Abstract:
Curiosity Stream is a speciality SVOD (Subscription Video on Demand) that specialises in factual content material. Suppose “Netflix for documentaries.”.
The market cap of Curiosity Stream is 64M. Nonetheless, it has ~66M in web present property. Priced to go bankrupt however is very unlikely to go bankrupt.
It has additional upside potential on account of its distinctive enterprise mannequin and moats.
Steadiness Sheet Evaluation
I’m beginning with a Steadiness Sheet Evaluation first as the present valuation could be justified simply with the stability sheet:
66M in web “money”
Curiosity Stream has 91.84M {dollars} in present property and 25.65 in present liabilities. This excludes unearned income legal responsibility as it is a non-cash account – CURI “owes” its clients 22M price of content material, and it providers this legal responsibility just by persevering with to function the service. This implies they’ve 66.19 in web present property.
8M in useful fairness
As of Jun 2022, Curiosity owns 8M of inventory in a personal start-up known as Nebula. Curiosity additionally has the choice to purchase as much as 25% of Nebula (Valuing Nebula at 50M in 2021). About Nebula: Nebula is a creator-owned streaming web site with greater than 500k subscribers (reported 2021). The highest YouTubers are on Nebula, with a cumulative attain of 200M subscribers. On Nebula, you get to observe movies out of your favorite YouTubers first, with further content material and unique content material solely discovered on Nebula. This is a superb worth proposition from the shopper aspect. Nebula is already worthwhile, based on the CEO. With rising paid subscribers, Nebula’s worth has most probably elevated in 2022, which isn’t mirrored on the stability sheet. Nebula’s Youtubers have a mixed attain of 200m and are enthusiastic about factual content material. Netflix, for instance, has about 200m+ subscribers. CuriousityStream is the one outsider investor, and even VCs can’t get an allocation. Curiosity Stream solely managed to get an allocation because it has labored along with Nebula for a number of years, constructing the connection; To place merely, this implies the inventory is treasured. Most significantly for CURI, due to this partnership – you might have high YouTubers consistently advertising Curiosity Stream and Nebula Bundle. CURI has an easy strategy to develop its subscribers.
78M in content material property
As of Jun 30, 2022, CURI has 78M in content material property, valued at price. Administration believes it’s price 5x as a lot (390M). Often, I might ignore intangible property as it’s laborious to worth; nevertheless, within the streaming wars, content material is treasured to outstanding gamers corresponding to Netflix, Apple, Disney & Amazon (who routinely spend 100m for a single title). I see a situation the place CURI can higher monetise these libraries by licensing them out or outright promoting them at price. They do at the moment license their content material out already. CURI can generate 71M in income in 2021, and LTM – 85.96M, so their means to monetize their library appears to be enhancing rapidly.
Selective E book Worth calculation
Choosing for probably the most tangible property, excluding all the pieces else (different intangibles, PPE, and many others.). Ends in 152M of E book Worth
66M in web present property (this already covers the market cap)
8M funding in Nebula
78M within the content material library.
With no debt, the present market cap of round 64M implies no less than of 100% acquire simply by the ebook worth.
Will CURI go bankrupt?
On condition that the CURI market cap is valued at lower than its present property, the market implies that the CURI sum of future money flows will likely be barely destructive. i.e. it can go bankrupt.
Will CURI go bankrupt?
In my view, no, and I’ve three causes.
Motive 1: Enhancing FCF
Firstly, the administration has guided optimistic money circulation in 2023. Ought to we imagine them? Trying on the Cashflow Assertion, we will see that the free money circulation margin has steadily improved from -300% to only -26% final quarter. CURI is on the verge of manufacturing optimistic money circulation; if that occurs in 2023, there may be 0 likelihood of chapter.
Motive 2: Administration
Secondly, the Chairman of CURI, who owns 40% of CURI, is John Hendricks – the founding father of Discovery Channel. He has a web price of 800m, along with his actual property portfolio price 280M by itself. Let’s assume CURI someway does run out of money. If Hendricks needed to, he might purchase out the entire firm with 1/10 of his web price. Certainly, he doesn’t have to take such drastic motion; he can inject a small amount of money into the corporate to tide it over laborious instances if extra capital is genuinely required. That is his ardour undertaking anyway; he left Discovery as a result of he disliked that it made extra actuality TV exhibits fairly than factual content material.
