Summary
- NeuLion's technology and 40% market share make it the NetFlix of Pro, College Sports and News stations.
- Company is growing 20% per year and could experience hyper growth with huge shift in cable subscription dollars moving to custom paid programming.
- Company is unknown on Wall Street given its Canada listing. NASDAQ listing is pending in late 2014 or 2015.
- Management team and board own more than 50% of the company and have never sold a single share.
- Upside to stock price is more than 100% to 250% over 1 to 3 year period.
Is NeuLion the next Netflix of Sports?
Every investor is always seeking the next Apple (NASDAQ:AAPL), Google (NASDAQ:GOOG) or Netflix (NASDAQ:NFLX). Naturally, investors are always looking at new IPOs since that is an opportunity to buy the hottest tech companies. Sometimes, these companies are already public and under the radar because they may have been spun off, merged or listed in another exchange (like Canada or OTC). Nevertheless, I believe I have found the next Netflix of Sports via a company called NeuLion (OTC:NEUL) and NLN.TO (Toronto) that is growing fast with higher Gross and Operating margins at a smaller revenue run rate than Netflix.
How I found NeuLion and a caveat emptor.
How did I find NeuLion? It wasn't through a stock screener (I have a proprietary screener), or through an insider or hedge fund network. In fact, I found it after going through Canaccord Genuity's 34th Annual Growth Conference's 166 investor meetings provided for free by Wall Street Webcast. It is access to these events and Seeking Alpha's platform that provides investors the same opportunities as large institutions.
Nevertheless, I need to be mentioning that listening to these investor meetings is not for the gullible. Every single one of these meetings is management teams speaking about the future potential of their company's products or services. Remember, they all want to be the next "big" company and know that conferences like these give them access to an audience, investors and opportunity for increased wealth. In other words, you have to listen to all of these calls cynically because it is very easy to believe in their pitches. The truth may be that the management team is hiding something from you.
For example, GT Advanced Technologies (NASDAQ:GTAT), which filed for bankruptcy after Apple pulled the plug on its sapphire crystal plant, attended the event. Yes, investors could have connected the dots that the CEO was selling millions of dollars of stock while it was trading at an all-time high. Yet, investors have to remember he was there to promote because he was paid to do so even though he knew about the problems with Apple and its plants.
Yes, we could find the next Netflix; even 1/10th of NFLX would still be a success for most of these companies, yet you can also come across a few GTATs too. I write this preface because I am about to write about a company that has a market cap of about $200 million and is trading for $1 a share. NeuLion could easily trade lower given its low liquidity, competition and management team. Also, this is the first article ever for NeuLion and I wanted to provide a much-detailed thought process of how I found the company and analysis to encourage more investors to find hidden opportunities such as NeuLion.
I purchased NeuLion's service before I even knew it was public.
Ever since I moved to China in 2008 to study Chinese and start a company I knew I was going to miss family, beach weather and watching my local sports. Luckily, that same year the NFL, NBA and NHL introduced to international customers a new service to watch all of the league's games through their portal. For $300 I could access NFL, NHL and NBA games in China, watch archives of past games and special shows, such as the NFL's "A Football Life." In fact, it was better than home since I had access to all of this content via my laptop and now iPad. I didn't have to purchase a cable or satellite subscription or bother recording it on my DVR. I remember researching and finding out at the time that NeuLion was private and didn't follow up with the story.
