Gaia,
a fundamental analysis!
March 8, 2019
SHARE PRICE: $8,70
MARKET CAP: $155,73B
1. INTRODUCTION
I’ve been following Gaia Inc. for some time now. I’ve seen a couple of investors saying that this is the new Netflix and it’s better to get in while it’s early. I thought now that the 2018 results are finally out, it would be a good time to take a closer look at it.
Because we’re talking about a microcap company, I expect to be writing a whole lot more than usual, as microcaps are mostly story stocks rather than number stocks. As always, let’s start by taking a look at their website.
2. BUSINESS OVERVIEW
2.1. BUSINESS DESCRIPTION
Through the years, Gaia has been a lot of things from solar power systems provider to DVD distributor. While I generally think it’s good to have a wide understanding of a company’s history, I’m not sure if all of this is relevant for today’s analysis. You can read the whole story here.
Today, Gaia Inc. is a subscription based streaming service offering videos on yoga and spirituality, pseudoscience and conspiracy theory, health care and well being. It has 550.000 subscribers across 185 countries and 8000+ titles.
The company divides its content into 4 different channels:
- Yoga: The original channel dedicated to Yoga and meditation videos.
- Transformation: Spiritual growth; Personal development; Expanded consciousness.
- Seeking Truth: Ancient origins; Secrets and cover ups; etc.
- Alternative Healing: The new channel dedicated to Food and nutrition; Energy healing; Longevity and Wellness.
2.2. LARGEST SHAREHOLDERS
Jirka is the largest shareholder. He’s got 38% of the company through the ownership of all Class B stocks and around 377.000 Class A stocks, giving him 82% of the voting rights.
He is quite the character. He came to the US in 1984, not speaking a word of english and he successfully founded and sold the natural food company Crystal Market, which later became Wild Oats which later was sold to Whole Foods as well as Corporate Express which he sold to Staples. You can read more about his story here.
2.3. MANAGEMENT TEAM
Jirka is the founder and CEO, a combination that I really like. This way, small shareholders can be more certain that their interests are being protected by management.
3. HISTORICAL CONTEXT
3.1. LONG TERM CHART
The stock price has had some wild swings along its history. The 91% drop in 2008 is one of the biggest drops I’ve seen. I’m super curious to know what was the cause for it.
Recently, after a 4x hike, we’re seeing another big drop starting in the middle of 2018 throwing the stock price from $21,75 down to the current $8,70. A 60% plunge!?!
3.2. MARKET CAP AND SHARES OUTSTANDING
Like the share price, the market cap too took a big dive back in 2008. The company is now priced by the market at $156M, so finally I’m not analysing large cap companies anymore.
The company bought a lot of shares in 2017 after selling their Yoga apparel business for $167M, and in 2018, when the share price was at a decade high, the company issued more stock to fund their growth. That tells me that the CEO is a good capital allocator.
3.3. SALES - OPERATING INCOME - OPERATING MARGIN
We can now understand the stock price plunge in 2008. The company had tremendous losses. I went to the 2008 annual report and they attribute this loss to an impairment of Goodwill and Intangible assets related to prior acquisitions.
In fact, until 2015, when they spun off the apparel business, Gaia was a whole different company, so we should be concentrated now on the numbers going forward from 2015 to the present day. Sales have been growing at a 48% CAGR for the last 3 years.
As we can see, this is still a non-profitable company. What they are doing here is spending lots of cash in order to grow the number of subscribers, more less like Netflix or Amazon did.
3.4. GROSS MARGIN
The company has been able to grow the gross margin in each of the last 3 years.
Gross margin in 2018 has reached 87%.
Netflix’s gross margin is 35%, World Wrestling Entertainment is 37%, so we can easily say that Gaia can produce content at a much lower cost than its comparables. In fact, Gaia produces its own content at $10K per hour while Netflix spends over $10M per hour.
The fact that the company has its own studio definitely contributes to having lower production costs than the competition.
3.5. SALES BY GEOGRAPHY
The USA represents 78% of total sales. I think we will slowly start to see the other countries gaining weight because Gaia is expanding into other languages.
3.6. NET INCOME, NET MARGIN
The first thing that pops to my eye when looking at the net income figures is that $87M spike back in 2016. This is related to the sale of the GaiaM yoga apparel business.
In 2018 the company reported net losses of -$34M.
3.7. NUMBER OF SUBSCRIBERS
As it would be expected, the number of subscribers has been growing by an average of 65% a year.
3.8. SEASONALITY
There is no relevant seasonality to sales, but there are quarterly variations in customer acquisition efforts, October through March being the ones when management spends the most dollars.
3.9. DIVIDENDS
I’m happy to say that Gaia is spending their money on growing their business instead of giving it away to the shareholders.
