2017 15.32 17.51 19.69 21.88

 

Your approach looks only at the upside.  What about the downside at $12/share if management is wrong?  And will it still be "fast-growing" in 2021 if management projections are met?

 

I don't have answers to those questions and others like them, so I sold most of my remaining shares yesterday.  But this could turn out very well for those who hold for a few years.

[Homestead31]

seems like maybe the day trading / momentum crowd got a little carried away yesterday morning...

 

that being said, at the closing price of $11.30 and based on management's 2021 guidance and a reasonable set of multiples for a fast growing, negative working capital, recurring revenue business, the market is discounting success at about 40% on the low end of the multiple range.

 

2021 earnings $2.50

multiple 17.5x 20.0x 22.5x 25.0x

Stock Price $43.75 $50.00 $56.25 $62.50

Discount Rate 40% 40% 40% 40%

2020 31.25 35.71 40.18 44.64

2019 22.32 25.51 28.70 31.89

2018 15.94 18.22 20.50 22.78

2017 11.39 13.02 14.64 16.27

 

There is obviously no guarantee this will work and this valuation method is crude and simplistic, but thus far they are doing everything right, have clear momentum in subscribers, an excellent capital allocator, and the business model is fully funded.... i would argue that a 40% discount rate is overly punitive.

 

with a 30% discount rate - which still provides a margin of safety in my mind - and at the middle of the multiple range, this is an $18 stock today.

 

2021 earnings $2.50

multiple 17.5x 20.0x 22.5x 25.0x

Stock Price $43.75 $50.00 $56.25 $62.50

Discount Rate 30% 30% 30% 30%

2020 33.65 38.46 43.27 48.08

2019 25.89 29.59 33.28 36.98

2018 19.91 22.76 25.60 28.45

2017 15.32 17.51 19.69 21.88

 

Your approach looks only at the upside.  What about the downside at $12/share if management is wrong?  And will it still be "fast-growing" in 2021 if management projections are met?

 

I don't have answers to those questions and others like them, so I sold most of my remaining shares yesterday.  But this could turn out very well for those who hold for a few years.

 

Obviously as the price moves up, the downside possibilities get larger. Without looking at my spreadsheets there is probably something like 50% downside to hard asset value, which is not for everyone so I can't blame you for selling.

 

That being said, if you're looking for multi-baggers, you have to stick it out through the ups and downs, and if this does work as management hopes, it still has 5 bagger potential from here.  You can probability weight 50% down 500% up in a variety of ways, and none of them will be "correct."

 

My point is only that if you back into a PV using a 40% discount rate, that is basically saying that the company only has a 60% chance of meeting their goals.  Based on Jirka's track record and the momentum that the business has, that seems low to me.

[KJP]

http://ir.gaia.com/press-releases/detail/234/gaia-reports-first-quarter-2017-results

 

[alwaysdrawing]

Seems like a fantastic first quarter.

 

Key pieces from release:

 

58% subscriber growth generated 61% increase in streaming revenues to $5.2 million

 

Gaia's paying subscriber count increased to 247,300 on March 31, 2017, up from 202,000 on December 31, 2016 and 157,000 on March 31, 2016. International reach expanded to over 150 countries, the library title count increased to 7,900, and a Gaia-branded premium subscription channel launched across all Comcast's Xfinity platforms during the first quarter.

 

Total operating expenses in the first quarter were $11.8 million, slightly better than our expectation, compared to $7.2 million in the year-ago quarter. The increase was due to the planned increase in selling and operating expenses associated with the announced acceleration of subscriber growth throughout 2017.

[KJP]

Seems like a fantastic first quarter.

 

 

I agree.  Assuming a total of $5 million in non-CAC operating expenses and corporate SG&A, my simple model predicted about $7.2 million in CAC for the growth they showed.  They appear to have spent less than that, though part of the difference comes from Q1 subs likely being weighted more towards (cheaper to acquire) yoga subs than other quarters.

 

Bottom line:  The economics appear to be holding up.

[Homestead31]

Briefing.com saying that Lake Street (one of 2 analysts that cover GAIA) is raising their price target from $12 to $17.  I haven't seen the note or the methodology, but $17 implies around a 30% discount rate from 20x 2021 guidance.  I think a 30% discount rate is sufficiently punitive given that the company is executing extremely well on all measures.