In fact, the company has gone through a series of transactions to get to where the company is today, Below is a table of transactions and a good reason this company is flying under the radar (read from the bottom up):
|
Company Deals and People
|
|
Date
|
Title
|
Type
|
|
2011/6/29
|
NeuLion Completes Preference Share Financing
|
Financing
|
|
2010/10/1
|
NeuLion Completes Acquisition of TransVideo International
|
M&A
|
|
2010/9/29
|
NeuLion Closes Convertible Preferred Shares Private Placement
|
Financing
|
|
2010/5/31
|
NeuLion to Close Series A Convertible Preferred Shares Private Placement
|
Financing
|
|
2008/10/21
|
JumpTV and NeuLion Complete Merger
|
M&A
|
|
2008/10/21
|
JumpTV Closes Private Placement
|
Financing
|
|
2008/2/19
|
Elmer Sotto, VP, Product and Business Operations
|
Management
|
|
2008/2/19
|
Blair Baxter, CFO
|
Management
|
|
2008/2/19
|
Jay Howard, VP and General Counsel
|
Management
|
|
2007/10/15
|
Jordan Banks, CEO
|
Management
|
|
2007/8/31
|
JumpTV Completes Acquisition of XOS' Broadband Network Business Unit
|
M&A
|
|
2007/8/9
|
JumpTV to Acquire Cycling.tv
|
M&A
|
|
2007/2/23
|
JumpTV Completes Public Offering
|
Financing
|
|
2006/8/10
|
JumpTV Completes IPO on TSX and LSE-AIM
|
IPO
|
|
2006/3/31
|
JumpTV.com Closes Another Round of Financing
|
Financing
|
|
2006/2/28
|
JumpTV.com Completes New Round of Financing
|
Financing
|
|
2006/1/5
|
JumpTV Completes Acquisition of Sports International Group
|
M&A
|
|
2005/12/16
|
JumpTV.com Adds Additional Funds
|
Financing
|
|
2005/9/2
|
JumpTV.com Secures Another Round of Financing
|
Financing
|
|
2005/5/20
|
JumpTV.com Closes Financing
|
Financing
|
|
2004/9/29
|
JumpTV.com Completes Financing
|
Financing
|
|
2002/8/14
|
JumpTV.com Closes Financing
|
Financing
|
Source
As you can see the company is a roll-up of a few companies and will continues to acquire more given the track record of the management team.
In this article, I am going to go into a detailed analysis of the company via the following categories:
- Business Model
- Management history
- Financial History and Growth
- Valuation
- Bear Story
Business Model
According to NeuLion's annual report the company is a:
"technology service provider that specializes in the digital video broadcasting, distribution and monetization of live and on-demand content to Internet-enabled devices. Through our cloud-based end-to-end solution, we build and manage interactive digital networks that enable our customers to provide a destination for their viewers to view and interact with their content. Our core business and business model have evolved from being a provider of professional information technology services and international programming to a provider of customized, end-to-end, interactive content services for a wide range of professional and collegiate sports properties, cable networks and operators, content owners and distributors, and telecommunication companies."
Doesn't this sound like Netflix's business model? NFLX gets content and makes it easy for the user to view through their offline (DVD mail delivery) and online portal. NeuLion is doing the same with Sports by getting the NFL and news stations to provide a platform for their viewers/fans. Given we, are in the age of content and mobile it is no wonder that a lot of properties like the NFL are putting more and more content through its portal.
NeuLion reports three different business segments:
- Professional Sports - "we provide our professional sports programming customers with the ability to deliver live and on-demand content. We maintain agreements with leading professional sports properties such as the National Football League (NFL), the National Hockey League (NHL), the National Basketball Association (NBA), Ultimate Fighting Championship (UFC), Major League Soccer (MLS), the American Hockey League (AHL), the Canadian Football League (CFL), the Western Hockey League (WHL), the Ontario Hockey League (OHL), and the Professional Bowlers Association (PBA)."
- College Sports - "NeuLion College platform, comprised of a suite of digital services that includes delivery of live and on-demand content, web publishing, electronic ticketing, donor management, e-commerce and advertising solutions. We partner with many National Collegiate Athletic Association (NCAA) schools and conferences and have agreements in place with over 175 colleges, universities or related sites, including the University of North Carolina, Duke University, the University of Oregon, Louisiana State University, Mississippi State University, Arkansas State University, the University of Nebraska, Texas A&M University, the Big 12 Conference and the Southern Conference. This past year, NeuLion added a number of new partners, including many Pac 12 member schools, the University of Oklahoma, the Ivy League Digital Network, and the University of Maryland."
