How would you like to invest in Inc. Magazine's 2012 Company of the Year? Unless you are a venture capital firm with deep pockets like Insight Venture Partners or the Raine Group (who both provided the first round of venture money to this private company in March), it is nearly impossible for an individual investor to buy a stake in the hyper growth of Inc.'s Company of the Year.
That company is Zumba Fitness, the world's largest dance-fitness program with more than 14 million people taking weekly classes in 140,000 locations across more than 150 countries.
As a private company, Zumba's financials aren't public, but the 250 employee company based in Hallandale, Florida is reportedly valued at $500 million. According to Zumba CEO Alberto Perlman, the company grew 4,000 percent from 2007 to 2010 and 750 percent in the last three years.
Zumba's growth has occurred in part due to the company's breadth geographically and in its products. Zumba's international business in 150 countries is expected to grow from its current, roughly 50 percent share of revenue. And, in addition to the core Zumba fitness classes, the Zumba product offerings now include music, apparel, and video games.
Thanks to Zumba's brand extension growth strategy, individual investors finally have an opportunity to own a piece of this amazing growth story, via a publicly-traded partner, Majesco Entertainment Company (COOL).
Investing in Zumba's Growth Partner
In 2010, Zumba began a partnership with Edison, New Jersey based Majesco Entertainment Company to produce and distribute the first Zumba Fitness video game. Majesco was an obvious choice because of its proven, 25-year history of publishing video games for the mass-market casual gaming segment. Majesco has built their business with an emphasis on the demographic of family, women and kids - all key target audiences for Zumba Fitness. Additionally, Majesco sells directly to leading U.S. retailers: Walmart, GameStop, Toys R Us, Target, and Amazon.
Majesco released the first Zumba video game, Zumba Fitness, on November 30, 2010 at retailers nationwide for the Wii, Xbox 360, and PlayStation3. To say Zumba Fitness was a hit would be an understatement. In the first year (2011) available, Zumba Fitness became the best-selling fitness game for the year and the industry's best-selling Wii title overall. A strong international launch followed in April 2011 which put Zumba Fitness as the #1 title across all platforms in the UK for 10 consecutive weeks.
To date, Zumba Fitness has sold over 8 million copies and remains a top seller. You can see below that only seven other titles have maintained a spot among the Top 100 Global Weekly Chart list (a ranking of the week's top retail sales by units) for more weeks than Zumba Fitness:
|Rank||Game||Weeks on Top 100 Global Sales List||Platform|
|2||Wii Sports Resort||182||Wii|
|3||Mario Kart Wii||245||Wii|
|4||New Super Mario Wii||161||Wii|
|5||Super Mario Galaxy||266||Wii|
|6||Wipeout: The Game||130||Wii|
This global success of Zumba Fitness has led to a surge in Majesco's revenue, earnings, and cash on hand. Not only did revenue surge 66% in the first year of the Zumba partnership, but in the first nine months of 2012, Zumba products accounted for 79% of all Majesco sales.
In the most recently reported Q3 2012 quarterly report, Majesco ended the third fiscal quarter with $27.3 million in cash and equivalents. The net cash provided by operating activities for the 9 months ended July 31, 2012 was $15.1 million.
In just two short years, Majesco has increased its cash position by nearly $20 million ($8M to $27.3M) due to the operating income generated by the blockbuster Zumba franchise.
|Majesco Entertainment Financials|
|Fiscal Year (ending 10/31)||Annual Revenues||Annual EPS||Cash on Balance Sheet|
|2010||$75.6 M||-$0.04||$8.0 M|
|2011||$125.3 M||$0.28||$13.7 M|
|2012||$135.0 M*||$0.25*||$27.3M (as of July 31)|
|*mid-point of company guidance|
Building on the success of Zumba Fitness, Majesco released the sequel, Zumba Fitness 2 in November 2011. As of the week ending December 15, 2012, Zumba Fitness 2 has sold 2,374,426 copies just on the Wii platform. And, taking advantage of the peak holiday shopping, the newest Zumba game, Zumba Core, was released on October 16, 2012, on Wii and Xbox 360.
