Long-time readers should note some significant changes in how I communicate in the public domain. The primary purpose of this forum is now to attract new contacts with professional industry expertise to share research and receive feedback (confirmation / refutation) regarding my investment theses.
Accordingly, this document should not be construed as an endorsement or recommendation of the companies or securities discussed herein. I am not an investment advisor and this is not an investment thesis. It is merely one part of the story, which I present for debate in hopes of determining all risks and upside potential. The disclosure at the end of this piece is critical to understanding the content of this document. Further, I frequently trade my positions and may buy, sell, or short the securities mentioned herein at any time, regardless of the facts or perceived implications of this article.
According to Steve Frankel (with whom I used to do business) at Dougherty & Co., GAIA “began to aggressively ramp its customer acquisition in the fourth quarter of 2016, with a goal of reaching 1M subs by the end of 2019. Customer acquisition costs increased from $4.5M (95% of revenue) in the fourth quarter of 2016 to $7.3M in the fourth quarter of 2017 (87% of revenue). However, increased traction with consumers and the growth of organic web traffic has enabled Subscriber Acquisition Costs (SAC) to decline from $108 (per subscriber) in Q416 to $81 in Q417.
For this, GAIA receives a lifetime value (LTV) of “roughly $150 – $180 for yoga-focused subscribers and about 2x that level for those focused on the content in Seeking Truth.”
Also, “Currently, Yoga and Transformation each account for 35% to 40% of the subscriber base with Seeking Truth representing the balance.”
So, all three areas are approaching parody. Thus, the blended LTV is likely halfway between $150-180 and $300-360… about $250. That implies that the average subscriber remains a subscriber for about 2 years ($247 divided by $10 per month), so I’ll round this number down to $238.80 (2 years at $9.95 per month).
So, GAIA is making $238.80 minus its acquisition cost of $81 per customer. That’s $168.80 of profit for each of its 400,000 subscribers (as of the end of February).
Of course, we also have to subtract its per-subscriber cost of goods (COGS) and G&A expenses – basically what they spend to support their customers.
COGS was about $11 million last year, but we have to consider that content created this year will still be useful for several years into the future. So, let’s conservatively allocate half of that cost to existing customers (so, $5.5M).
Corporate, general and administration for the past year was flat at $5.5 million. So, that’s $5.5M + $5.5M = $11 million in customer servicing costs. The average subscriber count was about 325,000 over that time frame, so the average customer currently costs GAIA about $35 per year to support.
So, they spend about $70 (and falling as they grow, thanks to their economies of scale) to service a customer over the course of their 2 year average life. This nets them a pre-tax profit of $168.80 – $70 = $98.80.
That’s a very nice ROI on their $81 investment… 131% annualized (see below).
Strong LTV vs. CAC — the true litmus test of an incredibly successful subscription business.
So, why has the company been showing a loss?
Simple. VERY simply, in fact…
Since they’re making so much profit on each customer (as shown above), GAIA continues to pour more and more money into marketing. As it says in their 10K, “Selling and operating expenses increased $19.0 million, or 76.0%, to $44.0 million during 2017”.
Their net loss was $23 million, so we can envision what would have happened if they didn’t invest that $44 million into marketing.
However, we want them to invest (in fact, more) into marketing (until the ROI becomes unattractive). If you offered me predictable $116 profit on an $81 investment, I’d be all in… and this is exactly why GAIA is increasing marketing and raising money (presumably to invest more). They should keep cranking up the marketing expenditures, until they are only making less than their weighted average cost of capital.
Their WACC is well below 15%, but I used 15% to calculate their maximum prudent CAC (in order to have some breathing room). I came up with $147.18, nearly double the current levels.
Of course, this is all quick, back-of-the-napkin math… but it’s close enough. Feel free to chime in if you feel inclined to refine this. Either way, it’s indisputable that this is the reason why GAIA was able to do a round of funding some 20% above where the stock was the month before… and immediately traded higher, not lower.
How does this compare to MoviePass?
We can jump right to the punch line, because anyone invested in HMNY knows how its rounds of funding have gone: down before the round, weak deal terms, and a sharply falling stock thereafter.
As for the CAC calculation, this is more of a challenge. MoviePass has a two-phased end game. How much they make or lose per customer now is vastly different than how much they’ll make or lose when/if they gain the critical mass needed to truly influence a meaningful percentage of market participants. So, for now, investors are being asked to accept big losses for the promise of big profits later.
