Description

Executive Summary

CLIQ Digital (CLIQ.GR), might not be the next Netflix ($225bn mkt cap), but it could be something like a fuboTV ($3bn mkt cap) and it has the makings of a being a potential 10 bagger from here. It’s a very fast growth (net revs +39% y/y) and profitable (~15% EBITDA margins) digitally native company, with a large TAM (€400bn) along with a low valuation entry point (~1.5x cons ’21 P/S, 9x ’21 cons EBITDA). Its market cap is only ~$250mn, but it has been one of the best performing stocks in Germany since 2020 (2020 EBITDA 2.5x vs. 2018 EBITDA) and global investor interest is set to accelerate.

Therefore, I think the stock price will continue to explode higher. My target price based on 2022 EBITDA (€36mn) and 12x EV/EBITDA is ~€67, or ~120% upside over the next 12-18 months. While management doesn’t provide formal guidance, the CEO thinks the company can do ~€250mn in revenue 2-3 years (vs. 2020 ~€100mn revs).

CLIQ recently started rolling out an “All-in-One” CLIQ Digital branded streaming bundle in Europe providing unlimited access to its proprietary music, tv, movies, audiobooks, games, and sports highlights for an attractive price of ~€14.99/month and they are witnessing a lot of success. In 2020, CLIQ Digital revenues/EBITDA grew 69%/178% as EBITDA margins jumped 14.2% (~500bps). While CLIQ doesn’t disclose subscriber level data, CLIQ did report that minutes of content streamed grew 250% y/y. In addition, the strong results continued into Q1 2021 as rev/EBITDA +48%/130% y/y. Miraculously CLIQ also announced a ~30% EPS accretive deal (yes 30%!!!) by purchasing its largest minority in it largest local subsidiary in May 2021 for <5x EBITDA. Nevertheless, the stock has recently corrected ~25% which creates a good entry point as shares now trade at a ridiculous valn based on my ’21 estimates: ~7.5x EV/EBITDA, ~11x P/E and 1.4x P/S. Also, I think CLIQ will do even better than 2021 guidance which outlines >30% revenue and ~40% EBITDA growth.

This idea has not yet been written up on VIC, SumZero or Seeking Alpha so a huge knowledge gap remains. Another disconnect is that US residents are not provided access to the Germany/DACH flagship website while located in US (without a VPN) so the US cliqdigital.com website is not representative of CLIQ’s actual offering. Nevertheless, I have visited the DACH site using a VPN and I think it’s a tremendous value for the money vs. ~$100/month equivalent that would be required to replicate the same bundle using global streamers.

CLIQ is currently only covered by regional research houses, but larger brokers are starting to take notice. CLIQ was recently selected by Goldman Sachs (GS) to participate in its 4^th European Small Wonders Symposium on May 27, where they will be joined by only ~10 other <$1 billion market caps that GS has deemed to be other potential future European highflyers

Company History & Strategic Shift Background

Founded in the Netherlands, and based in Dusseldorf, Germany, CLIQ’s predecessor company got its start ~20 years ago as the developer of vote by SMS/text for Big Brother Europe. Since then, CLIQ created a long-standing and profitable digital marketing company offering niche streaming products for the mass market at competitive prices across 30 countries. The company was an early adopter of streaming entertainment with the roll out of movies in 2016 and ~90% CLIQ’s revenues came from streaming subscriptions as of 2020.

Nevertheless, company’s DNA has been that of a lower quality “click-bait” company. Historically CLIQ would entice new subscribers to click on a streaming video and/or music playlist via catchy direct pull marketing campaigns. After viewing their desired video, consumers would then be prompted to sign up for an unlimited subscription streaming service to get more content. If one selected a movie clip then they would only be offered a movie subscription package – instead of an “All-in-One”. Also, CLIQ spent $0 on branded marketing while CLIQ inefficiently pursed its streaming strategy using a balkanized approach with several different (“private label”) websites doing business in each geography instead of a shared brand like CLIQ Digital. Moreover, given CLIQ’s previously limited content offering and its lack focus on customer attrition, CLIQs subscribers would historically only subscribe on avg for 6 months and then just cancel. Thus, CLIQ traditionally measured its success based on a “CLIQ Factor”, or essentially a 6 month return for each $1 of marketing spent. While this allowed for quick paybacks it was a bad business model which lead to a very low valuation multiple (3 yr avg: 5x EV/EBITDA)

Nevertheless, management recognized that the most value was being created by streaming portals that had recurring revenues and low attrition rates and CLIQ has set out to replicate this approach. In Q3 2020, CLIQ began to roll out its flagship CLIQ Digital branded “All-in-One” streaming strategy in the DACH region (Germany, Austria, and Switzerland) with a dramatically improved content offering as well as a newfound focus on customer retention (aka higher CLV).

To start, CLIQ accelerated its procurement of local German language movies and shows, it broadened its portfolio of music and audiobooks, and CLIQ completely revamped its sports content via new content partners. Now one of CLIQs strengths as highlighted during its recent presentation is its focus on local content and individual curation for its different markets, which is very important, as most of the material consumed is ones’ local language. As of Q1 2021, CLIQ also started offering Games and CLIQ signed new distribution deals with Warner Brothers and Disney for them to offer its DACH subscribers at least one free Blockbuster movie/month with an ability to use PPV for additional blockbuster movies.

