SFX Entertainment Reports Stellar Second Quarter, Remains Undervalued

Aug.17.14 | About: SFX Entertainment (SFXE)

Summary

Revenue up more than 200% in first six months of year.

Shares down 40% from IPO price in October.

Rising sponsorship revenue from major clients like MasterCard and T-Mobile.

Attendance at major festivals continues to rapidly increase.

2015 shaping up to be robust year with festival expansion to new territories.

SFX Entertainment (NASDAQ:SFXE) reported incredible second quarter results this week. Shares were up on the earnings report, but remain undervalued on a long term basis and compared to IPO prices. I highlighted the stock back in May and many of the points I made remain in play.

The key points I shared in May were:

· Series of acquisitions

· A new focus on more profitable ventures by the company (more festivals, more weekends, full control of merchandise)

· Two Rock in Rio festivals in 2015, possibility of concerts coming to movie theaters

· Ultimate DJ competition

· Marketing partnerships with large companies

SFX has been quiet on the acquisition front since that article, but the bigger festivals and marketing partnerships have been a big theme and were part of the reason the second quarter report was so good.

In my last article, I shared that SFX had key partnerships with T-Mobile (NASDAQ:TMUS), Anheuser Busch InBev (NYSE:BUD), and other big names through the Rock in Rio brand. In 2014, marketing revenue was expected to jump to $40 million. Since that time, the company has inked several marketing deals and now expects full year sponsorship revenue in the range of $50 to $60 million. Here is a look at some recent deals:

· Signed a joint venture with MasterCard (NYSE:MA). This is an exclusive global sponsorship that features guaranteed payments and revenue sharing.

· New marketing and ticket revenue sharing agreement with viagogo AG. This was a five year $75 million agreement. Viagogo resells tickets in more than 100 countries.

· Extended partnership with T-Mobile.

The continued strength of the marketing partnerships help to show that major brands are believing in electronic dance music. These deals are bringing major revenue to SFX while also validating the company as a leader in the music genre.

The second quarter revenue numbers shouldn't be a huge surprise to anyone who read the last article I posted. In that article I discussed the weak first quarter numbers. The company hinted that many items had been pushed back and would hit the second quarter instead.

Second quarter revenue was $82.0 million. The company posted a loss of $0.50 per share in the second quarter. This revenue figure was an increase of 199% from the prior year's $27.4 million. Six month revenue now stands at $115.8 million, an increase of 208%.

Festival attendance is one of the keys to an investment in SFX Entertainment. In the first quarter, total attendance more than doubled to 175,000. This was due in large part to the fact that there were 9 festivals versus a previous 4. Second quarter attendance rose 70% to 675,000. The company had 17 festivals versus 14 in the prior year. The 17 festivals was also 2 more than originally forecast by the company. The company continues to transition to hosting fewer total festivals with a focus on bigger longer events. This is paying off big as total attendance rises, despite non festival attendance seeing a small decline.

In the third quarter, there is an estimated 30 festivals, with 13 in North America and 17 in international markets. The fourth quarter is set to see 22 festivals, with 6 in North America and 16 in international markets. The third quarter will include the TomorrowWorld festival in Atlanta and Electric Zoo in New York, two of the company's largest festivals.

Looking ahead to 2015, SFX Entertainment has a huge lineup that will most likely include its biggest attendance numbers ever. For the first time ever, the company's Rock in Rio brand, which it owns 50% equity in, will have two festivals and will be held in North America. The Rock in Rio festival will have dates in both Brazil and Las Vegas. A partnership with NCM Networks (NASDAQ:NCMI) could also lead to Rock in Rio on the big screen, which I pointed out in the last article. That could provide a big boost to 2015 numbers as well and capitalize on the strength of the Rock in Rio brand, which SFX paid $62.3 million for its 50% stake.

The year 2015 will also see Tomorrowland venture to Brazil. This annual festival was always in the United States until a festival under the name TomorrowWorld was held in Belgium. Another TomorrowWorld will be held in Atlanta this year September 26 through 28. The TomorrowWorld to be held in Brazil has already seen strong demand. There was 176,000 pre-registered requests for tickets in the first 12 hours following the announcement. The company said of its TomorrowWorld social media fans, 1.4 million are residents of Brazil.

The risks continue for SFX Entertainment, which are likely scaring investors away. The company is not profitable and not expected to be until fiscal 2015 or 2016. The company relies heavily on the popularity of electronic dance music, which is viewed as a fad to some analysts and industry experts. Attendance continues to be strong, showing that the genre has legs and has not worn out its welcome yet.

Three analysts on Yahoo Finance give estimates for fiscal 2014 and 2015. Analysts see fiscal 2014 revenue rising to $418.2 million. Analysts see a loss of $0.86 for the current fiscal year. In fiscal 2015, analysts see a loss of $0.11 per share from $528.8 million in revenue. These estimates are below the ones from my last article, which were from only one analyst. At that time, the company was expected to post a profit of $0.39 per share in fiscal 2015. A profit is still quite possible with the strong lineup of big festivals and the increase in marketing revenue that is going further to the bottom line.

Shares of SFX Entertainment have fallen hard in 2014. The shares are now down 39% in 2014 and 43% since its October IPO. Since my article was published, shares are up a meager 4%. There is plenty of upside to this name. Investors may want to consider adding the stock to their portfolio to capture gains from the electronic dance music craze and the huge marketing and attendance revenue that goes along with it.

Disclosure: The author has no positions in any stocks mentioned, but may initiate a long position in SFXE over the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.