Following a review of FAB’s Libsyn subscriber numbers and Netflix’s (NASDAQ – NFLX) subscriber growth and valuation methodology we believe that a case can be made that FAB’s Libsyn division could be worth $150M or more.
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Ridiculously Overlooked and Undervalued Subscriber Base
In our initiation of coverage report, released on March 25, 2013, we focused on the underlying value of FAB’s shares based upon projected net income derived primarily through its China-based operations. However, following events of the past week, we believe that we may have overlooked or grossly undervalued the potential value of its Digital Media Services Business (podcasting), known as Libsyn.
For example, the trend in digital content distribution is shifting from an advertiser-supported model to a mix of “freemium” (mix of free and paid) model to a fully paid subscription model. Those firms with a paid subscription model typically carry much higher valuations than those that utilize an advertiser-supported model.
For example, Netflix (NASDAQ – NFLX) just announced its most recent quarterly results to great fanfare. The Company now boasts 29M subscribers to its $7.99/month streaming video service. At current levels, the stock trades at a market cap exceeding $12 billion. If one were to value the stock based on the number of subscribers, the value of each subscriber is well over $400 per subscriber, or over 4x annual revenue generated per subscriber.
In the case of Sirius XM (NASDAQ – SIRI), the stock trades with a market cap of over $20B, and the Company has over 23M paying subscribers, which translates into a value of $900 per subscriber, or over 4x average subscriber revenue.
We believe that based on trends in the space, Libsyn could choose to introduce a paid subscription option especially as more and more users stream rather than download podcasts. A quick back of the envelope forecast could look like this in the not so distant future:
Libsyn: 30M subscribers: 10% opt in = 3M paid subscribers
A few important points must be noted here. First, we are not saying that FAB’s Libsyn business is the same as Netflix or Sirius. We recognize that to a degree we are comparing apples and oranges. However, considering that in all 3 cases, we are talking about the distribution of digital content via paid subscription, all 3 are still fruits. Netflix deserves a very high valuation due to its leadership status, hyper-growth, profitability, and (now) its original programming. Sirius is a de facto standard in its space as well. We should also note that while paid digital content subscription rates for most companies seem to top out in the mid-$30M range, Libsyn could exceed that figure due to its wide reach abroad. Finally, as noted above, our assumption uses a 50% haircut to the current revenue per subscriber multiples of NFLX and SIRI and assumes only 10% opt in for a paid subscription service at a very low (merely suggested) annual rate.
With all of this in mind, we believe that there is real, hidden value in the FAB/Libsyn podcast subscription unit which, when monetized, could be afforded a substantial valuation. In the interim, the credibility that the projected 1Q13 net income generation will provide FAB’s shares cannot be discounted, as in our opinion, many investors seem to have taken a wait-and-see or I’m from Missouri attitude.
As a result, despite the EPS outlook and $5M per quarter in recent and projected cash generation, FAB trades only 4.3x our FY13E EPS estimate. We believe that even with a discount that is typically associated with stocks whose primary businesses are abroad, the stock is too cheap. With 20% projected net margins and an increasingly dominant share of the market, an argument could be made that FAB should trade 15x our FY13E EPS.
However, given the “fresh” nature of the recent acquisition in China, we have elected to take a more conservative stance and project that a 33% discount for its foreign operations could be assessed this year. If FAB is afforded at least a 10x multiple on FY13E EPS by year-end, the stock would reach our $9.00 price objective. Given the huge profitability and leading market status, we rate these shares Strong Buy.
Goldman Small Cap Research Ratings and Risk Profile Definitions:
Strong Buy (1) The expectation that the stock will exceed stock market performance, with below average equity market risk.
Recent Trading History For FU
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Analyst: Robert Goldman
Rob Goldman has over 20 years of investment and company research experience as a senior research analyst and as a portfolio and mutual fund manager. During his tenure as a sell side analyst, Rob was a senior member of Piper Jaffray's Technology and Communications teams. Prior to joining Piper, Rob led Josephthal & Co.'s Washington-based Emerging Growth Research Group. In addition to his sell-side experience Rob served as Chief Investment Officer of a boutique investment management firm and Blue and White Investment Management, where he managed Small Cap Growth portfolios and The Blue and White Fund.
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