Interestingly, we do know that both services charge a similar fee. GAIA charges $9.95 per month or $7.95 per month via an annual subscription. MoviePass charges around $7.50 on the annual plan after accounting for its processing fee (GAIA doesn’t charge a processing fee).
From a customer acquisition perspective, the key difference between GAIA and HMNY is that GAIA spends about $3 to service/support each subscriber per month after spending the initial $81 to obtain them. $1.50 of it is spent on content (the rest is spent on supporting the customer — delivering content, customer support, and internal accounting, etc.).
In contrast, HMNY’s content resides at the cinemas and they pay full price on most of the tickets for their customers to go (currently an average of about $11 a pop).
Of course, HMNY plans to close that $9.50 difference over time by gaining more influence over the studios, cinemas, etc. However, in the meantime, they are footing significant upfront expense in hopes of reaching that next level.
To understand HMNY’s metrics better, I recommend (again) reading “MoviePass. Premature Scaling?”. If you don’t understand the concepts discussed there, you cannot possibly understand HMNY’s situation… and this is the difference between professional investors, who have shied away from HMNY and retail investors who continue to argue in its favor.
The simple fact is that the metrics are not conducive to attracting institutional investment. Otherwise, perhaps Mark Cuban would have made an investment in MoviePass as part of his theaters’ agreement with them this week. Instead, investors quickly faded yesterday’s move and drove the stock even further down on Wednesday. Without institutional support, HMNY simply won’t be able to raise the funding necessary to make it to that magical “next level”.
I’ve said it before – many things are possible if you have enough capital to build the scale… but very few companies can attract the required level of capital. This is where MoviePass is struggling and I don’t see a remedy in sight.
The biggest problem is that the business model has not been showing the progress that we were promised. In fact, each month seems to bring a new hit to the long-term thesis. First, they said that $9.95 was ideal. Then, they lowered prices. First, they said that utilization would drop quickly. Then, it didn’t / hasn’t. First, they knew everything about us (many of us knew otherwise). Then, they were forced to retract.
Because of all this, their CAC has risen, their loss-leading subscription business has proven more “loss” than “leading”, their “Night At The Movies” vision has been killed, big (or even medium-sized) theaters aren’t signing up, big studios aren’t paying for more than cheap advertising, and forget about the credit card idea because Amazon and others are upping their game for a higher-level purpose — to gain access to our purchasing data.
High CAC, low LTV, and an eroding vision. Not good.
However, for some retail investors, the old saying remains apt: “Hope Dies Last”.
Unfortunately, time is running short. The summer movie gauntlet is around the corner. Meanwhile, Howard Lindzon said it best when he astutely observed that “rising rates matter for ‘growth’ stocks with no path to profitability”.
These factors will likely serve as the ultimate litmus test of how MoviePass gets funded with HMNY shares sitting at these levels.
To get my posts in real-time, just subscribe to this free blog. If you don’t want to get all of my posts via email, just sign up for my MailChimp mailing list instead. For that list, I only send key articles and occasional recaps of all the work I’ve recently done.
Disclosures / Disclaimers: I am long GAIA. However, this is not a solicitation to buy, sell, or otherwise transact any stock or its derivatives. Nor should it be construed as an endorsement of any particular investment or opinion of the stock’s current or future price. To be clear, I do not encourage or recommend for anyone to follow my lead on this or any other stocks, since I may enter, exit, or reverse a position at any time without notice, regardless of the facts or perceived implications of this article.
I am not a financial advisor. Nor am I providing any recommendations, price targets, or opinions about valuation regarding the companies discussed herein. Any disclosures regarding my holdings are true as of the time this article is written, but subject change without notice. I frequently trade my positions, often on an intraday basis. Thus, it is possible that I might be buying and/or selling the securities mentioned herein and/or its derivative at any time, regardless of (and possibly contrary to) the content of this article.
I undertake no responsibility to update my disclosures and they may therefore be inaccurate thereafter. Likewise, any opinions are as of the date of publication, and are subject to change without notice and may not be updated. I believe that the sources of information I use are accurate but there can be no assurance that they are. All investments carry the risk of loss and the securities mentioned herein may entail a high level of risk. Investors considering an investment should perform their own research and consult with a qualified investment professional.
I wrote this article myself, and it expresses my own opinions. I am receiving no compensation for it, nor do I have a business relationship with any company whose stock is mentioned in this article. The information in this article is for informational purposes only and should not be regarded as investment advice or as a recommendation regarding any particular security or course of action.
The primary purpose of this blog/forum is to attract new contacts with professional industry expertise to share research and receive feedback (confirmation / refutation) regarding my investment theses.