Description

Elevator pitch

Several stock-specific issues affecting the company in the last year, combined with the general market rout and in particular with the acute selloff in the SPAC world, created a timely and compelling opportunity to invest in BuzzFeed, the largest independent pure-play digital media company  in the US, at a highly distressed valuation. We believe there is a clear and credible path for the stock to appreciate 3-5x over the next 3 years with limited downside.

About BuzzFeed

BuzzFeed became a publicly traded entity in 2021 once it completed the SPAC-driven deal to combine its assets with Complex Network. The sponsor of the deal was 890 5th Avenue Partners, Inc.

BuzzFeed is recognized in the US as the leading Digital Media company focused on younger demographics. It’s the largest independent digital media outlet in the US by time spent for Gen Z and Millennials. BuzzFeed was founded by its current CEO Jonah Peretti in 2006, which co-founded The Huffington Post in 2005. Jonah is highly regarded in the industry as an excellent brand builder and visionary. The key brands in the BuzzFeed portfolio are:

• BuzzFeed – leading digital publisher for cultural relevance, with over 20m YouTube subscribers

• BuzzFeed News – leading digital news outlet for young readers with over 25m monthly unique visitors

• The Huffington Post – iconic digital news outlet, with over 10m monthly unique visitors

• Tasty – leading food network. 1 in 3 Americans have seen Tasty on a monthly basis

• Complex Network – it includes popular brands that target Gen Z male demographics, such as Sole Collector, HotOnes, Complex. In 2020 it has 150m monthly video views

Several other emerging brands, such as Is, Bring Me, Goodful, Nifty and Playful

These iconic brands have massive reach, engagement and distribution. There is no competitor (e.g. Vox Media, Vice Media, POPSUGAR Media, Group Nine Media) that comes close to BuzzFeed in terms of reach and engagement. It’s basically the only profitable digital media outlet in the market today:

Under the leadership of Jonah Peretti, BuzzFeed build a well-oiled machine that excelled in creating content for young demographics and distribute it digitally across different platform. The track record has been impressive. Jonah Peretti has built, organically and via M&A, a digital media powerhouse with revenues in excess of $500m today:

The organic growth has been equally impressive. The case study of Tasty is particularly telling, growing from basically zero in 2015 to nearly 200m FB followers in 2020:

What distinguishes BuzzFeed from larger platforms like Facebook and YouTube is that BuzzFeed is very particular about having full control over its content, which is entirely produced or curated internally. Unlike the likes of Twitter were content is user-generated, low cost and low quality, BuzzFeed spends a lot of money creating its content, either with its own creators or in partnership with other content companies. For example, in 2020 BuzzFeed signed a partnership with Lionsgate to produce feature films. Because of this high focus on content creators, BuzzFeed employs some 1,500 people and has a relatively low gross margin compared to other media companies (gross margin is sub 50%, compared to 80%+ for the likes of Facebook, Pinterest or nearly 70% for Twitter). However, average CPM and content monetization on BuzzFeed is much higher than for these other platforms. 

Business model

As a digital media company, BuzzFeed is conceptually a very simple business that comes though in many different shapes. BuzzFeed effectively produces content, distributes it and finally monetizes it, with a proprietary tech platform that enables a repeatable and efficient data-driven process.

In terms of content, BuzzFeed has a very diversified content based to be monetized. They have display, pre-roll, mid-roll video, programmatic advertising and custom content. The aim of the game for BuzzFeed is to become a one stop shop for advertisers looking to reach massive young audiences. BuzzFeed addresses brand safety concerns through its rich first party data and contextual advertising solutions. “BuzzFeed is also a trusted partner to the tech platforms, providing high-quality brand-safe content at internet scale to meet advertiser demand”.

In terms of platform, BuzzFeed distributes its content amongst its owned and operated platform, where it sells advertising impressions to large advertisers, or it distributes the content on other social media platforms, like Meta, YouTube and Instagram.