[Homestead31]

on the last conference call the company said they expected to be deleted from the Russell indexes, which would result in a sale of ~20% of their shares.

 

However, the first draft of the Russell reconstitution was released on Friday, and it looks like GAIA will NOT be deleted as the company expected.

 

https://www.ftserussell.com/research-insights/russell-reconstitution

 

that should remove a significant overhang from the stock.

[alwaysdrawing]

Another solid quarter for GAIA

 

Second Quarter 2017 vs. Same Year-Ago Quarter

 

--64% subscriber growth generated 68% increase in streaming revenues to $6.1 million

--Total revenues up 56% to $6.6 million

--Gross margin up 390 basis points to 86.1%

 

http://ir.gaia.com/press-releases/detail/237

[KJP]

I could not listen to the call yesterday.  Can anyone who listened clarify the highlighted section below, which appears to have gotten garbled in the transcription process:

 

Mark Argento

 

Okay, got it. Last question, in terms of obviously it looks like you're hitting the gas a little bit because of economics right now in terms of sub acquisition. How do you think about the cash levels and where does this kind of put you guys at your end when you think about the balance sheet?

 

Paul Tarell

 

I mean, we kind of, as we kind of said before, when we did a tender, when we bought 40% of company a year ago, we kind of provided enough cash to go based under our plan to profitability. So, and so it's more a question like we could or doing better than the plan and do you want to like for example we kind of two years from now we planned it go to community but funded from you know if operating cash flow because that time be profitable.

 

And so, it’s a question do we want to do it early if, you know market's right and stuff. So, those decision we have to make in future but for right now we find as we doing it as this is all tension. We're actually exceeding our budget because we don’t have to spend that much on the acquisitions for the customers. And also being ahead of that revenue and the margin, obviously there's a little more income coming from the topline.

 

So, I think from that part we find so would be in a more decision if we decide to do something accelerate from the future, different growth rate, but for right now there is no discussion about doing anything like that. But we would look at it, probably have annual board meeting end of the year. That's the way we would look at it.

 

Full transcript here:  https://seekingalpha.com/article/4096096-gaias-gaia-ceo-jirka-rysavy-q2-2017-results-earnings-call-transcript?part=single

[iambagman]

I agree, it is barely English - I listened to the call and thought it was barely English at the time - which is to say I don't think that they garbled too much in the translation - I think he is saying that things are going well - subs cost less and margins are better than plan - so they may try and grow more rapidly(accelerate from the future)

 

I am guessing here - but I think go to community - is about adding another vertical / channel that the were going to do when they were at scale and fund from profits- maybe things are ripe to make the move earlier.

 

Could all of this require a secondary - they have $36M in the bank and an unencumbered property - my assumption is it is unlikely

 

Basically things are going well - at the annual board meeting they may suggest some tweaks to the plan 

 

 

 

 

[KJP]

I agree, it is barely English - I listened to the call and thought it was barely English at the time - which is to say I don't think that they garbled too much in the translation - I think he is saying that things are going well - subs cost less and margins are better than plan - so they may try and grow more rapidly(accelerate from the future)

 

I am guessing here - but I think go to community - is about adding another vertical / channel that the were going to do when they were at scale and fund from profits- maybe things are ripe to make the move earlier.

 

Could all of this require a secondary - they have $36M in the bank and an unencumbered property - my assumption is it is unlikely

 

Basically things are going well - at the annual board meeting they may suggest some tweaks to the plan

 

Thanks.  It sounds like he's talking about the possibility of another equity offering down the road, but it's very hard to tell.

[Sergio8]

M. Rysavy basically said on the call that they have planned the tender so that they will have enough cash to fund the business for two years of accelerating growth. Then they planned to be profitable and fund new projects from those profits. But, because they are ahead of plan, they have more flexibility to use the resources : maybe they can go a bit earlier on those projects if they want, but they won't tell what they planto do with the balance sheet at year end (I believe they will just leave the cash sitting there if it is in excess and see what to do with it later).

 

At least, this is what I have in my notes. Hope I understood correctly.

