|Shares Out. (in M):||18||P/E||NA||NA|
|Market Cap (in $M):||350||P/FCF||NA||NA|
|Net Debt (in $M):||-51||EBIT||0||0|
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Netflix’s massive success begs the question: is there a “mini-Netflix”? That is, is there a Netflix-like company in a specialty that could develop a 1+ million subscriber base?
I believe the answer is: “Yes, several.” WWE Network (the leading wrestling channel) has 1.5+ million subscribers, but the stock has recently soared above a $6 B market value. CrunchyRoll (the leading Anime channel) has 1+ million subscribers, but it’s private and faces increasing competition.
I believe GAIA could be a “mini-Netflix” and reach a valuation of several billion within 5-7 years. In fact, GAIA CEO Jirka Rysavy (38% shareholder) sees GAIA as the “Netflix of Consciousness” and views GAIA as following Netflix’s path, saying “Netflix paved the way for us.”
Let’s try to apply a modified version of Greenblatt’s “Magic Formula” (ROIC and Earnings Yield) to GAIA. Investing in GAIA today is a bold bet on both the jockey and the horse. In the “Magic Formula” race, we are betting that the jockey keeps the Subscriber ROI high (+180%) and the horse produces a monster EBIT (to EV) in a few years’ time.
Let’s consider Subscriber ROI as a proxy for ROIC.
Let’s define Subscriber ROI as Lifetime value of subscriber divided by customer acquisition cost. I estimate GAIA has a +180% ROI on the average new subscriber. That is, GAIA makes almost 3 for every 1 it spends on marketing. While that metric may not be special in the SaaS world, in the media world (if you ask a media executive) that metric usually warrants a “wow” or “impressive”.
Let’s validate the ROI. Per conversations with CEO Jirka, average lifetime value of a subscriber is currently ~$240, up from ~$230 a year ago. The lifetime value of $240 (which is net subscription revenue * gross margin of 85-90%) implies that the average subscriber stays ~2.6 years at ~$95 a year. The lifetime value has been improving as GAIA attracts proportionally fewer yoga-focused subscribers (who stay an average of about one year) and proportionally more “seeking truth”-focused subscribers (who often stay 3-4+ years). Meanwhile, customer acquisition cost per subscriber is “mid-$80s”, down from the “mid-$90s” a year ago. GAIA spent about $10 million in the recent quarter for the acquisition of 116,000 gross subscribers (my estimate because GAIA, like NFLX, doesn’t report churn), implying a $86 customer acquisition cost. So, $240 lifetime value of gross subscriber divided by $86 gross marking cost per subscriber equals 180% Subscriber ROI.
GAIA only markets online, running about 3,000 online campaigns a year. GAIA’s team is always tweaking these campaigns to focus more on its target demographics: $75+k income, 28-60 age, 72% are Netflix subscribers, etc. GAIA is also increasingly focusing on attracting non-U.S. subscribers. Over the next ten years, by adding language support (Spanish added 3Q17, German added 4Q17, French added 1Q18), non-U.S. subscribers could reach 60-65% of subscribers, up from 25% today. Overall, GAIA estimates a 26 million target addressable market globally (perhaps 5% of Netflix’s 500 million addressable market globally).
Let’s state that again: Subscriber ROI is 180%. That metric is improving nicely. A year ago, Subscriber ROI was around 137%.
After GAIA overcomes its fixed costs and due to the extremely high (almost 90%) gross margin, Subscriber ROI from newer subscribers will approximate ROIC. In other words, after overcoming its fixed costs, GAIA is effectively “selling air” (selling digital assets with little reproductive cost).
Per GAIA management, 1 million subscribers would yield breakeven EBIT. GAIA’s goal is to have 1 million subscribers by the end of next year (2019), which gives time to ramp from its level of 421,000 subscribers (as of 3/31/18). As a check, 1 million subs would generate about ~$95 m in sales, ~$86 m gross profit, and breakeven EBIT after ~$80 m selling and operating cost and ~$6 m corporate overhead.
At 1.5 million subscribers (GAIA’s goal for the end of 2021), GAIA expects EBIT of $60 million (40% EBIT margin), yielding EPS of $2.50. At a 40x multiple (given the exceptional growth rate) of EPS that would imply a $100 stock, up 5x from here.
At 4 million subscribers – a number which CEO Jirka alluded to several times (both in his presentation and during 1:1s) during the recent B. Riley Conference – EPS could approach $10, which could imply a $300 stock (up 15x from here). At that time (perhaps 5-7 years from now), with those results, the consensus view of the investment community would indeed be that GAIA is a “mini-Netflix”.
What’s the “Capital” of the company?
GAIA has a large cash balance (~$51 million) and owns its HQ campus (~$30 million). Outside of cash and the building/land, the “capital” of GAIA is its growing content library and its technology platform plus human capital.
The content library is independently appraised at $56 million. Importantly, the library has over 8,000 titles and 90% of the content is exclusive to GAIA. Also, 80% of content views is on GAIA’s owned content.
I admit I was deeply skeptical of the content strategy when I looked in early 2017. I hated the yoga content as it felt ten years old. Meanwhile, I was really annoyed, even a bit angry, after watching a couple of the “seeking truth” series, such as the Nazca series about a discovery of alien mummies and a 10+ episode series about the “secret space program”. Finally, after spending 100+ hours on GAIA content and speaking at length with the GAIA management team several times, I have come to respect their content strategy, primarily for the four reasons below.