In terms of content monetization, BuzzFeed does it in 3 different ways:

1. Advertising – BuzzFeed own high touch content, whether editorial or news content, is sold to typically large advertisers in different forms, including display, pre-roll and mid-roll advertising

2. Content – BuzzFeed offers lightweight turnkey options for advertisers, giving them custom advertising assets in both long and short form. This revenue stream is the lowest margin one as the upside is entirely absorbed by the customer

3. Commerce – BuzzFeed earns affiliate commission on direct sales transactions initiated from editorial content. Amazon is the single largest customer. This revenue stream is the highest margin within the group

At the time of the SPAC merger, the Commerce business was absolutely on fire, growing over 60% YoY organically, and it was seen as the major driver for future growth going forward.

Secular drivers and synergy opportunities

There are several favorable trends supporting the business growth going forward:

• Digital video advertising is structurally growing, as users worldwide want more video content from their preferred brands

• Large media platform like Facebook need trusted (i.e. curated) supply of digital content at scale

• During COVID-19, digital media powered significant growth in video-linked eCommerce. 

• Ad Spend is finally shifting from Mega Platform (META and Google) to independent outlets to diversify ad budgets and seek more brand authenticity

The transaction with Complex offers specific cross-selling opportunities. There is very little overlap in terms of both customers and audience between BuzzFeed and Complex (BuzzFeed being for example female dominated and Complex male dominated). There are obvious low hanging fruits both on the cost side (more on this below) and on the revenue side, where BuzzFeed customers suddenly have access to a new audience for their advertising campaigns, and vice versa.

The flywheel effects of the business should in theory propel growth for the business going forward with positive operating leverage, especially incorporating the Complex acquisition. In 2021, the group generated c. $520m in sales on a consolidated pro-forma basis with EBITDA margins that were supposed to grow from c. 10% to as high as 25% in 2024. However, things didn't pan out as originally expected, as we shall see below.

The overhangs

Something clearly didn’t work out as planned. The SPAC deal with BuzzFeed and Complex was made at an equity valuation of $1.7bn, or $10 per share. Today the stock sits at $1.60:

BuzzFeed had c. $189m of debt outstanding as of Q1-22 ($150m convertible and c. $29m drawn revolver) and $75m in cash, for a net debt of little over $100m. At current share price, BuzzFeed enterprise value is c. $320m, which is about 80% lower than the valuation set when the SPAC transaction was consummated:

Ironically, this is very close to the valuation of Complex alone in 2021, which is a small part of BuzzFeed. The company reported sales (pro forma) of $521m in 2021, exactly in line with what was guided to the market a year ago, so why the valuation implosion?

The reason is that the long term plan presented to the market in June 2021, shown below, turned out to be incredibly unrealistic and borderline disingenuous. The company will significantly fall short of its initial guidance and in doing so, management seems to have lost all credibility. Trading on 0.6x EV / Sales, BuzzFeed is today trading as a distressed asset. In 2022, the company is expected to report sales of c. $475-480m, for an organic decline of 9-10%. This is a far cry from the 25% growth that was guided only a year ago. Similarly, EBITDA margins in 2022 are not going to double as per chart below. Rather, the company will experience a margin compression this year. 

What drove the massive disappointment? In our view, the company suffered from 4 temporary (i.e. not structural) headwinds:

1. Facebook weakness + TikTok strength

In the last year, we have all witnessed the sharp deceleration in Facebook ad business. At the time of the SPAC deal, BuzzFeed expected a 2020-2022 revenue CAGR for Facebook of c. 27%:

