In January 2019 I wrote four articles on a number of investments I thought were the most attractive out of the many I screen and follow. Two articles were on Gaia (GAIA) found here and here, one article on The Meet Group (MEET) found here and a Top Idea on Spark Networks (LOV) found here. Choosing winners is a key investment skill so the purpose of this article is to compare these three companies and decide which one is the best pick. By documenting my reasoning I hope it will help me, and others as well, to improve as investors. I use the following criteria: strong tailwinds; aligned and skillful management; attractive valuations; and short-term catalysts. I apply a relative ranking system of “1” strongest to “3” weakest in each category.
Strong tailwinds ranking: Gaia - 1, Spark - 2 and Meet - 3
Top ranked in this category is Gaia though I am not sure it is so much tailwinds as untapped demand. There seems to a cross-cultural need to transform, seek truth and/or heal as Gaia categorizes its channel titles. At present Gaia’s customer acquisition spend is focused mainly on the North America market but international viewers comprise over 30% of its total subscriber base. This indicates much more untapped demand in other countries and if Gaia captures a very small percentage of the global demand it will do extremely well. This gives Gaia a very long growth runway and it has multiple strategies to achieve its targets as discussed in my two Gaia articles.
Source: Spark’s Dec 2017 investor presentation
I rank Spark second. Spark’s management stress they are only capturing a fraction of the available opportunity as shown in the slide above. A combination of launching existing brands in new geographies, developing new brands and utilizing more marketing channels creates a virtuous loop supporting continuous growth. There is also M&A to consider and Spark has articulated how M&A enables it to grow its brand portfolio in a value accretive way. They estimate that AttractiveWorld and Spark Networks Inc were bought/merged at EBITDA multiples (including estimated cost synergies) of 3.4x to 5.3x. These multiples compare favorably with Spark's EBITDA multiple of about 10.5x pointing to a viable rollup strategy. Spark’s management has a long track-record of successfully executing these strategies.
Meet also stresses that it operates in a large and growing market. In its January 2019 investor presentation it highlights that the number of singles online globally is estimated to grow from 600 million in 2018 to 700 million by 2020. Meet is also benefiting from changing online behavioral trends such as live-streaming video driven by a smaller number of “broadcasters” who receive virtual gifts from a much larger pool of viewers. This form of human interaction is more commonplace in China where key players like Momo (MOMO) and YY (YY) have single digit USD billion market caps. My hesitation though is this is a relatively new trend and more time is needed to discern whether it is a short-term fad or long-term tailwind.
Aligned and skillful management ranking: Gaia - 1, Spark - 2 and Meet - 3
I will start off by allocating Gaia an immediate top rank. Its CEO Rysavy is the beneficial owner of 38% of Gaia and has demonstrated great vision and execution by setting out multi-year targets and then achieving them (e.g. 500,000 subscribers by end of September 2018). His previous successes include founding Corporate Express Inc. Spark’s CEO and COO have a combined beneficial ownership in Spark of about 7% worth USD8.5 million. In 2017 CEO Folgueira, CFO O’Hare and COO Schrezenmaier collectively received total compensation of EUR693,000 excluding the equity incentive awards. So the equity component is material and aligns management with shareholders. They have been executing well on their growth playbook as I expanded on in my Spark article. I give Spark a number 2 ranking.
Source: Meet’s January 2019 Investor presentation
Meet’s CEO Geoffrey Cook has been in place since March 2013 and has a very entrepreneurial background that includes founding myYearbook in 2005 and EssayEdge and ResumeEdge while a student at Harvard and later selling them to Thomson Corporation in 2002. His vision in 2016 to build a video platform is playing out very well as shown in the graphic above. He has a 3.2% beneficial ownership of Meet which amounts to about USD13.5 million. Stock and option awards made up about 70% of his total 2017 compensation. However, much of Meet’s success has come from the recent explosive growth of its Live Video offering which in my view needs a longer time-frame to assess its sustainability before assigning a higher rating.
Valuation (risk-reward) ranking: Spark - 1, Meet - 2, Gaia - 3
Gaia trades at an enterprise value("EV")/revenue multiple of 3.9x versus 2.5x for Meet and 1.0x for Spark. I have allocated a higher ranking to companies with lower EV/revenue multiples. Though Gaia is incurring high cashburn levels at present, due to a sustained subscriber acquisition drive, its inherent business model is very profitable with gross margins already over 85% and management guiding towards an 2021E pre-tax income margin of 40%. My main concern is the downside risk if subscriber targets are missed or margin expectations fail to materialize. Cash levels are forecast to decline rapidly in 2019E and a miscalculation by management could result in a dilutive equity raise. I therefore rank Gaia third in this category.
Meet is not profitable due to very high depreciation and amortization charges and stock-based compensation expenses but it is very cash generative. Its free cash flow levels were 14% of revenues for the 9 months ended Sept 30, 2018. In Meet’s January 2019 investor presentation it indicates its Live Video monetization generates 30% operating margins for every dollar of credits purchased to spend on virtual gifting. This cash generation cushions the downside scenario. Spark is very cheap and therefore has the greatest upside based on very modest assumptions and lowest downside. It comes top in this category.
Short-term catalysts ranking: Meet - 1, Gaia - 2 and Spark - 3
Meet is ranked top in this category. Its Live Video revenue is growing so fast it is able to publish monthly updates demonstrating material progress (e.g. here and here). If the momentum continues it should drive Meet’s share price higher. Next comes Gaia. 2019 is a key year for the company as management has repeatedly emphasised growing subscribers to the 1 million mark by the end of 2019. This makes every quarter very important and if it looks like Gaia is ontrack its share price should do very well. Spark’s main catalyst is achieving steady revenue and EBITDA margin growth post the Affinitas/Spark Networks Inc. merger. It may take a few years to establish enough data points. In addition, as the company is domiciled in Germany it reports less frequently (twice a year) than Meet and Gaia (quarterly).
Final rankings and key takeaways: Gaia - 1, Spark - 2 and Meet - 3
Based on all of the above Gaia comes out with the top rank of 1, followed by Spark and lastly Meet. I am surprised as my personal choice is Spark. Gaia beats out Spark due to near-term catalysts and a valuation ranking that is equal weight with the other criteria. Personally, I do not mind waiting longer if the risk-reward is more favorable which I think is the case with Spark. In Ray Dalio’s book “Principles,” he comments that having a computer working in parallel with his own analysis really helped him improve and systemize his decision making. I see ranking companies based on key criteria as a very simple algorithm that could be embedded into a computer. My choice of Spark is different from the more mechanical/computer-like output of Gaia. I am interested to see how this all plays out over the coming months and years. To help keep track the reference prices at the Jan 31, 2019 close were:
Disclaimer: Opinions expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisor capacity. This is not an investment research report. The author's opinions expressed herein address only select aspects of potential investment in securities of the companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies' SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author's best judgment as of the date of publication, and are subject to change without notice.
Disclosure: I am/we are long GAIA, LOV. 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.