3.10. PROFITABILITY RATIOS
This time there are no profitability ratios because the company isn’t profitable yet.
3.11. FINANCIAL RATIOS
Heheyy!!! Gaia has no debt. This is something I like to see in a microcap, especially one that is growing this rapidly. They’ve got $30M in the bank.
We can see that the proceeds from the spin off temporarily improved Gaia’s current ratio in 2016 but as the time goes by, management is using that cash to grow the subscriber count and the current ratio is coming back down again to more “normal” levels.
3.12. PRICE RATIOS
As price to earnings ratio doesn’t make sense in a non profitable company, let’s look at the price-to-sales ratio.
The price to sales ratio is coming down from unreal levels since the sale of Gaiam. The 2019 Price-to-Sales ratio is at 2,8 right now.
Just so we have a means of comparison, Netflix forward P/S ratio is 7,7 right now and World Wrestling Entertainment forward P/S is 6,2.
4. GAINING PERSPECTIVE
4.1. INDUSTRY AND STRATEGY
Gaia’s business model is one of my favourites. Subscription based services are asset light, highly scalable and have high degrees of operating leverage which means that once they have enough subscribers to pay for their costs, every new dollar that comes in, goes straight to the bottom line (which is just financial jargon for net income).
Gaia doesn’t have to produce another can of soda or buy any more raw material to be able to sell their product to those new subscribers. They have little to no marginal costs.
Like Netflix and other businesses with high operating leverage and low marginal costs, Gaia’s strategy is to pursue growth before profitability. That’s why they are investing heavily on content and marketing.
Because they have their own recording studio at their headquarters in Colorado, they can produce their own content at low costs compared to their competitors.
They‘ve also introduced a $299 premium annual subscription which gives access to the live events they will be holding on the new venue they are building on their Campus.
To me, the hardcore Gaia community seems somewhat like a cult or a religion, which I think it’s great for the shareholders. Religions are very sticky and now subscribers can even meet their favourite hosts.
4.2. RISKS AND COMPETITION
The competition here is obvious. It’s Netflix, Youtube, Amazon, etc.
Although these big boys could just wipe Gaia out of the face of the Earth, popular opinion says that they are not worried about such a small piece of the pie, so these smaller players can come and eat it too.
In my opinion, sooner or later, there are two ways this story can unfold. Or they kill Gaia or they buy it.
I usually talk about risks for the company and not the stock, although they are correlated (mostly in one direction) but since we are talking about a microcap with some degree of institutional ownership, if something doesn’t go according to plan, these institutions will be the first to get out of this stock.
This can lead to a massive sell off and consequential plunge of the stock price like the one we’ve been witnessing recently.
4.3. TYPE OF PLAY
Gaia is definitely a growth company.
5. OVERVIEW AND CONCLUSION
5.1. OVERVIEW
As in most microcaps, Gaia’s share price can be highly volatile on good and bad news (don’t mix share price volatility with risk). The stock’s success depends on whether reality follows the story investors are telling themselves or not, and management execution plays a big role there.
My problem with Gaia’s management is that after being able to meet their own goals like clockwork for so long, in recent quarters they’ve lowered their guidance and that’s why we’ve been witnessing this drop in the share price.
Just recently, on the shareholder’s conference call, Jyrka the CEO said they are adjusting their strategy and they don’t want to grow that fast anymore. Their plan was to reach 1,6M subscribers by 2020 and then pull back on the marketing efforts and grow at 20%-30% while reaching profitability simultaneously.
They are now saying they want to grow revenue at 30% (not subscribers) for 2019 and 2020 in order to preserve balance sheet strength!!!
It doesn’t seem that bad of a strategy to me, but I can’t understand the sudden change and management hasn’t been able to explain it clearly.
As I was saying in the beginning of this analysis, this is a bet on the jockey rather than on the horse. You’ve got to be pretty confident Jirka knows what he is doing and trust him to lead this company.
It is not that I don’t believe Gaia can be a multibagger. It’s just that things are blurry now. I’ll be looking at this one closely and I’ll come back to it soon.
5.2. CONCLUSION
This section will be available to paying subscribers in 2019 when we launch the Portfolios. If you’d like to get early-bird conditions, please send us an e-mail.
Don’t forget to check our other analyses. If you want more, join us at our new Facebook group.
6. DISCLAIMER
The material contained on this web-page is intended for informational purposes only and is neither an offer nor a recommendation to buy or sell any security. We disclaim any liability for loss, damage, cost or other expense which you might incur as a result of any information provided on this website. Always consult with a registered investment advisor or licensed stockbroker before investing. Please read All in Stock full Disclaimer.