If you notice, there are a lot of schools not mentioned, so there is a significant opportunity to expand this to a least 400 universities in the USA. I think small schools have more of an incentive to work with NeuLion because it would bring more value to its alumni base by selling access to games, memorabilia, tickets or even scouts to increase the profile of its profiles via the draft, etc.
- TV Everywhere - "platform that allows cable networks and operators, entertainment companies, content aggregators and multichannel video programming distributors ("MVPD"s) to deliver their live and on-demand content to multiple devices. We have agreements with ESPN, Univision, China Network Television (a new media agency of China Central Television), Sport TV, Rogers Media, Sportsnet, Outdoor Channel, TVG Network, CBC, Zon Multimedia, the Independent Film Channel, Cablevision, MSG Varsity, Shaw Communications, the Big Ten Network, Participant Media and the Gospel Music Channel."
Even though the company is working on three different markets the core technology can be used for all three, which means that most of the R&D budget would be beneficial to all of the segments vs. a % for each, which is a great way to leverage the current relationships with each new feature that is rolled out. Below is the list of services provided by the company that shows how both NeuLion and the customer could benefit from the relationship.
- interactive television video device player design and development;
- signal capture, encoding and transcoding of both live and on demand video content;
- support and management of multiple content delivery networks (CDNs), which involves real-time performance measurement of CDN providers with
- automated switching to different providers to ensure high-quality video for our customer's viewers;
- live video editing and tagging, which involves clipping video highlights to make them available for viewing in real time on Internet-enabled devices;
- content management, which involves preparing, scheduling and formatting various digital and analog TV signals and file-based video formats for streaming over the Internet to a range of devices;
- subscriber management, pay-per-view transaction support, advertising insertion and management, and subscriber authentication services;
- security, encryption and digital rights management, which preserves the integrity of the content and protects it from unauthorized access;
- billing services that enable our customers to manage the subscriber accounts of their viewers and also to provide pay-per-view transactions to their viewers;
- website design and hosting, as well as app design and creation;
- high-definition delivery of streamed audio, video and other multimedia content;
- game highlights, polls and alerts;
- advertising integration and substitution, which involves adding digital advertising into streamed video players;
- quality of service monitoring;
- subscriber support services;
- Internet marketing services to drive traffic to our customers' digital destinations;
- social media integration, which involves the connection of social networks such as Facebook and Twitter to online viewing experiences;
- reporting and analytics;
- user authentication services;
- online electronic ticketing and donor management;
- facilitating online merchandise sales;
- college market auction engine services (e.g., for sports memorabilia and experiences); and
- marketing and advertising sales.
How does the company earn money and what is their competition?
Currently the company's revenues are derived from subscription of the content providers where NeuLion gets a % of the retail price. Subscriptions can be monthly, seasonal, yearly or a one-time event or period (like playoffs only). The company can sell tickets online, memorabilia and ads via the app unless the content provider gives more of a % of the subscription fee to NeuLion.
One of the concerns I had is that the competition may not be another company but the content providers themselves bringing an in-house media development team. However, the more I researched the more confidence I had that it would be difficult and expensive for a content provider to do. I believe the issue is that the content provider may not be as focused in developing a cutting edge service for its customers whereas NeuLion has every incentive to improve the product. So, say a school wants a new feature it would probably cost them hundreds of thousands of dollars to implement whereas the company could spend the same amount or less and it could be a new feature for every property. In other words, it is crucial for the company to continue to improve the features and services.
Management History
When I read the proxy statement the first section I go to is the list of holders of the stock. I want to know how much money the management team has invested in the company (whether they bought stock or through options).
