Description

Description:

I believe Gaia Inc. is a short. It masquerades as a “Mini-Netflix” but in reality its different in ways that count the most, LTV/CAC, churn and addressable market. Hack731 just wrote up GAIA as a long so please read that as background. I believe bulls like Hack have created a “Jirka Says” investment thesis (Jirka is the eccentric CEO) without adequately slicing and dicing the numbers to see that the LTV/CAC numbers pointed to by mgmt are not supported. As many who invest in subscription models know, the most important metric is revenue retention or churn. While neither NFLX nor GAIA disclose churn, analysts have pointed to <10% annual customer churn at Netflix North America while Gaia’s own disclosures point to ~80% annual churn.  Gaia’s churn causes the need to massively increase gross subscriber additions in order to maintain growth which I believe will lead to rising CAC as they flood their marketing channels with additional spend. Additional increases in CAC will cause already poor unit economics to further deteriorate as Gaia continues to grow.

Company Background:

Despite Jirka’s success with Corporate Express, shareholder value has been harder to come by at Gaia fka Gaiam. Gaia, a subscription video on demand company catering to the “seeking truth,” “transformation,” and “yogi” customer types was incubated as part of Gaiam the yoga apparel company started by Jirka Rysavy which has been public since 1999. On several occasions in the past 29 years Gaia shares have gotten hot like a bikram yoga class only to crash (defying the laws of metaphysics proselytized in Gaia’s content).   

Unit economics:

While it might behoove me to point out that GAIA has generated TTM revenue of $32.1m while burning exactly $32.1m in cash in relationship to their ~350m market cap, I will not belabor this point. Everyone involved knows these numbers. Where there is significant confusion is on the LTV/CAC as well as churn calculations that underpin the bull case. To be fair Gaia’s disclosure has made it tough to analyze but I believe some of the same disclosures used by Hack in his piece can shed some light on the situation from a different angle. Hack quotes the following to derive an almost 3x LTV/CAC:

“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. 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.”

Setting aside the fact that a subscriber who stays 2.6 years at $95/year should generate $210 not $240 of gross profit LTV @85% this math I believe significantly underestimates Gaia’s true churn rate and overstates LTV.  Gaia stated publically that CAC in Q1 was “mid-80s” so let’s say I agree with Hack’s analysis that gross subscriber adds were 116k in Q1. Given we know beginning subs were 364.5k and ending subs were 421k if gross adds were 116k then churn was 59k. Doing the math 59/364.5= 16% quarterly churn or >5% monthly churn which annualizes to 80% per year.

If churn is really 5% per month then gross profit LTV is really $135 ($6.75 in monthly gross profit per sub/.05) versus direct CAC of $86 for an LTV/CAC of 1.57x which is a far cry from the nearly 3x cited by bulls. Additionally, Hack cites the $10m of direct acquisition spend called out by mgmt. on the Q1 call but I think it’s notable that this number excludes another $5m in costs from the Selling and Operating line.  If one includes the entirety of the “Selling and Operating” line in CAC while still excluding the “Corporate General and Administrative” line then fully loaded CAC goes to $128 (14.8m in S&O/116k subs) versus LTV of $135 which shows a fully loaded LTV/CAC of 1.05x which is not so great.

Explanations:

The alternate reality at Gaia extends beyond the content, but also to the explanations. One thing that certainly could be true is that a lot of the churn that occurs happens relatively early on so churn of a smaller portion of the subscriber base “seasoned subscribers” is significantly lower than whole base. While this may be true, you would have to compare the LTV of the “seasoned subscriber” to the full cost of acquiring not just that subscriber, but all of the subscribers that churned out in order to leave Gaia with just one “seasoned subscriber.” Perhaps the LTV of $240 that Jirka tells people about is really for “seasoned subscribers?”

Growth:

On the latest conference call Jirka said that Gaia was “ahead of the pace needed for reaching our target of 1 million subscribers at the end of the next year.”

To me this is a version of reality that I do not subscribe to (pun intended). Gaia began 2018 with 364.5k subscribers and has put out a goal of 1m subscribers at the end of 2019 meaning they have to add 635k subscribers over 8 quarters or 79k per quarter. They added 56k in Q1 which means over the next 7 quarters they need to add 83k per quarter to reach their goal. I don’t see how Q1 puts them ahead of pace.

Regardless, I think it will be very tough for them to ramp up subscriber acquisition enough to hit those numbers without starting to push up customer acquisition costs to a point where unit economics are no longer attractive to anyone.  

Valuation:

Gaia is not easy to value. They are investing tons of capital into subscribers where the returns may not be significantly higher than the capital they put in and where churn is very high. I think Gaia is worth significantly less than where its trading unless churn or CAC drop significantly.

Catalyst

Path to 1m starts to look impossible and then eventually is abandonded 

Churn & Cash Burn become more apparent