Posted on August 27, 2021 by Brad Steveson
Gaia, Inc. (NASDAQ: GAIA), a conscious media and community company, is quietly performing well but the market seems to be unaware, unimpressed or both. I spent some time recently digging into my model assumptions and fine tuning my forecast, reviewing the past few earnings calls again and sharing with fellow Breakout Investors for collaboration and feedback on my work. I continue to come to the same conclusion which is that GAIA is worth a lot more than it is trading for right now and that value is only going higher. I would almost be so bold as to say that the stock simply can NOT stay down at these levels for much longer. There is no way the market continues to ignore or remain unaware of the shareholder value this company is creating. Ok, yes I know anything is possible but I am trying to make a point.
What is GAIA? I think GAIA describes it best on a slide from their most recent investor presentation:
GAIA believes their addressable market is about 26m strong. This represents people who are interested in 2 or more GAIA topics and say they are willing to pay a subscription according to a Gaia Segmentation and Market Size study completed in 2018. GAIA currently has 770k subscribers, which would indicate there is still a lot of room for growth.
When I first heard about GAIA back in 2017 (hat tip Mark Gomes at Mark Gomes Research – Research Without Recommendations (wordpress.com), the company was operating deep in the red, spending between 115% and 200% of revenues on operating expenses and between 80% and 120% of revenues on customer acquisition costs funded with various financing activities along the way. In March 2019, the company reported full year 2018 results and announced it had decided to increase the target minimum ratio between a subscriber’s lifetime value and the cost to acquire them from the original target of 2:1 to 3:1. The company also announced plans to further increase this ratio to 3.5:1, transition to positive EBITDA by the end of September 2019 and maintain revenue growth of around 30% going forward. In other words, they decided to abandon the high spend for high growth approach so they could stop raising capital and achieve profitability more quickly.
The company has since scaled the revenue growth expectations back to 20% and has made good on the pledge to achieve positive and growing EBITDA every quarter since Q3 2019. In the most recent quarter ending June 2021, the company was able to achieve a 20% EBITDA margin for the first time, maintain 4.5:1 LTV/CAC ratio by spending 40% of revenue on CAC and the company spent 20% of revenue on content. The company’s plan going forward is to continue focusing on revenue growth while reducing CAC spend from 40% to 30% of revenues allowing them to allocate more to content and grow EBITDA margins going into 2022. You can see on the table below the results from the past 6 quarters and my forecast through the end of 2022, which I believe reasonably reflects those plans.
Valuation: I have calculated what the stock price would need to be going forward to maintain a similar PE or EV/EBITDA multiple that it has had over the past 4 quarters. You can see that in the table above. If my calculations are correct, the stock should be valued at $18 by end of 2021 and $29 by end of 2022. I also believe that these valuation multiples are extremely low or conservative for a recurring subscription revenue business model with no debt, great margins, and strong, sustainable, self funded growth. It would not be out of line to see a 20 EV/EBITDA multiple, which would change my valuation targets to $24 by end of 2021 and $40 by end of 2022. Either way there’s a lot of upside potential for a stock barely trading above $10 today.
Risks: In spite of any risks, I have a difficult time seeing this stock trading lower than it is now going forward if my operating model forecast proves to be correct. Therefore, I think the main risk is that I am wrong and the company performs significantly worse than I have forecast above. Below are some risks or perhaps beliefs in the market that may explain why the stock price has lagged behind it’s intrinsic value.
I haven’t seen any signs that these risks are posing a threat to the company’s performance, but these are certainly things to be aware of and continue to assess on a quarterly basis.
Wild Cards: I see two possibilities to further increase shareholder value in 2022 beyond what I show in my forecast. The company should begin to pile up more cash over the next several quarters leaving it with a few options. First, the company recently authorized a share repurchase program of up to 5,000,000 shares of its Class A common stock. With only 19.8 million shares outstanding, this program accounts for over 25% of their stock outstanding. This is one option they may deploy to put that cash to work. Another option I see is increasing CAC spend above their current plans when they see opportunities to drive additional subscriber growth with that money. Their spending approach has generally been conservative, so I would expect them to carefully evaluate opportunities before committing the resources.
Summary: Overall, I believe that the stock has significant upside potential with low downside potential making it a risk/reward darling for me. The financial performance is strong and disconnected from the share price. The risks are manageable and unlikely to affect financial performance going forward. There are additional opportunities for further upside than I have in my model. For these reasons and others, this stock is a favorite of mine.
Disclosure: I am long and may buy or sell shares at any time.
If you want to know more about GAIA, Breakout Investors has been covering this company for some time now. You can join me in my breakout room, search for the ticker GAIA and catch up on all of our research. You may also join the discussion in real time. It is free to join and the link is here: Breakout Investors