Here is a table from the Proxy:
|
Total Number
of Shares
Beneficially
Owned(1)(2)(3)
|
Number of
Shares Owned
|
Convertible
Instruments
Exercisable
Within Next
60 Days
|
% of Shares owned
|
|
Nancy Li(4)
|
|
40,768,596
|
39,756,096
|
1,012,500
|
23.4%
|
|
|
Charles B. Wang(5)
|
|
34,701,933
|
33,084,888
|
1,617,045
|
19.8%
|
|
|
G. Scott Paterson(6)
|
|
9,650,438
|
9,105,290
|
545,148
|
5.5%
|
|
|
J. Christopher Wagner
|
|
1,805,542
|
1,518,042
|
287,500
|
1.0%
|
|
|
Michael (Horngwei) Her
|
|
3,105,453
|
2,742,953
|
362,500
|
1.8%
|
|
|
Gabriel A. Battista(7)
|
|
470,569
|
367,508
|
103,061
|
*
|
|
|
Shirley Strum Kenny
|
|
545,508
|
545,508
|
0
|
*
|
|
|
John R. Anderson
|
|
335,794
|
335,794
|
0
|
*
|
|
|
David Kronfeld (8)
|
|
30,476,471
|
2,490,449
|
27,986,022
|
15.1%
|
|
|
Roy E. Reichbach
|
|
691,382
|
353,882
|
337,500
|
*
|
|
|
All current directors and executive officers (12 persons)
|
|
126,086,613
|
93,135,337
|
32,951,276
|
61.0%
|
|
The CEO Nancy Li and Chairman Charles. B. Wang, own 43.7% of the company. I had to find out who these two people were and then I remembered the headlines associated with Charles B. Wang, whom I will call Chairman Wang going forward. Back in the 1990s, Chairman Wang was the Chairman of Computer Associates (NASDAQ:CA), which came under investigation for reporting false revenues and earnings to the tune of billions of dollars. In fact, the CEO of Computer Associates, Sanjay Kumar, was imprisoned for the fraud. Chairman Wang left unscathed mainly because he never used e-mails or voicemails and was impossible to prove if he was orchestrating the fraud. NeuLion's CEO Nancy Li was also in Computer Associates and also walked away unscathed.
Nevertheless, both of them are very well off because of CA and this public company is probably going to be the last one they will operate as Chairman Wang is now 70 years old, and CEO Li is 56. Their stock value of NeuLion as of today is about 70mm which is about 5% to 10% of their net worth given both own the New York Islanders Hockey team, real estate all over the world and over $1 billion in compensation earned through Computer Associates. So, yes they have skin in the game but consider it is only 5% to 10% of their wealth so if anything they are looking at this like a long dated call option.
Proxy Analysis
I pay just as much attention to the proxy statement than the annual report given all of the qualitative information about the management team, related party transactions, compensation and any potential irregularities. For example, Gotham City Research LLC was able to spot out irregularities with GOWEX (their report caused the company to go bankrupt in 5 days) because of one section on the proxy statement.
Below are a few things I learned from reading the proxy:
- From reading the biography of each board member I get the sense that this is not a diversified board as I don't see any clear independent director. I guess when the CEO and Chairman own 43% of the vote you can make up such a board.
- The compensation of the board is $20,000 USD in cash per year but only 2 of the board members get cash whereas the rest receive options which further dilutes shareholders.
- Nancy Li's cash compensation as a CEO isn't outrageous at about $310,000. The VPs of the company get $250,000. Again, let's keep in mind that Nancy doesn't need the salary she is worth much more than that married to Chairman Wang.
- David Kronfeld, director and venture capitalist, owns 15.3% of the company, meaning three board members own 59% of the company.
- All three of the controlling shareholders haven't sold a SINGLE share since they took control of the company. That says a lot about their conviction about the future of this company.
