Some thoughts on streaming-video-on-demand company Gaia
Please note that this piece is only the author’s opinion. It is not financial advice, and it is not a recommendation. Please do your own work and make your own decisions. The author currently owns shares in GAIA.
Before I go into my opinion on GAIA below, I wanted to list a few resources which have been helpful to me in learning about the company
- Value Investors Club post on GAIA from 8/13: https://www.valueinvestorsclub.com/idea/GAIAM_INC/104537
- Corner of Berkshire and Fairfax post on GAIA: http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/gaia-gaiam-inc/
- Company presentation: https://www.sec.gov/Archives/edgar/data/1089872/000119312516706633/d255864dex991.htm
Currently, GAIA has three main sources of value
- Roughly $60M of net cash (see their Q2 16 conference call: http://seekingalpha.com/article/3997513-gaias-gaia-ceo-jirka-rysavy-q2-2016-results-earnings-call-transcript)
- Owned headquarters building worth something like $20M
- A streaming video subscription business with Q2 16 annualized revenue of $14M
The current version of GAIA is the result of recent transactions that seemed designed to allow the CEO and controlling shareholder to focus on the streaming business.
In terms of recent transactions, GAIA recently sold its yoga products / apparel business (the Gaiam brand) to Sequential Brands in order focus on its streaming business — the deal closed in July and was for $167M. GAIA also in May had made a smaller divestiture ($12M) of its 51% interest in Natural Habitat, which is an “adventure travel and ecotourism company.”
The cash generated from the above transactions will go to two things:
- First was a tender offer — GAIA retired around 10M shares (roughly 40% of its shares) at $7.75
- Second is for the net cash position at the company today, which will fund accelerated growth at GAIA, as well as opportunistic repurchases
Note that before the sale to Sequential Brands was announced, GAIA had planned to spin-off the streaming business — in my opinion, it’s a positive sign that the CEO was flexible enough to take advantage of a different (and seemingly better option).
The CEO and controlling shareholder is Jirka Rysavy. Below I’ll discuss (1) his current stake and involvement with GAIA, and (2) his history and background.
In terms of his current stake and involvement with GAIA, there are few important things in my view:
- First is that he owns roughly 38% of the company (including all the super-voting B shares) — importantly he didn’t tender any of his shares, so he essentially used the tender offer to increase his ownership stake from 23% to 38% at the $7.75 tender price
- Second is that before the sale of the products / apparel business, he had been Chairman of the combined company — however, presumably because of his optimism about the streaming opportunity, he became CEO of the company post-transactions
In terms of his history and background, there are some good pieces to read, including
- The Value Investors Club post linked to above
- Various articles you can find by Googling him, such as
- 1995 Inc profile: http://www.inc.com/magazine/19951201/2511.html
- 1999 WSJ article: http://www.wsj.com/articles/SB91549499570381000
- 2013 local paper article: http://bizwest.com/successful-exec-rysavy-backs-up-his-beliefs/
The things that are important to me out of the article are that
- He seems like an impressive and experienced entrepreneur, who has had success across a number of industries — he in some ways fits the “Intelligent Fanatic” model (see https://fundooprofessor.wordpress.com/2015/07/10/intelligent-fanatics/ or http://microcapclub.com/2016/01/how-to-find-intelligent-fanatic-ceos-early/)
- He seems to have a genuine interest in what one article called “Lifestyles of Health and Sustainability”
What is the product?
Subscribers pay roughly $100 per year — there are options for $10 monthly or $95 annually. In return they get access to a library of 7K (and growing titles).
There are a couple points in terms of how to think about the content consumed
- First way is by who makes / owns it — 80% is in-house content
- Second way is by topic of the content — the split here is
- 40% Seeking Truth
- Best way I can describe this bucket is that it seems like a collection of non-mainstream, alternative beliefs (e.g. UFO’s, conspiracy theories, etc.)
- Here’s the home page: http://www.gaia.com/seeking-truth
- 40% Yoga
- 20% Spiritual Growth
- 40% Seeking Truth
What is the industry / competitive positioning for GAIA?
I am positive on streaming businesses in general for a couple reasons.
