Gaia: Is The Niche Too Small?

| About: Gaia Inc. (GAIA)
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Summary

Jirka Rysavy is a legendary businessman and he owns 38% of the company.

Scott Miller of Greenhaven hedge fund is long GAIA.

Rysavy's motivations are unclear.

Growth prospects may not be as good as what Miller believes.

I would only consider going long below $6 per share.

Gaia (NASDAQ:GAIA) is a digital video streaming service that provides media content to its subscribers. What makes this company unique is that it focuses on "New Age" and alternative content. For $9.95 per month you get unlimited access to over 7,000 videos about yoga, meditation, alternative health, conspiracy theories, and so on. Growing very fast and already showing at least 180,000 users, is GAIA a good investment at current price?

Source: Gaia.com

I have read with great interest the latest Greenhaven investor lettor, where Scott Miller talks about why he went long GAIA. He makes a good bull case. Mainly, his thesis is that this is a "trust me" company where the CEO, Jirka Rysavy, has a long history of great management skills, that he already created much value for shareholders in the past and that he owns 38% of the company. With about $5 of stock price covered by cash ($60M) and building ($20M), there should be a solid floor if things turn sour. As for the business itself, Miller sees lot of growth for the next years, projecting over 1.6M users in five years with a price target around $20.

Miller is right about Jirka Rysavy: this guy is a legend. He's a Czech who came to the US with nothing in 1984. He founded Corporate Express and was at one time CEO of a company with $4.5 billion in revenue and 27,500 employees while still living in the woods with no indoor plumbing. He also created other successful businesses. Gaiam (which became Gaia last summer) wasn't his greatest accomplishment, but what he did before with Corporate Express was impressive.

However, as much as I am confident that Rysavy wouldn't live off the shareholders and would prefer to liquidate if things didn't work out well, I'm not so sure about the motivations behind this new GAIA business. Of course, he has skin in the game, but he is already rich, so even if he lost everything in GAIA that wouldn't be the end for him. There is a possibility that GAIA is simply a way for him to share his "New Age" philosophy with others. I'm not saying he is not trying to make money; I just believe it's maybe not the most important thing for him and he may overestimate his market potential. You don't live in a cabin in the woods for years if money is the most important thing for you. I believe he may want to create some kind of testament with this business as he is aging and after years on other projects.

Of course, I could be wrong, but please consider how is presented the movie he directed and that was released last year, Secret of the Water:

Water - a living substance, the most common and least understood. It defies the basic laws of physics, yet holds the keys to life. Known to ancients as a transmitter to and from the higher realms, water retains memory and conveys information to DNA. However, water can die if treated poorly. Influences such as sound, thoughts, intention, and prayer, as well as toxins such as chlorine, structure water's molecular arrangement- affecting all it comes in contact with.

Again, if this is a "trust me" company, we have to trust the CEO and be sure that he is rational in what he is doing. I didn't watch his movie but the descrption does not seem that rational to me. Does he really believe in the potential of GAIA? Probably. But maybe he is overenthusiastic about what it means to others and how much growth can come out of it.

I think this is precisely the weakest argument in Miller thesis: projected growth. He compares GAIA to Crunchyroll, which offer streaming anime videos and has over 700K users, and says that it proves you can have a small niche and get a lot of subscribers. Let's pause here. Anime is very appealing and typically have very low churn rates because many of those shows have hundreds of episodes. You can plug your children on any Japanese anime and they'll have lot of fun. Anime are actually cool and teenagers love them.

GAIA is a great resource, but let's be honest: what is the percentage of the population that's into this kind of stuff? Maybe 0.5%, 1%? And how many of them would pay $9.95 per month for yoga lessons that they can get for free on YouTube (hello Tara Stiles)? How many of them would pay $100 per year for conspiracy theories interviews and "New Age" purification and things like that? GAIA could continue to growth its users, but at some point it will take its margins down because there is a cap on organic growth in such a small niche. They'd need to spend much more to get new users and their churn rate would rise.

In the end, I just don't see how I could buy such a company at the current price. I like the CEO but he's been on other projects lately and I'm not sure what his motivations are. If the stock price was down under $6 (from around $8.65 right now), I think I might consider a buy as hard assets ($5) would cover much of the price and you have to give some value to the content that's already there. Paying the current price is believing in growth that can or can't exist. I believe there are more compelling opportunities right now and that's why I'll give GAIA a pass. Best of luck to shareholders.

Disclosure: I/we 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.