Motive 3: Unit Economics
Thirdly, the distinctive factor in regards to the SVOD business is there may be little to no marginal price to serve media. If it comes right down to it, administration can lower promoting, lay off workers aside from the technical stuff, and simply let the servers stream movies. This can be a structurally worthwhile firm. Administration is attempting to develop its strategy to profitability. Nonetheless, they will rapidly scale back prices as effectively to succeed in there.
Potential Threat and why is it so low-cost?
Each now and again, the market gives a free lunch, and this seems to be one. If we will clarify why we’ve the free lunch, we will construct conviction within the funding.
Bear Argument associated to the corporate
The first bear argument is that the corporate is unprofitable and can stay unprofitable. This implies it can go bankrupt or doubtlessly want a capital elevate.
Nonetheless, the rationale why CURI is unprofitable is that the corporate was in development mode. Since 2022, administration has been dedicated to reaching optimistic money circulation by 2023; consequently, the working loss has decreased considerably in Q1 and Q2 2022.
Upon additional evaluation, the working loss is primarily pushed by the amortization of their content material property, which is a non-cash expense. From CURI, 2021 10k:
Firm amortizes content material property on an accelerated foundation within the preliminary two months after a title is printed on the Firm’s platform, because the Firm has noticed and expects extra upfront viewing of content material, typically on account of extra advertising efforts. Moreover, the amortization of authentic content material is extra accelerated than that of licensed content material. We evaluation components that influence the amortization of the content material property frequently and the estimates associated to those components require appreciable administration judgment. The Firm continues to evaluation components impacting the amortization of content material property on an ongoing foundation and also will document amortization on an accelerated foundation when there may be extra upfront use of a title, for example on account of vital program gross sales
They’ve a fiduciary obligation to estimate how a lot their content material “worth” has lowered every quarter. There may be undoubtedly a shelf life to a bit of content material; information or sports activities, for instance, have a particularly brief lifespan. Nonetheless, documentaries have an extended shelf life, as info do not change. Additionally, this accounting is difficult, because the precise video content material has not “degraded” in high quality, not like equipment or tangible property. The incremental buyer can watch the video on the similar high quality. As an investor, you’ll be able to imagine they’re being conservative, correct or liberal with their estimations; I feel that the easiest way is to keep away from the earnings assertion completely and have a look at the money.
Trying on the money circulation assertion, you’ll be able to see that FCF stays roughly fixed. Alternatively, income is growing quickly. Due to this fact, the FCF margins are enhancing to a big extent. Curiosity stream is as a substitute on the verge of FCF profitability.
Bear Argument associated to technical causes
Lack of momentum. CuriosityStream is “uninvestable” within the present market. It’s a development, Tech, Unprofitable, Micro Cap, COVID, Streaming inventory. In 2022, these aren’t the traits you need. This explains why the market hates CURI.
Microcaps are identified to be illiquid and extremely dangerous.
Rebuttal: Momentum can change when the financial sentiment modifications or extra protection. Previous worth efficiency doesn’t point out future efficiency. Microcaps are additionally the place you’ll be able to doubtlessly get probably the most positive factors.
Bear Argument associated to the product
“Documentaries are undifferentiated & simple to repeat by main SVODs like Netflix”.
Rebuttal: Documentaries are simpler to make and fewer differentiated than huge flashy blockbusters. Nonetheless, this does not imply CURI will fail. I argue that focusing ONLY on factual content material is the promoting level; lowering the varieties of content material is a function, not a bug. There exist area of interest audiences that do take pleasure in documentaries, mother and father who need to purchase this for youngsters, and employers buying this for his or her workers…these folks want to purchase a pure-play documentary service.The true competitors for CURI, I imagine, is towards different pureplay factual SVODs like Kanopy, Wonderium, MagellanTV, and HistoryVault. My thesis is that CURI at the moment has escape velocity and is one probably the most outstanding participant within the pureplay factual SVOD market – they win by being first, extra in depth and sooner.
2) I can discover documentaries on youtube free of charge.
Rebuttal: The free Youtube documentaries argument does not maintain, because the documentaries discovered on CURI are premium long-form documentaries. All SVODs are typically attempting to provide premium content material; if the youtube argument was legitimate, then we might all be unsubscribing to Netflix and watching free net dramas on youtube. Secondly, CURI is making FAST (Free Advert-Assist Streaming TV) channels which might be free and ad-supported. On a aspect note- associated to the youtube argument – CURI is leveraging its partnership with Nebula to market these actual free Youtube factual content material.