[Homestead31]

that was my read as well.  from the beginning they have used the term "fully funded business plan," and we know that expenses have come in below estimates thus far.  I do not think there is any reason to expect a secondary offering, absent jirka having identified another business opportunity he wants to pursue (unlikely).

 

i think this is cheap here - they are executing very well, and their credibility is growing.

[alwaysdrawing]

I agree with the read of Sergio8.  So far things are going very much according to the plan Jirka set out, and I believe content owners/creators will be able to generate considerably higher returns as cable continues to fracture.  GAIA being fully funded, no debt, growing fast, with a motivated owner will lead to good things from here.

[Sergio8]

There are definitely some really exciting things going on there, with a great story and a good storyteller with a track record of being a good CEO for developing start-ups.

But I feel we have to be careful, at the very leat for the following reasons: Do we really know if the expenses are below estimates? Management tells us they are, but we do not actually know their estimates (we only have have ours). Based on elementary math, we can say that the costs of acquiring subscribers rose this quarter, although the CFO refused to give them on the call.

 

We always have to be careful when management gives numbers we cannot verify. Another example: I was not able to confirm that their sponsored video really had 60 000 000 views. Another one: they tell their breakeven is at 123 000 subs. I believe this is not true any longer, as SG&A ex acquisition costs rose significantly.

 

So all these things may lead to some caution.

 

Last (and very important for value investors I guess), the company was trading below any reasonable estimate of net asset value (incl. subscribers at 250$ per sub). Today, even if we believe that the value of subscribers is going to expand (which is optimistic) to say 300 $ per sub, Gaia trades above its net asset value. So their plan has to work at these levels of valuation if we want this investment to be really attractive (which does not mean the story is not attractive, but there is no more margin for errors at this price).

 

My point is not to say that Gaia is not an attractive investment (I still own a small long position). It is certainly a nice story, with a good jockey. I just would like to point out that at these price levels, it is not outrageaously cheap. They have to be able to keep their acquisition costs low enough and improve the lifetimevalue of their customers if they want their NAV to grow significantly over time and justify a much higher stock price. And perhaps they will do it.

 

But it is never easy to make such bold predictions (is it even possible?). For example, how can one reasonably predict the future behavior of Gaia subscribers? If no one can, how can we easily accept that the newly acquired subs will stay longer than the previous ones? And how will our investment fare if the contrary happens?...

[SnarkyPuppy]

There are definitely some really exciting things going on there, with a great story and a good storyteller with a track record of being a good CEO for developing start-ups.

But I feel we have to be careful, at the very leat for the following reasons: Do we really know if the expenses are below estimates? Management tells us they are, but we do not actually know their estimates (we only have have ours). Based on elementary math, we can say that the costs of acquiring subscribers rose this quarter, although the CFO refused to give them on the call.

 

We always have to be careful when management gives numbers we cannot verify. Another example: I was not able to confirm that their sponsored video really had 60 000 000 views. Another one: they tell their breakeven is at 123 000 subs. I believe this is not true any longer, as SG&A ex acquisition costs rose significantly.

 

So all these things may lead to some caution.

 

Last (and very important for value investors I guess), the company was trading below any reasonable estimate of net asset value (incl. subscribers at 250$ per sub). Today, even if we believe that the value of subscribers is going to expand (which is optimistic) to say 300 $ per sub, Gaia trades above its net asset value. So their plan has to work at these levels of valuation if we want this investment to be really attractive (which does not mean the story is not attractive, but there is no more margin for errors at this price).

 

My point is not to say that Gaia is not an attractive investment (I still own a small long position). It is certainly a nice story, with a good jockey. I just would like to point out that at these price levels, it is not outrageaously cheap. They have to be able to keep their acquisition costs low enough and improve the lifetimevalue of their customers if they want their NAV to grow significantly over time and justify a much higher stock price. And perhaps they will do it.

 

But it is never easy to make such bold predictions (is it even possible?). For example, how can one reasonably predict the future behavior of Gaia subscribers? If no one can, how can we easily accept that the newly acquired subs will stay longer than the previous ones? And how will our investment fare if the contrary happens?...

 

Great post. 

