As on April 17, 2017, Gaia, Inc. (NASDAQ:GAIA) has reached 52-week high of $12.40 and was last trading at $11.25 with market cap of $170 million.
Gaia (previously Gaiam, Inc.) was incorporated in Colorado in July 1988 and operates as a global digital video subscription service. Gaia has recently streamlined its operations and became more focused on online video subscription service business. Gaia has divested its several other unrelated businesses such as solar energy business RGS Energy (NASDAQ:RGSE), DVD distribution business, Gaiam-branded consumer product business, and eco-travel subsidiary, and sold off investments in Natural Habitat. Gaia is investing these proceeds to grow its online video subscription business. Gaia's business model is similar to that of Netflix (NASDAQ:NFLX), Amazon Prime (NASDAQ:AMZN), Hulu Plus and HBO. While content of other players is mostly entertainment-driven and license-based, Gaia's content is niche type with copyrights over own in-house produced content and exclusive licensing agreements.
Gaia operates through four content channels:
i) Yoga - Yoga, eastern arts like T'ai Chi, Qigong, Ayurveda etc.
ii) Transformation - content in alternative health, spiritual growth, and expanded consciousness for a stronger, healthier, productive, and enlightened lives.
iii) Seeking Truth - interviews with and presentations from thought leaders in topics like ancient wisdom, metaphysics etc.
iv) Films & Docs - inspirational films, critically acclaimed documentaries, and thought-provoking short films.
The fourth channel was not mentioned in the Annual Report 2016, but is available on Gaia app.
As per Annual Report 2016, Gaia has a library of over 7,700 titles in total. Approximately 80% of this content is produced in-house with production studios and media professionals. Rights over remaining content are acquired through exclusive licensing agreements having tenure ranging from 3 to 20 years. Paying subscribers have access to over 90% of the titles, and they can either watch them through streaming or download them and watch offline.
Gaia is accessible on all major devices and platforms: Apple TV, iPad, iPhone, Roku, Chromecast, Android devices including phones, tablets, and Amazon Fire, laptops, desktop computers, and TV through a HDMI chord. Gaia app is available on iTunes and Google Play Store. I have downloaded the app on my android phone and explored the content. I must say, the user interface and the sample content I have checked out are pretty impressive. On an average, the videos on the app have over 90% likes.
Following are the reasons I find Gaia a very attractive investment opportunity:
i) Cash balance as on December 31, 2016, is $54 million, and the company envisages capex of $15 million for FY 2017, and this capex will be funded through the cash balance. With shares outstanding of 15.15 million (ignoring dilution), this should translate roughly into $3.6 cash per share and $2.6 cash per share (post-capex), respectively.
The company owns its 150,262 sq. ft. office building in Louisville, CO. Based on the information from realtor.com, residential properties in Louisville, CO, fetch a market rate of approximately $187 for sq. ft., and applying same rate for this property should translate to approximately $28 million value i.e. $1.85 per share.
This establishes a floor of $4.5-5.5 per share. The above calculation does not include media library, investments, and other assets. Including these, the liquidation value could be over $6.5 per share. That way, the investor is paying $5-6 for future growth of the operating business, which I consider is very cheap given the scalability of the business.
ii) The company achieved subscriber growth rates of 58% and 52% in 2015 and 2016, respectively and expects this rate to be at 80% in 2017. Subscriber base of Gaia as on December 31, 2016, is approximately 202,000, and Gaia believes that size of its potential target market to be approximately 3.85% of the global video subscription service market i.e. subscriber base of 11.5 million. By 2021, the company expects to build a subscriber base of 1.6 million, achieve revenue of $150 million, and pre-tax income of $60 million.
I strongly believe that the Gaia should be able to achieve the subscriber base of 1.6 million sooner than 2021 for following reasons:
- Working professionals, particularly those aged above 30, live stressful lives and would always be interested in content that would be useful for their well-being. For example, over 60% of the messages, pictures, and videos that I receive over WhatsApp on my phone are: a) quotes from eminent personalities b) health-related tips c) transformational & personality development videos etc. And, as soon as I find some content useful, I have a tendency to forward them to my friends, colleagues, and well-wishers. I think same is the case with most of the people. Applying the same analogy to Gaia, anybody who has come across Gaia app/ content would definitely recommend/refer it to somebody they care about.
- Gaia subscription fee is relatively cheap. Pricing plans for Gaia subscription are: $9.95 per month (99 cents for first month); $20 for three months (and $9.95 per month thereafter), $95.40 per annum. My wife and I used to go to Yoga classes earlier, and we were taught and used to do almost the same routine, week after week, throughout the year. And we used to pay (combined fee of) approximately $550 per annum. Compared to this, annual subscription fee of Gaia looks very cheap, and people living under one roof could just do with one subscription plan. As a bonus, we would get access to variety of content in Yoga and other categories as well.