First, GAIA is starting with a position of market leadership in content for both yoga and “seeking truth”, enjoying 60% market share in yoga related areas per Nielsen. Per GAIA’s customer surveys, the Net Promoter Score (NPS) is 83 for “seeking truth” focused subscribers and 57 for yoga focused subscribers. That’s miles ahead of Netflix (only 13) and Amazon Prime (negative 11). GAIA’s market leadership position also enables it to add “ambassadors” and referral deals (Roku, AppleTV, Comcast, etc.).
Second, GAIA has apparently developed a clear pathway to cultivate long-term subscribers who love GAIA. GAIA initially attracts mostly yoga fans (modestly sticky; they stay for a year on average), then moves them to a bridge category called “transformation” content (sticky, they stay for a couple years on average), and then to “seeking truth” content (very sticky; they stay for 3-4 years or longer). A year ago, GAIA was focusing more on growing “transformation” content, like topics in alternative health and conscious parenting. Now, GAIA is focusing more on “seeking truth”, like topics in ancient/alien civilizations and new age spirituality. Altogether, across the 8,000 videos, content is roughly one-third yoga, one-third transformation (the “bridge” category) and one-third “seeking truth”. The subscriber mix is now beginning to reflect that content mix: one-third yoga focused, one-third transformation focused and one-third “seeking truth” focused.
Third, GAIA’s original content cost is only $10k per hour (including talent, animation, sound, location, editing, etc.), versus about $10 million per hour (1,000x more!) for Netflix’s original content. The talent (often authors) benefit from the exposure to half a million GAIA subscribers (helping them sell more books, etc.), so they are willing to help create the video content for free or for very little cost. For several years, authors/luminaries have included David Wilcock (series "Wisdom Teachings") and Gregg Braden (series "Missing Links"). Now, as its subscriber base grows, GAIA is attracting more famous, international authors who have sold many millions of books. For example, GAIA CEO mentioned to me that two new future series are on the way, one from Graham Hancock (who has sold over 5 million books; author of “Magicians of the Gods”) and one from Erich von Daniken (who has sold over 7 million books; author of “Chariots of the Gods”).
Fourth, GAIA has a flair for being controversial, which attracts subscribers. I asked CEO Jirka where he draws the line between fringe and fiction. In short, I was concerned that too much “fiction” content could cause viewers to reject GAIA. In response, Jirka remarked that he “likes being controversial.” For example, Nazca (the series about a batch of alien mummies found recently in Peru) drove almost 100 million YouTube views and likely pushed a decent wave of subscribers to GAIA. It seems to be a part of human nature to be attracted to conspiracy stories and controversial topics, which seems to be a sweet spot of Gaia’s “seeking truth” content.
Tech platform plus human capital:
The website, which was completely redesigned with a new software stack a couple years ago, is valued at a cost of $23 million. If you spend time as a GAIA subscriber, you will notice a clean app with the ability to download tethered content and easily search and save titles across Roku, iPhone, etc. Like Netflix, the website design allows for GAIA to closely track titles viewed by each subscriber and “hearts” (the exact point the subscriber loves a scene in a title and marks it with a “heart”, analogous to Facebook “likes” but done while watching a title).
While big data and data science are buzzwords across the technology industry, I believe that such data in the capable hands of a master team is especially valuable. In short, I see Jirka’s team as master data heads. Jirka’s team is playing the same data game that they excelled at in the first company, Corporate Express (which he drove from scratch to a Fortune 500 company and a $4.7 B exit in 1999): relentlessly find or develop the 5,000 inventory items that will drive the highest market share and margin from the [office supplies] customer. Here, it’s relentlessly find or develop the 5,000 titles to drive the highest market share and margin from the [OTT] customer.
In summary, I believe that “capital” for this company is more than just cash, building/land, and a content library. It’s a tech platform in the hands of an exceptional, data-driven team, with a track record of huge success.
Earnings Yield (EBIT/EV)
If GAIA chose to cut its marketing spend, it could be immediately profitable. Instead, GAIA is driving towards 1 million subscribers, after which it expects to be consistently profitable.
At 1.5 million subscribers (by YE21), EBIT could be $60 million. The current EV is $309 million. That’s a 19% EBIT/EV in 3.5 years.
At 4 million subscribers (perhaps by YE25), EBIT could be $150+ million. That’s EBIT/EV approaching 50%.
Meanwhile, we arguably have some downside protection: Cash ($51 million) + Building/Land ($30 million) + Tech platform ($23 million) + Content library ($56 million) + Subscriber base (2-3x run-rate revenue of $40 million = $80-120 million) = $240-280 million, or about $13-15 per share.
Of course, like NFLX in 2012, we are miles away from GAIA achieving an awe-inspiring subscriber base. Investing in GAIA today is a bold bet on both the jockey and the horse. In the “Magic Formula” race, we are betting that the jockey keeps the Subscriber ROI high (+180%) and the horse produces a monster EBIT (to EV) in a few years’ time.
Continued execution toward 1 million, 1.5 million, (perhaps much later) 4 million subscriber counts
Once profitable, GAIA does more share repurchases (history of a 40% share repurchase in 2016; also note the history of significant share repurchases at CEO Jirka’s prior companies like Corporate Express)
Company could be acquired for several billion (CEO Jirka has had multiple exits, including the last two major companies he founded: Corporate Express and Crystal Market/ Wild Oats)
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