 

Initially when we were all looking at this ($6 range), the downside/upside scenarios were very asymmetric which led to a great investment.  We would all do very well buying 6-8 companies with that type of asymmetry, holding until they reach a more balanced +/- expected value, and then switching to other asymmetric positions.  The difficulty is continually coming across ideas to fill a portfolio with this type of asymmetry coupled with the fact that the companies who turn out to be long term compounders likely require holding onto a position when the asymmetry becomes more in-line with reality and putting more faith in continued execution+business runway+management incentives.

 

I think there's still some asymmetry but it's not as out-of-whack and it's more reliant on future assumptions.  Napkin calc (taking their steady-state guidance at face) indicates the following:

 

Downside scenario: growth stops at 12/31/2017

12/31/2017 subs = 367k   

GP (85% margin) = $35mm

EBIT (40% margin) = $14.2mm

EBIT * 8x multiple (given riskiness of future cash flows) = $114mm

Value of building = $17mm

Equity Value (assumes no cash) = $131mm

Value per share = ~$8.60 per share

 

Upside scenario: management hits 1.5mm sub target for end of 2021

12/31/2021 subs = 1,500k

GP (85% margin) = $150mm

EBIT (40% margin) = $60.2mm

EBIT * 8x multiple = $482mm

Value of building = $17mm

Equity Value (assumes no cash) = $499mm

Value per share = ~$32.90 per share

 

Obviously, the key variables are CAC/LTV + true addressable market + trust in management to make the right capital allocation decisions should costs change.    I've reduced 1/4 of my position because of share appreciation + the introduction of downside (purchase price of low $6's had serious downside protection), but I will probably wait until management gives me a reason to not trust them.  They have much more insight into the addressable market + underlying LTV/CAC than we can glean publiclly and are financially aligned. 

[Sergio8]

My process is an old school "balance sheet based" one (probably because I still do not fully understand any other financial statement), so my assesment of the asymetry is a bit different from that perspective. But it is fun to see that our conclusions are almost identical. I share the tought process if someone is interested.

 

I read the Balance sheet like that:

Financial assets on the balance sheet: Cash + investments + real estate is ~ 77 M.

Off balance sheet Subscibers asset: 277800 @ 250 $ per sub ~ 70 M

 

So my conservative NAV appraisal comes at 144 M.

 

On a private market value basis, I give a credit to their content base which cost ~ 30 M to develop, so my PMV comes at 174 M.

 

Downside :

 

The downside would come if subscriber acquisition costs in the future exceed their value. We can account for that by a write off of the cash value, by say 50%, which would cut previous estimates by 17 M. NAV would be 127 M and PMV would be 157 M. I therefore believe the downside is at around 8$ per share.

 

Present Upside:

 

The upside would come if cash is invested at high IRR. We can account for that by assigning it a premium valuation of say 100 million if they make roughly 3x their money in the next 3 years (based on their losses in the next years, it would come tax free). Then, we can add 60 M to the NAV and PMV estimates.

 

NAV would be 204 M and PMV would be 234 M. It seems reasonable to think that it comes somewhere around 13 $ per share.

 

5 years view upside (with rosy glasses):

 

Then, they reinvest their 100 M and make it 250 M in 2 years thanks to efficiency gains. Then NAV and PMV would increase by an additional 150 M, and NAV would be 354 M and PMV 384 M (about 23$ per share).

 

As NAV grows quickly thanks to good reinvestment dynamics, the company would then perhaps deserve to trade at a premium to NAV, somewhere around 30$ par share would make sense.

 

-

 

So, based on those considerations, I even made Gaia my main investment at the low prices we had before, as it was priced below the downside estimate, and we were paid to benefit from the upside. Now, it is clearly not my main investment : upside could be interesting with a 5 years investment horizon, but downside is a real possibility. We would still have 5 $ of upside for each $ of downside in the very best case. But not in the other cases.

Hope it helps.

[SnarkyPuppy]

My process is an old school "balance sheet based" one (probably because I still do not fully understand any other financial statement), so my assesment of the asymetry is a bit different from that perspective. But it is fun to see that our conclusions are almost identical. I share the tought process if someone is interested.

 

I read the Balance sheet like that:

Financial assets on the balance sheet: Cash + investments + real estate is ~ 77 M.

Off balance sheet Subscibers asset: 277800 @ 250 $ per sub ~ 70 M

 

So my conservative NAV appraisal comes at 144 M.