In the most recent Q3 2012 conference call, Majesco CEO Jesse Sutton said, "Our Zumba Fitness products continued a strong performance, ranking among the top interactive dance and fitness titles. Overall, the Zumba Fitness franchise has now sold over 8 million units and maintained its standing as the second largest fitness franchise in the entire video game industry, and is also the best-selling fitness franchise on Kinect."
Key to Majesco's Continued Growth with Zumba Fitness
The key reason why Zumba Fitness video games sales have been so strong is that the marketing power of Majesco's partner (Zumba Fitness) in promoting the Zumba brand is enormous on a global scale.
According to Inc.'s feature article, Zumba Fitness will spend $50 million on advertising in 2012 and $63 million in 2013. Additionally, Zumba Fitness classes in 140,000 locations reach 14 million fitness participants from 150 countries on a weekly basis.
Majesco's game sales benefit from this exposure and help reduce their need to spend too heavily on marketing. This allows for more video games sales to hit the bottom line generating significant operating income.
Top Value Investment in Gaming Sector
If you are finding out about this undiscovered gem and opportunity to invest in Majesco and Zumba Fitness's growth for the first time, your timing provides an excellent entry with Majesco shares near their 52-week low. After hitting the 52-week high of $3.17 on January 10, 2012 in anticipation of the blowout earnings a week later, the stock has dropped by 70% over the year to Friday's close of $0.97, a bargain PE of 3.6 to next year's EPS estimates of $0.27.
|Electronic Arts (EA)||11.61||$4.35B||$1.22||0.99||1.06||$1.32B|
|*Yahoo Finance Next Year Estimates|
Additionally, at a market cap of $39 million, Majesco is now priced just over $10 million more than the $27 million cash on hand. This is an extremely cheap valuation for a company generating this kind of cash.
At this time of the year, my theory is that tax loss selling has driven the price down to absurd levels. Near the 52-week low, not many people have gains in COOL this year and some are selling for a loss to offset realized gains elsewhere.
Also, some investors may feel that Majesco has become too dependent on the Zumba Fitness products as a percentage of their revenue growing to 79%. That is a generally a valid concern, but when the majority of your revenues are coming from products based on a partnership with one of the fastest growing companies on the planet, I'm not worried.
It is more of a plus to generate strong revenues with a proven and growing franchise like Zumba Fitness than with an unproven product.
Plus, Majesco also released eight other games in their Q4 2012 (ending October 31) to provide additional revenue drivers which include:
1. NBA Baller Beats (in partnership with NBA); for Xbox 360
2. Mini Putt Park (in partnership with Zynga.com)
3. Harley Pasternak's Hollywood Workout (interactive fitness game); for Wii and Xbox 360
4. Hello Kitty Picnic with Sanrio Friends for Nintendo 3DS
5. Double Dragon Neon for Xbox Live Arcade
6. Sci-Fi Heroes for iPad, iPhone, iPod Touch
7. Legends of Loot for iPad, iPhone, iPod Touch
8. Flea Symphony for iPad, iPhone, iPod Touch
Unlike venture capitalists, individual investors do not always have an opportunity to invest in the growth of the fastest growing private companies. Thanks to Zumba Fitness's partnership with publicly traded Majesco Entertainment, the small guys can participate in this derivative play of Inc.'s 2012 company of the year.
And at this moment and time, Majesco's $0.97 share price (3.6X next year's earnings) is not pricing in the huge value of this Zumba franchise and the growth ahead. When we get a glimpse of the holiday sales of the new Zumba Core game and the continuing sales of the first Zumba Fitness and Zumba Fitness 2 games at the Q4 earnings call later in January, investors are likely to decide to price Majesco with the Zumba franchise added, leading to a significant increase in share price closer to my fair value estimate of $2.70/share.
As Zumba Fitness grows, Majesco Entertainment grows - and I don't think Inc. magazine would have named Zumba Fitness the Company of the Year if their growth trajectory was slowing down any time soon.
Disclosure: I am long COOL.