Motley Fool ArticleI don't think this was posted on this board, good reading! Cheers
More and more, we’re seeing traditional content creators seeking ways to distribute their wares on their own terms. And the method du jour for getting their content out there has been online or over-the-top streaming.
However, for most of them, the streaming business is a bit outside their circle of competence. That’s why many (and the number is growing) have begun outsourcing this to specialized streaming-platform builders like NeuLion, Inc.(TSX:NLN).
The company continues to win business after having already delivered more than 63,000 live events on the back of 38 million downloads of NeuLion-built apps. It’s our expectation that it will continue to gain traction in this growing niche, providing long-term investors with market-beating returns along the way.
Building the platform
For investors considering a stake in NeuLion, one could liken it to how we’ve recommended investing in the energy sector—choosing to go with the picks-and-shovels and the pipeline folks instead of the producers.
You see, NeuLion doesn’t run on the costly hamster wheel of paying directors, writers, actors, illustrators, and the like to continually churn out new (and hopefully profitable) content. No, it’s in the business of getting said content from the cutting-room floor to your primary visual cortex.
It does this in a variety of ways across virtually any connected device thanks to its end-to-end digital platform solutions. In fact, it’s the only company of its kind that “owns and operates all pieces of the video workflow.”
To date, this has created a competitive advantage in that NeuLion can bring a brand new video platform to market quicker than any company we’ve come across. Just last year, it worked with the Tennis Channel and had a video network operating in just eight weeks! What’s more, after NeuLion broadcast the 2015 French Open, Tennis Channel Plus streaming subscriptions grew 400% year over year—a compelling case study if there ever was.
It’s success stories like this that keep clients, viewers, and, in turn, revenue rolling in for NeuLion. And, much like several of our recommendations, a significant portion of NeuLion’s revenue stream is of the recurring variety—around 60%. Looking forward, the percentage of recurring revenue is likely to grow over time as more and more multi-year deals are signed and subscription levels grow within individual partner platforms.
Time to market isn’t NeuLion’s only competitive advantage. Among others, we count the ability to provide streaming across a wide range of devices (iOS and Android), diverse monetization opportunities for clients, state-of-the-art viewing experiences, interactive streaming, and a highly scalable model that provides exciting operational leverage.
The roar grows louder
Now, when it comes to the future for NeuLion, growth won’t fall squarely on the shoulders of management. It will also be relying on the growth in internet adoption around the globe and increased use of smart mobile devices.
Simply put, more potential viewers equals greater revenue potential for NeuLion.
According to Benedict Evans from Andreessen Horowitz, the noted venture capital firm, global population will reach eight billion folks by 2020 with five billion (!) owning a smartphone. That’s more than double most estimates I’ve found of current smartphone penetration. These statistics are even more encouraging when you take into account that smartphones aren’t the only way viewers have been accessing NeuLion-built-and-operated platforms.
“NeuLion is the leader in delivering live 4K streaming and we are excited to partner with them to integrate NeuLion’s 4K streaming technology on our Sony 4K HDR Ultra HD televisions to ensure the very best 4K experience for consumers,” said Nick Colsey, vice president of Business Development, Sony Electronics.
Couple this proliferation of mobile device ownership with greater internet availability, and it’s fairly easy to see NeuLion’s business growing without even signing a single new content client. Just look at research from The Pew Center, where we learn that 87% of adults in “advanced economies” are considered internet users versus just 54% in “emerging/developing economies.”
On top of those massive demographic shifts, one must also take into account the viewing tendencies of the next two generations to enter the prime earning years of their lives: Millennials and Generation Z. Right now, 60% of teens in the U.S. use tablets and smartphones to access TV. Expand that around the world, and the target market continues to surge.
And, if you’re on the fence about NeuLion’s ability to grow globally, it’s already well ahead of the curve with offices in nine non-U.S. countries. International hiring is also a focal point for NeuLion, adding five new sales members this fiscal year on top of its expanded office in London.
Finally, NeuLion is also a leader when it comes to technological adaptation. Look no further than 4K-enabled televisions (ultra-high definition), where global shipments are expected to reach 330 million units by 2019. And NeuLion has a foot in the door right off of the manufacturing floor with some of the biggest consumer electronics brands in the business thanks to them embedding NeuLion’s CE SDK technology right into the TV sets.
*Fun fact: NeuLion streamed the first-ever 4K sporting event in the U.S. on a platform built for Univision (a Mexico vs Senegal soccer match held in Miami, FL). And, for UFC fans, you can catch a glimpse of NeuLion’s 4K capabilities with UFC 205 on November 12.
What’s it worth?
Now, for the all-important question:“What should NeuLion be worth in the market?” Funny you should ask. In August, Disney actually made a $1 billion investment in a NeuLion competitor, BAMTech, which is part of Major League Baseball Advanced Media and powers MLB’s live-streaming options. It also poached the NHL from NeuLion last year despite being considered a high-priced alternative with inferior technology.
(Personally, I don’t place too much weight on the departure because BAMTech incentivized the NHL to jump ship with a 10% stake in BAMTech. This is unlikely to take place in the future because there’s only so much more of BAMTech to go around.)
For this $1 billion, Disney bought itself a 30% stake in BAMTech, which had estimated annual revenues of around $100 million in 2015 (right around NeuLion’s 2016 projections) and is growing at 10-15% per year. (NeuLion sales are up more than 20% per year over the last five years.)
Taking all of this into account, Disney likely paid 33 times sales ($1 billion / [$100 million * 0.3]) for its stake in BAMTech. If you applied that multiple to NeuLion, we are looking at a $3 billion business that is currently valued at $177 million. To be sure, I’m not suggesting NeuLion will turn into a 16-bagger overnight, but it does hint that NeuLion is possibly a littleundervalued (to say the least).
Overall, this deal is more encouraging to me than anything else. It shows that one of the largest sports media companies (Disney by way of ESPN) is taking digital streaming seriously with NeuLion at the forefront.
Casting comparisons aside, NeuLion seems like an attractive bargain on its own too. Just look at its debt-free net cash position of $70 million, which accounts for 39.5% of its total market value. It’s trading at just 5.8 times earnings and at an enterprise-value-to-revenue ratio that hasn’t been seen since the summer of 2012. (P.S. shares are up 325% since June 29, 2012.)
Foolish bottom line
We Fools love identifying companies ready to ride nascent trends to great heights. With NeuLion, we believe we’ve found just that. Based on everything we’ve read, digital streaming is here to stay. And the praise heaped upon NeuLion over the past several years is hard to overlook.
To be sure, volatility in the name shouldn’t come as a surprise. However, over the next three to five years, we’re confident the pops will far outweigh the drops.
Onward!
Disclosure: Iain Butler owns shares of NeuLion. David Gardner owns shares of Walt Disney. The Motley Fool owns shares of and recommends Walt Disney.