First, I like their industry position. It seems like we are in the early stages of a transition to consumption of video via streaming services. The below three-part series of articles was particularly helpful to me in thinking about the industry landscape:
- Part I: http://redef.com/original/there-isnt-too-much-tv
- Part II (the most relevant to GAIA): http://redef.com/original/after-tv-videos-future-will-be-bigger-more-diverse-precarious-than-its-past
- Part III: http://redef.com/original/attention-infrastructure-how-big-medias-present-has-imperiled-its-future-and-how-to-save-it
Using the above framework, I’d think of GAIA’s streaming business as being an “identity feed” (i.e. a content offering that focuses on a very specific subject area / subculture) that doesn’t directly compete with something like NFLX. GAIA has said 70%+ of their subscribers also have NFLX.
In terms of the yoga portion of their business, there are a number of yoga-only competitors including:
- YogaGlo: $18 / month, 3,500 classes though yoga-only (versus wider range of videos on GAIA), privately owned, CEO / founder is Derik Mills
- Dirty Yoga: $20 / month, yoga-only, co-founder is Jess Gronholm
- My Yoga Works: $15 / month, 800 classes, owned by Great Hill Partners
The second more minor point to me is that this is a subscription business, and subscription businesses tend to be generally nice (because of customer switching costs, customer habit formation, pricing power, etc.).
How fast is it growing?
Best way to measure growth right now in my view is to look at subscriber count.
A couple recent data points are
- 2015 full-year subscriber growth was probably around 35% to 40% — they hit 100K subscribers in early 2015 (so were below that at end of 2014), and they finished 2015 with 135K
- Q2 16 YoY subscriber growth was 45%
An important note is that they’ve said for some time that their growth rate was constrained by their desire to run the business at breakeven. They have talked about being able to grow around 35% to 37% without losing money (but would lose money if they wanted to grow faster).
They are guiding to 50% subscriber growth for the full-year 2016 (so ending count of roughly 200K subscribers), and then they want to accelerate growth to 80% for the next two or three years. These targets would imply the following subscriber counts
- 2016: 200K
- 2017 at 80%: 360K
- 2018 at 80%: 650K
- 2019 at 80%: 1.18M
Of course these are management targets, so who knows for sure whether they are reasonable or not. I will say that this for me is one area where management is important — the CEO in this case is experienced, smart, heavily incentivized, so while he could be making a mistake, I’d significantly prefer betting on his being right than on the average management target.
Also note that the CEO claims that if they weren’t running the business for growth today, it would be profitable (and this is with public company costs for such a small revenue base).
Downside and Upside
The most appealing part of the current situation with GAIA is the skew in outcomes.
First, GAIA stock at roughly $7.50 with 15.5M diluted shares has market cap of $116M
To me, a pretty bad downside case looks like this:
- Economics for them get worse (due to increased competition, rising content costs, etc.), and streaming business starts losing money
- In this case, I think given CEO’s significant ownership stake, history of divestitures and outright sales of his businesses, and general rational behavior (e.g. tendering with a big chunk of the cash from recent transactions), there is little risk that CEO allows the business to burn significant cash (if the economics either turn out not to be working today or get worse)
- In that case, you have paid $116M and will get (cash burnt between now and then + $60M net cash + $20M building + sale value of their subscriber base and content)
In my view, in order to do materially worse than the above, you’d have to have something catastrophic happen, e.g. CEO burning money in the face of clear evidence things aren’t working (this isn’t a complicated business — you’ll see quickly if your cost of acquisition spikes, cost of content spikes, etc.), material fraud (seems very unlikely given CEO had chance to cash out but instead tendered no shares), etc.
Also, given the cash pile / ability to run business profitably, you are very well protected from “normal” issues, even like a Great Recession redux — what would happen if there was another financial crisis in the near-term? Well GAIA would have its $60M in cash, as well as a likely-sticky subscription business it could run for cash, while its private / PE-owned competitors would struggle.
On the other hand, the upside in the case where things go according to management targets seems very high. If we assume $80 in revenue per subscriber (just a guess given there will be a delta because of portion taken by certain distributors like Amazon), then you’d have potential $52M in 2018 run-rate revenue or $94M in 2019. Pick whatever revenue multiple on that that you’d like, but note that NFLX is around 5x sales (and they’re not growing 80% a year).
P.S. — Presentation
They recently added a presentation which you can access through the SEC’s website (link is here: https://www.sec.gov/Archives/edgar/data/1089872/000119312516706633/d255864dex991.htm). For another way to think about the upside here, note that they talk in the presentation about a 5Y goal of $2.50 EPS.