Ultimately Facebook is set to grow low single digits in 2022. This has been particularly painful for BuzzFeed for two reasons. First and foremost, Facebook is the single biggest 3rd party platform for BuzzFeed to advertise and sell content to. Secondly, and probably most importantly, BuzzFeed still does not monetize with TikTok. For both commercial as well as technologic reasons, BuzzFeed still cannot adequately measure the viewership in short video content form. This means that a lot of viewership goes unmonetized. In the case of TikTok, 100% of viewership goes unmonetized. This is something that BuzzFeed had to deal with in the past and will ultimately solve. In the meantime though, not only its biggest platform is struggling, but the biggest growth in viewership and audience in the market is happening on a platform which is not yet equipped to properly monetize customer engagement. At the most recent quarterly result, the company said their measured viewership declined 4%. We know that it grew considerably but it grew in those short form videos which are not accurately measured, yet.

2. Commerce weakness

Much of the acceleration in the top line was supposed to come from commerce, which was growing above 60% organically in 2020. It turned out that a material driver of growth was the pandemic related e-commerce boom. Expected growth did not materialize in 2022. In Q1-22, commerce revenue was actually down 27% YoY. The company clearly miscalculated the post-pandemic hiatus, which was exacerbated by the overall consumer spending weakness we’re currently experiencing.

3. Macro headwinds

There is not much to add here. The message from all large media tech businesses, from Snap to Twitter, from Pinterest to Google (and Facebook) has been pretty clear: the outlook for the rest of the year is far from being rosy. BuzzFeed is just as exposed as other media outlets to advertising weakness.

4. Growing pains

Conversations with industry executives have been very insightful in this regard. Jonah Peretti, the founder and CEO, is a highly respected executive, considered a true visionary and is very much respected by his staff. However, he is not a ruthless operator and has enjoyed a very “cushy” existence under private sponsors. As the CEO of a publicly listed company, Jonah needs a high caliber CFO and a hands-on COO. Current COO Christian Baesler is the former CEO of Complex and a very good executive, but he still doesn’t have a strong hold on the entire company, yet. Delicia DellaFortuna is the current CFO and lacks the experience needed to run a half a billion revenue company. We believe the appointment of Marcela Martin as President of BuzzFeed is a huge win for the company. She was the CFO of Squarespace and before that the CFO of Booking.com. We are told she is a ruthless executive and will cut costs to the bone, extracting much needed cost synergies from the Complex acquisition, and focus on cash flow generation, which is exactly what this company needs today.

The path forward and upside optionality

We believe that 2022 will turn out to be the absolute trough for BuzzFeed, from both margins and growth perspective. By H2 2022, the very hard comps in Commerce will lapse and the revenue synergies with Complex will kick in. We will have to wait for 2023-24 for a cyclical recovery, which will come at very high incremental margins thanks to Marcela Martin’s work on cost. At that point, we would expect a major re-rating of the stock. BuzzFeed today is the largest, and only publicly traded, pure play digital media company and, as far as we know, the only profitable and cash generative one. As per table below, precedent transactions in the Digital Media space occurred anywhere between 3x and 5x sales, with some outliers going for as high as 13x:

We would expect BuzzFeed to re-rate to an EV/Sales multiple of at least 2-3x by 2025, once the company will again post sustainable double digit growth with margins approaching 20%. This would imply c. $1.0-1.5bn in EV or $0.9-1.4bn in equity value by 2025, or c. $6-9 per share, for a prospective 3-5x return over the next 3 years.

Furthermore, we believe the investment proposition is highly asymmetric in that the downside is relatively limited. While the company does carry a debt load of $150bn in convertible notes and another c. $30m in drawn revolver, it has ample liquidity to withstand the likely recession which will significantly affect the company in H2 2022. The company has a cash balance of over $70m and Q4 is typically by far the most profitable quarter, so we would still expect some cash generation this year. Over the last 2 years the company posted healthy EBITDA margins so even in a recessionary environment, given access to liquidity, the company will not run into financial trouble. Management is therefore well equipped to withstand the current storm and from a pure valuation standpoint, it’s hard to see further downside.

Catalyst

* Rebased market expectations

* New CFO / President starting in August