- The two pages dedicated to related parties transactions proves that the Chairman and CEO are in full control of this company and that there will be a lot of these related party transactions moving forward. For example, the convertible debt deal or that the office is owned by the Chairman and leased to NeuLion and NeuLion's involvement with the New York Islanders. If you are comfortable with all of this then there is no reason to consider this a red flag.
- Did the company really fire Ernst and Young to save money? In 2012, NeuLion fired E & Y, which would have been a red flag for any public company, but the proxy stated it was to save money and in 2012 the company was looking at any way to save on costs. I looked back at the proxy from 2008 to 2012 and noticed that on average E and Y was getting about $400,000 USD a year in compensation whereas the new firm was 30% less. Yes, financially speaking it did save money but investors should take note that this smaller firm needs NeuLion more than E & Y so their vested interest to keep the client happy is more so.
- Company is proposing a reverse stock split AND listing on NASDAQ. By far the biggest news in the Proxy as this would allow more investors and institutions to purchase shares in the open market and potentially give it a higher valuation. This move could also provide Chairman Wang, CEO Li and Kronfeld the liquidity they need in the future. I believe the reverse split would be at LEAST a ratio of 7 to 1 because any stock under $5 wouldn't hit the radar of mutual funds.
Financial History and Growth
As mentioned before, the company has a history of transactions consisting of mergers and acquisitions to get to what NeuLion is today. The company since its reverse merger has only made one small acquisition. Below is a table showing the income statement of the company from 2009 to 2013. I didn't put in 2008 as the merger really was done late in the year and wouldn't be a good comparable.
Note: Numbers listed in millions.
|
2009
|
2010
|
2011
|
2012
|
2013
|
|
Revenues
|
$28.09
|
$33.17
|
$39.67
|
$38.98
|
$47.11
|
|
Growth
|
|
18.1%
|
19.6%
|
-1.7%
|
20.9%
|
|
Gross Profit
|
$13.70
|
$18.76
|
$23.29
|
$25.29
|
$33.83
|
|
GP Growth
|
|
36.9%
|
24.1%
|
8.6%
|
33.8%
|
|
GP Margin
|
49%
|
57%
|
59%
|
65%
|
72%
|
|
SGA
|
$28.77
|
$27.10
|
$25.61
|
$23.54
|
$24.29
|
|
SGA Growth
|
|
-5.8%
|
-5.5%
|
-8.1%
|
3.2%
|
|
SGA % Rev
|
102%
|
82%
|
65%
|
60%
|
52%
|
|
R+D
|
*Note 1
|
$5.05
|
$6.20
|
$6.67
|
$7.42
|
|
R+D Growth
|
|
|
22.8%
|
7.6%
|
11.2%
|
|
R+D % Rev
|
|
15%
|
16%
|
17%
|
16%
|
|
D+A
|
$4.14
|
$5.18
|
$5.37
|
$4.40
|
$3.76
|
|
D+A % Rev
|
15%
|
16%
|
14%
|
11%
|
8%
|
|
EBIT
|
($19.20)
|
($18.57)
|
($13.90)
|
($9.30)
|
($1.64)
|
|
EBIT Margin
|
-68%
|
-56%
|
-35%
|
-24%
|
-3%
|
|
Net Income
|
($19.64)
|
($17.52)
|
($14.37)
|
($10.08)
|
($2.28)
|
*Note 1: Company didn't split up R&D from the SGA until 2010.
For the last 6 months the company has reported the following:
|
6 months of 2014
|
|
Revenues
|
$26.88
|
|
Gross Profit
|
$19.83
|
|
GP Margin
|
74%
|
|
SGA
|
$12.78
|
|
SGA % Rev
|
48%
|
|
R+D
|
$4.16
|
|
R+D % Rev
|
15%
|
|
D+A
|
$1.40
|
|
D+A % Rev
|
5%
|
|
EBIT
|
$1.5
|
|
EBIT Margin
|
5.6%
|
|
Net Income
|
$1.7
|
My thoughts about the financials are that the company has been able to expand their margins nicely given the leverage of the business model. Although I do continue to see the company spending 12 to 15% of their revenue on R&D, however, I do think the SGA as a % of revenues can go as low as 30% over the 2 to 3 years if the company continues to grow revenues at +15% a year.