- Gaia's founder Jirka Rysavy has a history of over-promising and overachieving. His first venture, Corporate Express (an office supplies wholesaler) had revenues of $31 million in 1992. At the time of acquiring Trick & Murray (with revenues of $15 million in 1992), Jirka proclaimed that he would grow Corporate Express to $300 million revenues by 1995. For 1995, Corporate Express had revenues of $1 billion.
With rich content, relatively cheaper subscription plans and an existing subscriber base of 202,000, Gaia should be able to compound the subscriber base and revenues at faster rates under the guidance of Jirka Rysavy.
Let us assume that the company does meet its projected targets for 2021. Even with slowdown in growth rate to 30% after 2021, it would take seven years for Gaia to reach its potential target subscriber base of 11.5 million. Using the pre-tax income of $60 million in 2021, 30% growth rate, and cash contribution margin of 90% (as described in company presentations), if we do some back-of-the-envelope calculations using DCF, the company's stock could be worth another $10-20 (in addition to the floor value we have mentioned earlier). However, these projections are far-fetched, and I am just trying to indicate the potential of the business.
The business model is proven, and anybody who has seen the growth of the likes of Netflix, Amazon Prime etc. in past decade or so would subscribe to this.
This business has a huge potential for scalability worldwide through minor modifications such as adding foreign language support without having to invest in local foreign operations. As on date, 30% subscribers are outside the US and the company expects this to be at 50% in five years and at 60-65% in 10 years.
iii) Jirka Rysavy has an impeccable track record in starting from scratch and building multi-billion dollar businesses.
Corporate Express was started in 1986 with 11 employees and was sold to Buhrmann, a Dutch conglomerate at $2.3 billion in 1999 and had $4.5 billion of revenues at the time of its sale.
His another venture Crystal Market was sold to Wild Oats, which was later sold to Whole Foods (WFM).
In 2016, Gaia sold its equity investment in Natural Habitat and Gaiam brand business for combined gains of $125 million. With an investment of $2.5 million in Natural Habitat, Gaia made a profit of approximately $10.3 million (over 400%) over a period of a decade and a half.
As per Annual Report 2016, Jirka Rysavy has 38% shareholding in the company and 85% of total voting rights, thus exercising significant control. The shareholding and voting rights have increased by almost 10% from the previous year. As on May 10, 2016, the shares were trading at $6.71, and post the tender offer, shares were trading at $7.75 on May 11, 2016. The tender offer presented a gain of 15.5% to the shareholders.
Tender offer resulted in higher equity interest for the management and increased shareholder value. Founder's shareholding and the tender offer indicate company's super confidence about its prospects.
iv) Gaia has no debt on its balance sheet. In future also, the company expects itself to be fully funded out of own cash accruals. With prepaid subscription revenues and zero inventory, Gaia expects itself to operate on negative working capital.
v) As indicated by its management in conference calls, there is a possibility for the tender offers for share repurchases and dividends in the near future, thus increasing the value for the shareholders. In the distant future, assuming Gaia builds a significant subscriber base, there is a possibility of merger with/takeover by one of the larger players, which could also be beneficial for the shareholders of Gaia. Also, there is always a possibility of expanding the media library and business by acquiring other niche content providers.
vi) Given that Gaia is a microcap company and its founder usually prefers to stay out of the limelight, the stock was under the radar, and that could be the reason the stock was trading at lower prices.
Having said that, some of the risks associated with the stock are described as hereunder:
i) At present, it seems ad-free streaming could be one of the features helping Gaia in building brand loyalty. Apart from that, Gaia seems to have no other strong brand loyalty point, and it would not be very hard for its larger competitors to replicate the business model and content with the kind of resources at their disposal. For example, though Gaia has copyrights over the Yoga-related content produced in-house, similar videos can be made with other established Yoga practitioners, as the underlying principles and exercises are same.
Gaia's presentation in September 2016 indicates that 70% of Gaia's subscribers also have Netflix subscription. Now, imagine a scenario where Netflix comes up with content similar to Gaia, adds a separate category to its existing media library, and marginally increases the price for overall subscription plan. This would drive price-sensitive customers away from Gaia as they would be gaining access to vast media library at lower subscription prices.
ii) I believe there is a significant potential for dilution. The total no. of Class A shares to be issued/remaining available for future issuance upon exercise of options, warrants, and rights stands at approximately 3 million. Compare this with 9.75 million Class A shares outstanding at present and that indicates a possibility for significant dilution. However, in one of its conference calls, the management has indicated that it would like to go for more stock repurchases and dividends in the future. Since the management had carried out a tender offer for repurchase of shares and options in May-July 2016 for an amount of approximately $76 million, I believe the management would walk the talk in future as well.
Overall, I believe that investment in Gaia could fetch 100% return in next couple of years; and over a period of five years, the returns could be even higher.
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.