Author Topic: GAIA - Gaiam Inc.  (Read 28829 times)

Sergio8

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Re: GAIA - Gaiam Inc.
« Reply #140 on: August 11, 2017, 06:39:41 PM »
There are definitely some really exciting things going on there, with a great story and a good storyteller with a track record of being a good CEO for developing start-ups.
But I feel we have to be careful, at the very leat for the following reasons: Do we really know if the expenses are below estimates? Management tells us they are, but we do not actually know their estimates (we only have have ours). Based on elementary math, we can say that the costs of acquiring subscribers rose this quarter, although the CFO refused to give them on the call.

We always have to be careful when management gives numbers we cannot verify. Another example: I was not able to confirm that their sponsored video really had 60 000 000 views. Another one: they tell their breakeven is at 123 000 subs. I believe this is not true any longer, as SG&A ex acquisition costs rose significantly.

So all these things may lead to some caution.

Last (and very important for value investors I guess), the company was trading below any reasonable estimate of net asset value (incl. subscribers at 250$ per sub). Today, even if we believe that the value of subscribers is going to expand (which is optimistic) to say 300 $ per sub, Gaia trades above its net asset value. So their plan has to work at these levels of valuation if we want this investment to be really attractive (which does not mean the story is not attractive, but there is no more margin for errors at this price).

My point is not to say that Gaia is not an attractive investment (I still own a small long position). It is certainly a nice story, with a good jockey. I just would like to point out that at these price levels, it is not outrageaously cheap. They have to be able to keep their acquisition costs low enough and improve the lifetimevalue of their customers if they want their NAV to grow significantly over time and justify a much higher stock price. And perhaps they will do it.

But it is never easy to make such bold predictions (is it even possible?). For example, how can one reasonably predict the future behavior of Gaia subscribers? If no one can, how can we easily accept that the newly acquired subs will stay longer than the previous ones? And how will our investment fare if the contrary happens?...
« Last Edit: August 11, 2017, 06:43:16 PM by Sergio8 »


SnarkyPuppy

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Re: GAIA - Gaiam Inc.
« Reply #141 on: August 12, 2017, 08:12:25 AM »
There are definitely some really exciting things going on there, with a great story and a good storyteller with a track record of being a good CEO for developing start-ups.
But I feel we have to be careful, at the very leat for the following reasons: Do we really know if the expenses are below estimates? Management tells us they are, but we do not actually know their estimates (we only have have ours). Based on elementary math, we can say that the costs of acquiring subscribers rose this quarter, although the CFO refused to give them on the call.

We always have to be careful when management gives numbers we cannot verify. Another example: I was not able to confirm that their sponsored video really had 60 000 000 views. Another one: they tell their breakeven is at 123 000 subs. I believe this is not true any longer, as SG&A ex acquisition costs rose significantly.

So all these things may lead to some caution.

Last (and very important for value investors I guess), the company was trading below any reasonable estimate of net asset value (incl. subscribers at 250$ per sub). Today, even if we believe that the value of subscribers is going to expand (which is optimistic) to say 300 $ per sub, Gaia trades above its net asset value. So their plan has to work at these levels of valuation if we want this investment to be really attractive (which does not mean the story is not attractive, but there is no more margin for errors at this price).

My point is not to say that Gaia is not an attractive investment (I still own a small long position). It is certainly a nice story, with a good jockey. I just would like to point out that at these price levels, it is not outrageaously cheap. They have to be able to keep their acquisition costs low enough and improve the lifetimevalue of their customers if they want their NAV to grow significantly over time and justify a much higher stock price. And perhaps they will do it.

But it is never easy to make such bold predictions (is it even possible?). For example, how can one reasonably predict the future behavior of Gaia subscribers? If no one can, how can we easily accept that the newly acquired subs will stay longer than the previous ones? And how will our investment fare if the contrary happens?...

Great post.   

Initially when we were all looking at this ($6 range), the downside/upside scenarios were very asymmetric which led to a great investment.   We would all do very well buying 6-8 companies with that type of asymmetry, holding until they reach a more balanced +/- expected value, and then switching to other asymmetric positions.  The difficulty is continually coming across ideas to fill a portfolio with this type of asymmetry coupled with the fact that the companies who turn out to be long term compounders likely require holding onto a position when the asymmetry becomes more in-line with reality and putting more faith in continued execution+business runway+management incentives.

I think there's still some asymmetry but it's not as out-of-whack and it's more reliant on future assumptions.  Napkin calc (taking their steady-state guidance at face) indicates the following:

Downside scenario: growth stops at 12/31/2017
12/31/2017 subs = 367k   
GP (85% margin) = $35mm
EBIT (40% margin) = $14.2mm
EBIT * 8x multiple (given riskiness of future cash flows) = $114mm
Value of building = $17mm
Equity Value (assumes no cash) = $131mm
Value per share = ~$8.60 per share

Upside scenario: management hits 1.5mm sub target for end of 2021
12/31/2021 subs = 1,500k
GP (85% margin) = $150mm
EBIT (40% margin) = $60.2mm
EBIT * 8x multiple = $482mm
Value of building = $17mm
Equity Value (assumes no cash) = $499mm
Value per share = ~$32.90 per share

Obviously, the key variables are CAC/LTV + true addressable market + trust in management to make the right capital allocation decisions should costs change.    I've reduced 1/4 of my position because of share appreciation + the introduction of downside (purchase price of low $6's had serious downside protection), but I will probably wait until management gives me a reason to not trust them.   They have much more insight into the addressable market + underlying LTV/CAC than we can glean publiclly and are financially aligned.   

Sergio8

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Re: GAIA - Gaiam Inc.
« Reply #142 on: August 12, 2017, 11:50:02 AM »
My process is an old school "balance sheet based" one (probably because I still do not fully understand any other financial statement), so my assesment of the asymetry is a bit different from that perspective. But it is fun to see that our conclusions are almost identical. I share the tought process if someone is interested.

I read the Balance sheet like that:
Financial assets on the balance sheet: Cash + investments + real estate is ~ 77 M.
Off balance sheet Subscibers asset: 277800 @ 250 $ per sub ~ 70 M

So my conservative NAV appraisal comes at 144 M.

On a private market value basis, I give a credit to their content base which cost ~ 30 M to develop, so my PMV comes at 174 M.

Downside :

The downside would come if subscriber acquisition costs in the future exceed their value. We can account for that by a write off of the cash value, by say 50%, which would cut previous estimates by 17 M. NAV would be 127 M and PMV would be 157 M. I therefore believe the downside is at around 8$ per share.

Present Upside:

The upside would come if cash is invested at high IRR. We can account for that by assigning it a premium valuation of say 100 million if they make roughly 3x their money in the next 3 years (based on their losses in the next years, it would come tax free). Then, we can add 60 M to the NAV and PMV estimates.

NAV would be 204 M and PMV would be 234 M. It seems reasonable to think that it comes somewhere around 13 $ per share.

5 years view upside (with rosy glasses):

Then, they reinvest their 100 M and make it 250 M in 2 years thanks to efficiency gains. Then NAV and PMV would increase by an additional 150 M, and NAV would be 354 M and PMV 384 M (about 23$ per share).

As NAV grows quickly thanks to good reinvestment dynamics, the company would then perhaps deserve to trade at a premium to NAV, somewhere around 30$ par share would make sense.

-

So, based on those considerations, I even made Gaia my main investment at the low prices we had before, as it was priced below the downside estimate, and we were paid to benefit from the upside. Now, it is clearly not my main investment : upside could be interesting with a 5 years investment horizon, but downside is a real possibility. We would still have 5 $ of upside for each $ of downside in the very best case. But not in the other cases.
Hope it helps.
« Last Edit: August 12, 2017, 12:05:55 PM by Sergio8 »

SnarkyPuppy

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Re: GAIA - Gaiam Inc.
« Reply #143 on: August 13, 2017, 06:35:14 AM »
My process is an old school "balance sheet based" one (probably because I still do not fully understand any other financial statement), so my assesment of the asymetry is a bit different from that perspective. But it is fun to see that our conclusions are almost identical. I share the tought process if someone is interested.

I read the Balance sheet like that:
Financial assets on the balance sheet: Cash + investments + real estate is ~ 77 M.
Off balance sheet Subscibers asset: 277800 @ 250 $ per sub ~ 70 M

So my conservative NAV appraisal comes at 144 M.

On a private market value basis, I give a credit to their content base which cost ~ 30 M to develop, so my PMV comes at 174 M.

Downside :

The downside would come if subscriber acquisition costs in the future exceed their value. We can account for that by a write off of the cash value, by say 50%, which would cut previous estimates by 17 M. NAV would be 127 M and PMV would be 157 M. I therefore believe the downside is at around 8$ per share.

Present Upside:

The upside would come if cash is invested at high IRR. We can account for that by assigning it a premium valuation of say 100 million if they make roughly 3x their money in the next 3 years (based on their losses in the next years, it would come tax free). Then, we can add 60 M to the NAV and PMV estimates.

NAV would be 204 M and PMV would be 234 M. It seems reasonable to think that it comes somewhere around 13 $ per share.

5 years view upside (with rosy glasses):

Then, they reinvest their 100 M and make it 250 M in 2 years thanks to efficiency gains. Then NAV and PMV would increase by an additional 150 M, and NAV would be 354 M and PMV 384 M (about 23$ per share).

As NAV grows quickly thanks to good reinvestment dynamics, the company would then perhaps deserve to trade at a premium to NAV, somewhere around 30$ par share would make sense.

-

So, based on those considerations, I even made Gaia my main investment at the low prices we had before, as it was priced below the downside estimate, and we were paid to benefit from the upside. Now, it is clearly not my main investment : upside could be interesting with a 5 years investment horizon, but downside is a real possibility. We would still have 5 $ of upside for each $ of downside in the very best case. But not in the other cases.
Hope it helps.

What's the rationale behind $250?   Why not $200? $300? $1000?

thinkpad

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Re: GAIA - Gaiam Inc.
« Reply #144 on: August 13, 2017, 07:26:53 AM »
250$ was given by management during a previous quarter confcall.


(Happy to read your input Sergio :) i am an old'member of IF. I understand you reduced your position in gaia)
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Homestead31

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Re: GAIA - Gaiam Inc.
« Reply #145 on: August 16, 2017, 01:42:55 PM »

Value of building = $17mm

not the main pivot of the thesis, but I think your building value is real low.  A year ago management said they thought it was worth, "at least $20 million."  According to loopnet, industrial property (ie warehouse) in Boulder County is up 13.9% YoY.  Office space is up mid-high single digits.  GAIA's bulding is somewhere in the middle i believe... and I think that is conservative.  If you dig around, there are other properties with access to highway 36 that have sold at prices that imply the GAIA building would be worth north of $30M.