Growth projections of the company
Whenever you want to look at a growth story you have to consider the following factors and my thoughts on each segment.
- Long-term potential revenue
- Market share penetration
- The expenses to maintain the growth rate
- Expansion of margins
- Growth of competition
- Pricing power
- Technology
- Management team execution
- Long-term Potential revenue isn't easy to calculate like Netflix where you can project that every single subscriber will bring in X dollars in revenues. The reason you can't use that model with NeuLion is because the company doesn't break out how many subscribers it has for each of the products that it offers. Also, we don't know the arrangement made for each customer. For example, the professional sports team's pricing and pricing model is different than that of TV Everywhere. Here is what we do know though:
|
Revenue Breakdown
|
2013
|
2012
|
Growth
|
|
Pro Sports
|
$20.9
|
$13.5
|
55%
|
|
College Sports
|
$12.6
|
$10.9
|
16%
|
|
TV Everywhere
|
$11.3
|
$10.6
|
7%
|
|
Total
|
$47.1
|
$39.0
|
21%
|
The growth rate in the Pro Sports division is fantastic, however, College Sports isn't growing as fast as I expected. In fact, the main reason for that is because the largest competitor is CBS and Sidearm Sports. The company could figure out ways to take clients from each with new products and services but sometimes these universities relationships take a while to change. Nevertheless, I estimate that the College and TV Everywhere segments can grow quicker than its current rate by either taking market share or acquiring a company like Sidearm Sports. Nevertheless, I just don't see that happening for a while given the company's focus on going where the puck (I mean money) is.
Market share penetration
According to an investor presentation, the company has a 40% market share in the Sports streaming and content delivery portal, the rest of the competitors are inhouse developers and other smaller companies (which could be acquired by the company over time).
Now, is it possible to calculate what the true market value is in each of the company's divisions? Will everyone want to purchase a subscription of more than $100 for access to the content of their favorite sports team, Pro or Collegiate? We only know one thing. There will always be fans of sports and more of these fans are going to be interacting with content online via their iPad and iPhone.
The proper way to go into making a model would be the following:
- Estimate # of fans of X sports team in the country or worldwide (depends on how popular)
- Estimate # of fans that would be willing to purchase content of their sports team (potential market to target - old vs. young user base)
- Estimate # of fans that actually purchase the service today and what that # is vs. point 1. (penetration rate would be the term used)
- Estimate average transaction size of fans willing to purchase content of their sports team (what would they purchase vs. not purchase)
- Show in the model increased penetration and pricing impact to estimated growth.
We could do this manually for every sport and team around the world. We know that there are billions of Sports fans all over the world, in fact, here is the list of the top 10 most popular sports:
| rank |
Sport |
Estimated Fans |
Regional Popularity |
| 1. |
Soccer / Association Football |
3.5 Billion |
Europe, Africa, Asia, America. |
| 2. |
Cricket |
2.5 Billion |
Asia, Australia, UK. |
| 3. |
Field Hockey |
2 Billion |
Europe, Africa, Asia, Australia. |
| 4. |
Tennis |
1 Billion |
Europe, Asia, America. |
| 5. |
Volleyball |
900 Million |
Europe, Australia, Asia, America. |
| 6. |
Table Tennis |
850 Million |
Europe, Africa, Asia, America. |
| 7. |
Baseball |
500 Million |
America, Japan. |
| 8. |
Golf |
450 Million |
Europe, Asia, America, Canada. |
| =9 |
Basketball |
400 Million |
America. |
| =9 |
American Football |
400 Million |
Europe, Africa, Asia, America, Australia. |
Source
NeuLion is heavy into Football, