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Stingray: The Solution To Obsolescence Is Not Acquisitions

Dec. 06, 2018 5:00 AM ET1 Comment
Aletheia Analytics profile picture
Aletheia Analytics


  • Stingray has made 35 acquisitions totaling $756 million. My analysis indicates that they have either generated far less EBITDA than guided, or the base business is in serious decline.
  • Stingray appears to utilize aggressive addbacks in its presentation of Adjusted EBITDA, rendering it 52% higher than my estimate of run-rate EBITDA.
  • Stingray's recent acquisition of Newfoundland Capital takes leverage to 4.8x. Free cash flow will be negative with the new debt burden, potentially rendering dividend at risk in the future.
  • The tipping point may be an existential threat from the generational shift of Canadian cablecos to an IPTV platform. Stingray's linear music channels are typically included in the lowest cost TV packages. This may no longer be the case with IPTV.
  • Recommend that investors SELL their Stingray shares with downside of 30-85%.

Summary Investment Thesis

Stingray Digital Group (RAY.A, or the “Company”) offers potential downside of 30%-85% from its current price of $7.43. My analysis of Stingray’s historical acquisitions and their contribution to EBITDA indicate the company has either paid substantially more than the 4x-6x EBITDA multiples communicated to the market, and/or its base business is in serious decline. In the face of a potentially declining base business, Stingray has become increasingly aggressive with respect to addbacks in financial metrics presented to investors, to the point where the Company’s Adjusted EBITDA is 52% higher than my estimate of run-rate EBITDA.

On top of negative headwinds from macro level trends of pay TV ‘cord-cutting’ and ‘cord-nevers’, Stingray faces the additional existential risk of being left behind in a generational shift of major Canadian cablecos as they deploy the Comcast Xfinity X1 IPTV platform in the next few years. RAY’s traditional curated music channels were typically included in every base cable TV subscription. It appears that these linear channels may not be included in even higher priced IPTV packages, which could result in significant reductions in Stingray’s reach. In an age where consumer tastes are quickly evolving, RAY’s traditional linear TV music channels are likely to be viewed as obsolete. This appears to be happening as we speak, as a review of Roger’s Ignite TV product indicates that Stingray’s traditional music channels are not currently included in any of the IPTV packages.

In light of these difficulties, Stingray doubled-down by acquiring a Canadian radio operator for 10.5x EBITDA, which is almost twice the implied valuation of the target’s closest competitor. Stingray has stretched its balance sheet to 4.8x leverage in order to accommodate this acquisition (and potentially increasing to 5.1x pending additional proposed acquisitions). Proforma Stingray will not have a path towards deleveraging as the entity will generate negative

This article was written by

Aletheia Analytics profile picture
Searching for equity special situations where I have a contrarian view. I believe in differentiated deep fundamental research to thoroughly understand a potential investment.

Analyst’s Disclosure: I am/we are short RAY/A. 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.

ALL READERS SHOULD PERFORM THEIR OWN DUE DILIGENCE. This article represents the opinions of the author only, as of the date of this article. The author makes no representation as to the accuracy or completeness of the information set forth in this article and has no duty, express or otherwise, to update the contents herein. The author may also cover his/her short position at any point in time without providing notice to readers. The information set forth in this article does not constitute a recommendation to buy or sell any security. This article contains certain "forward-looking statements," which may be identified by the use of such words as "believe," "expect," "anticipate," "should," "planned," "estimated," "potential," "outlook," "forecast," "plan" and other similar terms. All are subject to various factors, any or all of which could cause actual events to differ materially from projected events. This article is based upon information reasonably available to the author and obtained from sources the author believes to be reliable; however, such information and sources cannot be guaranteed as to their accuracy or completeness. Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

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