Gaia (GAIA) has been a battleground stock on SA. For now, the shorts seem to have won, with the price hovering near 52-week lows.
However, we believe this decline is a temporary event in which growth-oriented investors transition towards value investors as Gaia shifts towards profitable growth. We believe Gaia should be able to grow while generating significant net income in the next few years, which should unlock tremendous upside for the stock and temper bankruptcy fears.
What is Gaia
According to its 10K, Gaia operates a global digital video subscription service and online community that caters to a unique and underserved subscriber base. Its digital content library includes approximately 8,000 English language titles as well as a growing selection of titles available in French, German, and Spanish. Subscribers have unlimited access to this vast library of inspiring films, cutting edge documentaries, interviews, yoga classes, transformation-related content, and more – 85% of which is exclusive.
Gaia has an attractive business model with 87% gross margins from recurring subscription revenues. Customers are extremely satisfied with Gaia’s service, with Gaia scoring 4.6 stars on Trustpilot and 4.8 stars on the app store.
Gaia has two short-term targets. The first is to reach EBITDA profitability in September, and the second is to reach FCF and net income profitability in Q2 next year. Gaia aims to complete both of these goals while growing at 30%.
Reaching any of these two goals will increase the credibility of management, but reaching the second goal specifically will also help to show that Gaia will no longer need outside capital going forward, which should prove a major catalyst. Of course, it is important to grow revenues as well at 30% while completing these two goals.
We have done the basic math and believe Gaia is capable of hitting both its targets without exhausting its cash. Our projections show that, even in a worst case scenario, Gaia will only spend $12mil at most out of its $17mil cash hoard. In fact, another contributor showed that there would be $7.8mil in cash left by the time Gaia hit net income profitability, but, for unknown reasons, mentioned that this doesn’t leave much room for error.
We believe that if Gaia hits its two goals while growing revenues, investors will be forced to acknowledge that the company is capable of growing quickly while being profitable, thus giving it a higher valuation. It’s worthwhile to note that Gaia also aimed for profitability in 2015 and ultimately hit it.
Why this opportunity exists
Gaia is an extremely controversial stock due to the fact its content is targeted towards a niche audience, which means most people can’t relate to it, and due to the massive losses it has generated over the past few years to grow its subscriber base.
To us, it seems foolish to short a stock because the company doesn’t offer a product you like. Although not everyone likes watching conspiracy theories, there is clearly a market for this content, and we don’t see anything wrong with tapping into this market.
There are also some who claim that competition from free programming on YouTube will eat into Gaia’s market. However, we believe this risk is overstated. It is incredibly hard to find high quality content on YouTube and searching for high quality content is very time consuming. While there will be some cheap individuals who won’t be willing to pay for Gaia’s service, reviews we’ve read show that most people are willing to pay up to get access to Gaia’s library. As one review reads:
I use to struggle to find high quality programming around the topics of wellness, holistic health and consciousness on the internet. I’d have to venture on youtube and search for hours to find valuable information. Not anymore. This is an incredible hub for knowledge and a never ending source of content for personal development.
Short sellers also criticize Gaia for losing money to grow subscribers and believe that subscribers will leave when Gaia stops spending money on customer acquisition costs. We think this fear is unfounded as LTV is on average going up, which means lower value customers are being replaced with higher value customers, which means that the churn rate for new customers should decline going forward. Churn should also slow as the base of mature subscribers continues to increase.
As an example, let’s say Gaia acquires a subscriber for $80 that has an LTV of $240, or an LTV:CPA ratio of 3:1. Gaia will spend $80 in SGA to acquire this subscriber in the first year, yet will only get $80 in revenue in this time, representing a margin of $0. In the second year, however, Gaia only needs to spend a little on content to retain the subscriber (the economics are probably more complex, but this should be a rough idea of what happens). This shows that subscriber economics improve dramatically in the long term. As Gaia’s base of long-term subscribers increases, profitability should similarly improve.
Even though it is growing at over 30% and is an asset-light tech company, Gaia currently trades at just 2.1x TTM sales. This is really low for a fast growing streaming platform. Netflix (NASDAQ:NFLX), for example, trades at 7x TTM sales. There is honestly no reason for this disparity to exist. Yes, Netflix is profitable, but Gaia is fast heading to profitability too. Gaia is also superior to Netflix in many ways – it has more control over its content and has higher gross margins, for example.
What makes this disparity worse is that Gaia has a $10mil investment in an undisclosed company and a $30mil headquarters, so the real P/S, once you net out these items, is slightly higher than 1x. Upside is increased by the fact that Gaia has around $90mil in total NOL carryforwards, so when it actually reaches profitability, most of the earnings should flow to the bottom line.
It does help that multiple insiders have bought a significant number of shares over the past few months. Most notably, Jirka Rysavy, bought over 100,000 shares above $7, noting that he “believes that the stock is undervalued” in his filings. From our experience, insider buying has led to a significant increase in the stock price more often than not, even for money losing companies.
Overall, Gaia has an asset-light business model that is quickly scaling to profitability, yet has a bargain valuation compared to peers. Insiders are buying into the company, and we believe the short thesis is more based on emotion than fundamentals.
Disclosure: I am/we are long GAIA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.