SFX Entertainment And Electronic Dance Music: A Fad Or A Position Worth Investing In?

Oct. 3.13 | About: SFX Entertainment (SFXE)

Based in New York City, SFX Entertainment, INC (NASDAQ:SFXE) is scheduled to have their IPO on 10/9/2013. Shares of the company are expected to be priced between $11.00-13.00 and the shares offered are going to be around 16,666,667 with a total offer amount of $249,166,671.00.

SFX entertainment is one of the largest producers of live events and entertainment content for the global electronic music culture. The company owns the rights to famous events such as Tomorrowland and Sensation and was founded by iconic music festival entrepreneur Robert F.X. Sillerman. The following will explore the fundamentals behind this IPO as well as assess whether the electronic music culture is merely a fad or something worth investing in long-term.

Since 2010, electronic dance music (EDM) has exploded around the world and become a global franchise. Though EDM was at first a primarily European phenomenon, in recent years, events such as Electric Daisy Carnival, Electric Zoo, and Ultra have quickly brought the EDM culture to the American marketplace. That being said, mega music festivals are growing in popularity across the U.S. and are showing no signs of slowing down. With tickets for festivals dramatically increasing (as is evidenced by Ultra, which has tickets going for more than $900) and DJ events becoming the fastest growing segment of live entertainment with 45% year over year growth since 2007. The general perception is that Electronic Dance music is going to continue its growth into the future. However, as the electronic music festival market grows it is also becoming a progressively more crowded marketplace. Companies such as ID&T/SFX and Insomniac/Live Nation are competing heavily with one another for who will control the global mega-festival market. With such enormous companies vying heavily for market share in a burgeoning $4 billion a year global industry, the issue that arises is that of the possibility of Americans losing interest for electronic dance music, resulting in an overly-saturated event market.

This market saturation could then cause already inflated ticket prices to drop and revenue streams to diminish. However, According to the International Music Summit Business Report, the global market directly associated with electronic dance music is projected to be approximately $4.5 billion in 2013. In addition, the total attendance at the five largest U.S. EMC festivals grew 41% annually from 2007 to 2012. This in unison with the fact that dance music has been around for more than 20 years in Europe, makes an undeniably good claim for SFX's future and that of the entire EDM industry as well. That being said, assuming the EDM culture doesn't fade away, but rather, continues to grow, SFX currently controls the rights to some of the most profitable live concerts in the world. One example of this was with their most recent Tomorrowland concert in Belgium, which sold approximately 180,000 tickets in one second. SFX recently brought the same concert to the United States and sold more than 120,000 tickets for the event in September. In addition, SFX intends to have three more Sensation events in North America for 2013.

The company is also quickly following their competitor, Live Nation, in attracting corporate sponsorships. SFX's CEO, Sillerman is known for dominating in the corporate sponsorship sector, an area becoming progressively more important as companies realize the potential of marketing to the ideal 16-34 age group. As a testament to how profitable corporate sponsorships are it may be appropriate to examine Live Nation's books in recent years, the foundations of which were built by Sillerman himself prior to its sale to Clear Channel. Between 2007 and 2012 Live Nation's sponsorship and advertising revenue grew from $164 to $248 million. Meaning that roughly $176 million and or 38% of Live Nation's $459M adjusted operating income (AOI) was derived from sponsorships and advertising. This especially bodes well for SFX, which has just recently developed an agreement with WPP one of the world's leading communications services group with billings of $70.5 billion and revenues of more than $16.5 billion. This partnership will prove extremely valuable for SFX going forward and definitely increase their annual profitability.

In terms of fundamentals, the company reported revenues of $37,553,000 and a net income of -$44,652,000. Regarding assets and liabilities the company's total assets are approximately $252,535,000 while their total liabilities are $114,860,000. SFX Entertainment is currently counting on the cash flow of its acquisitions, many of which are currently operating at a loss, to turn them into a profitable company. Taking everything into account, though SFX is functioning in a highly profitable industry and maintains some great assets it is perhaps a good idea to wait and see how they perform in coming months before taking any key positions. If the company begins to widen its margin of profitability and reduce expenses, then that will mitigate any short-term revenue loss and will be the ideal time to take up a position.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.