On top of its this improved CLIQ Digital branded “All-in-One” roll out, CLIQ has accelerated its shift toward moving its own marketing team in house, rather than paying unaffiliated third parties to drive eyeballs, which is leading to much higher marketing efficiencies. In 2018, CLIQ realized that using third party marketing affiliates wasn’t working effectively and its partners were not focused and/or well incentivized. However, starting in the US in early 2019, CLIQ refocused its marketing efforts towards its own in-house direct media buying team and this has helped to drive a rapid increase in marketing efficiencies. Due to its in-house strategy, CLIQ can now more appropriately leverage its own proprietary business intelligence / “conversion machine” data gathered over the last >15 years leading to better targeted marketing campaigns while focusing on achieving higher conversion and retention rates. The company’s CLIQ Factor rose from 1.51 in 2019 to 1.68 in 2020 and unsurprisingly, marketing/revenue declined to ~32% of revs (-300bps y/y). Given this success, CLIQ is accelerated the transition to direct buying in Europe starting in Q4 2020. The European market is more complex and fragmented so results should be a bit slower but CLIQ is already seeing success. Going forward, CLIQ intends to have ~90% of its marketing budget directed toward direct buying vs. using affiliates.

CLIQ is now focused on launching the CLIQ “All-in-One” streaming bundle in UK and France and I believe they are just in the 1^st inning of their global expansion. While some might be concerned about CLIQ’s ability to compete and grow in very competitive landscape, investors should have no fear. The size of the digital entertainment market is a massive €400bn TAM with growth of >10%. This is being driven by a secular shift towards cord cutting and the increasing usage of smartphones accompanied by improving mobile operator networks such as 4G and 5G. While streaming is a nice market for large brands with deep pockets, there is also a market for a Lidl/Aldi (budget player) in the streaming world like CLIQ. Moreover, as consumers continue to subscriber to several offerings (“stack”) there is definitely room for a value-based provider to achieve a few hundred million in revenues.

Moreover, CLIQ’s content strategy ensures sustainably low ARPUs and content costs for its consumers. First, CLIQ strictly focuses on licensing content, rather than buying it or creating it, which can be more costly. Moreover, CLIQ’s focus on B/C rated tv and movies, where there is little competition ensures low-cost content. Also, CLIQ believes that as the global content houses merge and get bigger they are building larger and larger catalogs of content that might remain unfeatured by their own parent companies and could be up for rent. In regard to music, CLIQ users are offered pre-set streaming genre-based playlists via Stingray which come at basement level royalty costs. In all content costs are expected to remain at 10-12% of revenues and CLIQ Digital is actively searching for co-operation with strong content providers to further improve its content portfolio.

Earnings Upside

After increasing its FY 2020 guidance several times last year, management’s initial 2021 guidance calls for >€140mn in revenue, ~€22mn EBITDA and a CLIQ factor of 1.6x. This implies that revenue/EBITDA will grow +31%/39% respectively in ’21 and its EBITDA margin will expand to ~16% (+100bps). Nevertheless, I believe that CLIQ has once again provided very conservative and beatable guidance. First, CLIQ entered the year with a CBV (customer base value) +35% y/y (vs. ~30% ‘21E rev growth). In addition, despite management pointing to continued marketing efficiency improvements, they guided towards a CLIQ factor of ~1.6x (vs. 1.61 in 2020), which doesn’t make any sense.

On top of this organic growth, CLIQ has net cash and its looking to do opportunistic tuck-ins. Its recent buy-out of its minorities lead to a >€2.5mn reduction in minority interest which added >30% to its earnings power. This is a MASSIVE increase in earnings and has basically been ignored by the market (stock -20% since announcement ~2 weeks ago)

Lastly, CLIQ’s management team has cited M&A as a key driver of growth and they are developing an internal team that will look to acquire complimentary streaming subscription / content companies offering local content in their regions. While M&A will likely focus on smaller tuck-ins consensus gives them no credit for potential M&A that can add additional revenues and higher LTVs

Valuation Overview

Lastly and perhaps most important, shares remain absurdly cheap (<10x ’21 EV/EBITDA and <1.5x P/S) which is a vestige of the company’s previous business model, even as CLIQ continues to make progress around subscription growth and lower attrition (higher LTVs). Nevertheless, it will be some time before people look at CLIQ Digital in the same vein as global streamers, but Insiders own >15% of shares and remain highly focused on improving customer lifetime value as a means to drive the valuation of the companies shares significantly higher.

In speaking with CEO, management understands the name of the game and that higher retention leads to a higher valuation. They are seeing some modest improvements with some of its earliest “All-in-One” subscribers still there after >6 months (its previous avg)

As continued support for this strategic refocusing, CLIQ recently hired a former senior IR individual from Metro, one of the largest German consumer companies, and he has been very vocal about getting the word out about the new CLIQ "All-in-One". Moreover, IR states that management is increasingly receptive to disclosing subscriber level data and the company might look to roll out some more KPIs in 2021 so that investors can track their progress.

While CLIQ’s aspirational peers NFLX, SPOT and Storytel all see slightly slower revenue growth (+15-20%) they trade at significantly higher multiples. For ex: NFLX trades at 6.5x/34x ’21 P/S / EV/EBITDA. While SPOT trades at ~3.5x ’21 P/S and Storytel trades at 5.0x ’21 P/S despite both showing -ve EBITDA and lower growth. Lastly, niche sports-based streamer, fuboTV trades at >5.4x P/S (or a >3x higher val’n than CLIQ) despite being another subscale streaming bundle operator.

Catalyst

GS Small Wonder Symposium May 27th

Q2 results - potentially higher '21 guidance

Content M&A and/or additions

Initial "All-in-One" KPIs and updates

Higher ADV = more institutional investors = less volatility