Description

Thesis: After a brief hick up in managing their own growth expectations in 2018 the company has become a high cash flow growth, sticky customer base niche provider of streaming content at 50% discount to peers, with an incentivized management team and a potential value unlocking catalyst in 2H21, with a 200 to 400% upside from here. 

Background: Gaia was originally founded as Gaiam, a cheap but popular yoga clothing brand, by its eccentric but wildly succesful founder Jirka Rysavy. As he's done in the past with a number of businesses Jirka cultivated side ventures inside Gaiam including an eco tourism business and streaming channel. In 2015 the company with 22,000 subscribers at the time filed paper work for a spin off of the steaming channel. While there were a lot of naysayers on the brand business, with almost no one assigning anything above 5x EBITDA in 2016 Jirka sold the Gaiam business for $146mm to Sequintal Brands at 9x and the 50% ownership of ecotourism biz to Linblad expeditions for $12.85mm, which if I remember wasn't really profitable. It was a pretty sweet deal and the company announced its commitment to the streaming biz and dedicated half the cash to its growth. The other half, in 2016, went on a $7.75 tender offer in which Jirka did not participate in and increased his ownership % two fold. This was done to clean up old school Gaiam shareholders. Note he's also done this with a nascent solar biz which didnt really pan out in terms of absolute dollars but was still very profitable at the time. Prior to Gaia/Gaiam Jirka has also founded Corporate Express which was sold to Staples, and Wild Oats which was sold to Whole Foods. He's a hippy through and through, very wealthy, lives in a giant ranch in Colorado. I once asked him why he is doing Gaia even though he was already very rich and his answer was "I use to sell floppy disks to Steve Balmer at 20% gross margins and he would put consumer software on it, Office, and sell it with 90% gross margins. Ever since then I've always wanted to create a succesful consumer software business with 90% gross margins". 

At that point, Jirka and Paul Terel (CFO) very much admittedly over their head in terms of running a streaming biz, committed to 60 to 80% customer growth over the next few years. That was misstep number one but one even myself was clamoring for in terms of potential. Then just a year later the company raised a bunch of money as the stock ran up to over $20, at $18 for "just in case cash".  That was misstep number two. Then, as you could read here the short thesises posted, the real problem was while the incredible 50-60% churn rate and the resulting out of control CACs. So in November 2018, just a few months after the raise based on high growth, the company did an about face and lowered growth expectations to 20-30% with a focus on more profitable subs with a goal to get to FCF positive by year end 2020.

So before you go further with this thesis you absolutely need to be comfortable with a) the incredibly weird content Gaia puts out ... but one that you can not deny is incredibly popular. If you're not ok with some weird bat s--t stuff they put out as a business concept you'll never be comfortable with thesis. I am cognizant enough that this is also the reason why the stock hasn't really appreciated despite the outstanding results, discomfort with content. You can view it as a negative or as a potential catalyst, say at 1mm subs from 750k today, that people will have to believe that the content is popular. b) with Jirka and his weirdness. He is the content creator and that is one of his priorities. There was a weird, mostly over eggagerated hit piece on him in Business Insider a few months ago. It didnt do anything to the stock. I choose to view him as a very shareholder friendly and oriented visionary who is very focused on long term value creation. What he does in his spare time or how he does it, as long as its ethical, I don't care. He will sell this company at some point at some dumb unexpected price. 

So what happened between November 2018 and now? The company grew from 500,000 subs to 750,000 subs in 10 quarters or 18% CAGR and its quarterly revenues from $10.9mm to $19mm or 24.6% CAGR (i.e. the rest was done with price increases). Its keept its goal since 2018, achieving 25% rev CAGRs and profitability. Its quarterly SG&A expense (of which $1.5mm is corporate) went from $20-21mm a quarter or 200% of revenues to $15-16mm (with $2.5-3mm in depreciation) a quarter or 83% of revenues. The gross margins have stayed flat at 87%. How did this happen and why didnt the market believe it? It was pretty simple, in the sense when they made the announcement in Nov 2018 at 500k subs which had grown 66% or 200k subs of which 80% would be gone in two years. It needed to not only growh to 600K subs (20%) by adding a 100k but to replace almost 120k as well. By year end 2019 it needed to grow 150k subs but (guestimate) to replace only replace 100k or so on a higher base. In other words, in the last two years its subscriber base which was 300k in late 2017 was really turned over by a much more profitable, stickier, 1/3 of which is willing to pay an annual $100 up front, subscriber base at 750k. This is what I believe what "Wall Street" and the short sellers were missing. That they needed time to cycle out the s--ty subs of 2017-2018 and to focus on a much more stickier 18-20% sub growth which is where they are now. 

So where are we now? The company should have revenues of $80mm, $100mm and $125mm (25% y/y) in 2021-2023. This should result in $20mm, $28mm and $40mm in EBITDA (32% margin) and $5mm, $15mm and $25mm in Free Cash Flow. These are not high hurdles. I think the SG&A stays in the $60-70mm range while gross profits get close to $110mm by 2023. The company controls its CapEx which is still the lowest per hour content in the industry at sub $10k/hr. This is achivable just via the type of content they do (weird but cheap) and having its own in house studio. This should also result in 1.2mm subs by year end 2023. Please note the company has negative NWC which should contribute to FCF generation. 

So these are my estimates. I think these are pretty consistent run rates with what management has done and stated they plan on doing. There are a lot of levers to pull including international expansion, price increases, and higher ARPUs via expansion of their conferences and the $299/y premium subscription. If the stock price doesn't go up they will aggressively buy back shares per announcement at 1Q21 call.

Here is my value add, event driven value creation in 2H2021. A few years ago the company made a $10mm investment in an international start up. Thats as much as I can know on what it is without MNPI. I also know that the founder of the start up is very secretive (goes well with Jirka) and had the company sign a long term NDA which runs out this year. The reason I went through the whole "Jirka likes to incubate businesses" story is because this is one of those, just happens to be with an NDA, and its been on the books for years and every year it passes the auditor "not write down" test. Thats obviously not why I think what I think, but it should also help decipher clues. My estimate is that this asset is worth $3-$5 per share right now. But thats not on MPNI but on my 5+ years of being a shareholder and deciphering clues from my convos with mgmt. 

So thats my thesis. Jirka owns 5.8mm shares, or 30% of the O/S at $65mm at extremely depressed prices. Paul has a 100k shares and 120k RSUs at $2.5mm. Paul and the directors have been buying shares at sub $11 hand over fist. Gaia is trading a 2.5x next 12 months revs with FCF profitability while much much more awful comps like Curiosity Stream and Netflix trade at 4.4x and 7.4x. Gaia is trading at 12% 2023 FCF yield. Should a profitable media content business growing revenues 20%+ at substantial profitability (20% FCF margins by 2023) be trading at 12% yield? No. So my 18 month price target is $35 at 4% 2023 FCF yield plus cash, excluding "other asset" value. I think at that price, Jirka will start to consider selling the company. He has mostly stepped away to focus on content and thats where his passion lies.  Downside is probably dead money risk where its at right now, to languish between $10 and $12 forever where it trades range wise sometimes daily. 

Risks: can probably peruse the short thesies on here, content weirdness in age of cancel culture catches on, Jirka checks out (unlikely), CACs going through roof on industry changes as more and more streaming services compete for subs and their share of wallet; the TAM of people clamoring for weird content is smaller than even management thinks (my guess is 10s of millions globally over time). 

Catalyst

Continued growth in subs/revenues profitability; management executes stock buy back; unlocking of value from "other asset";