 

On a private market value basis, I give a credit to their content base which cost ~ 30 M to develop, so my PMV comes at 174 M.

 

Downside :

 

The downside would come if subscriber acquisition costs in the future exceed their value. We can account for that by a write off of the cash value, by say 50%, which would cut previous estimates by 17 M. NAV would be 127 M and PMV would be 157 M. I therefore believe the downside is at around 8$ per share.

 

Present Upside:

 

The upside would come if cash is invested at high IRR. We can account for that by assigning it a premium valuation of say 100 million if they make roughly 3x their money in the next 3 years (based on their losses in the next years, it would come tax free). Then, we can add 60 M to the NAV and PMV estimates.

 

NAV would be 204 M and PMV would be 234 M. It seems reasonable to think that it comes somewhere around 13 $ per share.

 

5 years view upside (with rosy glasses):

 

Then, they reinvest their 100 M and make it 250 M in 2 years thanks to efficiency gains. Then NAV and PMV would increase by an additional 150 M, and NAV would be 354 M and PMV 384 M (about 23$ per share).

 

As NAV grows quickly thanks to good reinvestment dynamics, the company would then perhaps deserve to trade at a premium to NAV, somewhere around 30$ par share would make sense.

 

-

 

So, based on those considerations, I even made Gaia my main investment at the low prices we had before, as it was priced below the downside estimate, and we were paid to benefit from the upside. Now, it is clearly not my main investment : upside could be interesting with a 5 years investment horizon, but downside is a real possibility. We would still have 5 $ of upside for each $ of downside in the very best case. But not in the other cases.

Hope it helps.

 

What's the rationale behind $250?  Why not $200? $300? $1000?

[thinkpad]

250$ was given by management during a previous quarter confcall.

 

 

(Happy to read your input Sergio :) i am an old'member of IF. I understand you reduced your position in gaia)

 

[Homestead31]

 

Value of building = $17mm

 

not the main pivot of the thesis, but I think your building value is real low.  A year ago management said they thought it was worth, "at least $20 million."  According to loopnet, industrial property (ie warehouse) in Boulder County is up 13.9% YoY.  Office space is up mid-high single digits.  GAIA's bulding is somewhere in the middle i believe... and I think that is conservative.  If you dig around, there are other properties with access to highway 36 that have sold at prices that imply the GAIA building would be worth north of $30M.

[Homestead31]

if a tree reports really good earnings, including faster growth, lower cost, and a bigger than expected addressable market, and there is no one listening, does it make a sound?

[thinkpad]

There is no way to verifiy if cac is really lower than expected. Because we dont know what was expected...

Cash is burning very quickly...

 

I am Still a shareholder but i have some doubts.

[KJP]

if a tree reports really good earnings, including faster growth, lower cost, and a bigger than expected addressable market, and there is no one listening, does it make a sound?

 

The sub growth and development of CACs is very good.  I would watch the non-CAC expenses carefully.  Over the last year, they've added about $5 million annually in non-CAC sales and operating expenses (was $3.5 million/quarter, now ~$4.75 million/quarter).  I don't think these expenses relate to increased content production, because production costs are capitalized and amortized through COGS.  If the growth in non-CAC sales and operating expenses levels off then it's a non-issue.  If it doesn't, the business won't have the operating leverage many expected.

 

In addition, actual cash content costs are running much higher than the amortization running through the income statement.  I don't think it's possible yet for outsiders to estimate how much new content spend is necessary to keep sub growth high/churn low. 

 

EDIT:  As a result of the increasing costs, I don't think they'd actually be profitable on a run-rate basis even if they dialed back on growth, which is a claim management has made since they had 120,000 subs.  Quick estimated numbers below:

 

Subs 311000

Rev 33588000

Gross Margin 87.50%

GP 29389500

Non-CAC S&O -19136000

Corporate -6000000

Pre-CAC EBIT 4253500

Steady-State CAC -13087916.67

EBIT -8834416.667

[KJP]

There is no way to verifiy if cac is really lower than expected. Because we dont know what was expected...

 

 

Based on the disclosures about CAC as % of revenue in the press release, you can determine whether advertising costs/new subscriber have gone up or down.  One of the bear arguments was that advertising costs/new subscriber would go up, but so far this year they've actually gone down.