3) CURI documentaries suck.
From my private expertise utilizing the product, it’s a blended bag. I would agree that some content material is fairly unhealthy, however even Netflix or Disney have duds of their libraries. Nonetheless, there are additionally actual gems just like the Titans of Wall Road and purchased content material from the BBC. Over the long run, I imagine with extra capital, economies of scale, information and experience, CURI will be capable of produce and purchase higher-quality documentaries.
Okay, it is low-cost, so what?
At this level within the article, the present valuation can already be justified with the stability sheet and has gone by way of the danger and bear arguments with out discussing the operational enterprise & earnings assertion, which cowl the draw back. Nonetheless, additional analysing the enterprise case – CURI does have some good qualities that enable us to hypothesize that CURI is perhaps enterprise.
Excessive Income Development
Streaming is consuming into Broadcast and Cable. Infact, Streaming overtook Broadcast and Cable for the primary time
Inside Streaming – the rise of bundling & MVPDs like Roku, Amazon, and Youtube TV – CURI is a simple, inoffensive and low-cost value-adding praise for folks’s different SVODs or non-video providers.
Excessive Gross Margin
Negligible marginal prices after the preliminary upfront price imply “Sofware-like margins” with out sky-high valuations. Superior gross margin in comparison with industries promoting tangible items.
In comparison with the opposite SVODs:
Documentaries have longer “shelf-life” – extra timeless (AKA much less content material spend)
Simple to translate and internationalize to a number of languages
Educating as a substitute of brainless content material – e.g. employers shopping for subs for workers, homeschoolers, Faculties, and fogeys shopping for for his or her kids. CURI already has a small portion of their income, however this will develop far more.
Excessive Working Margin
Pure play streaming with out the legacy networks & personnel overhead of Cable & Broadcast which might be declining. No have to keep away from cannibalising their money cows, not like Para, WBD, AMC
Moats
Why Curiosity Stream can defend earnings:
“Unattractive” moat – filmmakers, administration and Hollywood studios might even see documentaries as unattractive & uninteresting in comparison with the subsequent motion flick. The business has moved away from Factual content material to Actuality TV. Hendricks, the founding father of Curiosity, began it within the first place as a result of his earlier firm Discovery Channel started to do extra actuality TV. In order the remainder of the market more and more goes in a single course, CURI turns into extra differentiated.
Administration & Tradition. The founding father of Curiosity is the founding father of Discovery Channel – plenty of networks. Sturdy undivided self-imposed concentrate on factual content material. Associated to level 1.
Creating Model. Not a moat but, however little doubt they need Curiosity to be the most effective place to get documentaries on the Net. Within the 2000s – the cable manufacturers have been Discovery Channel, Animal Planet, and Nationwide Geographic. I feel the 2020s and past can belong to CURI.
Community Results/ Economies of scale. Extra subscribers imply CURI acquires/produces extra documentaries which in flip means extra and higher documentaries. Why subscribe to a service with much less content material? Curi is a enterprise that naturally compounds worth over time.
Differentiated buyer acquisition. Strategic partnership with Nebula. Nebula’s YouTubers have 200 million subscribers in cumulative attain; these subscribers love factual content material. Different factual SVODs do not have entry to this.
Switching Price. Persons are lazy/neglect to cancel a subscription.
A observe about moats within the Leisure Business
They are saying content material is king. Nonetheless, that is unfaithful typically, as content material manufacturing is undifferentiated. Anybody with a digicam and eye can technically make movies. Content material is a kingmaker, and content material distribution – initially cinemas, cable and broadband- is a extra secure aggressive benefit. Within the trendy age, SVODs or platforms like MVPDs are the gatekeepers which have the distribution to succeed in clients.
In conclusion, CURI has $152M in ebook worth, of which 66M is pure money, whereas its fairness is just 64M on the present market cap. Even in case you’re sceptical that CURI can ever generate severe cash, it’s already severely underpriced. It isn’t laborious to think about it can break even. Moreover, CURI market positioning is strong; there may be upside free of charge in case you imagine CURI can proceed to develop and generate vital money. Go to my web page to to learn extra evaluation or see it with footage.
Disclosure: I’m taking an extended place in CURI.Disclaimer: I’m not a monetary advisor… do your individual due diligence.
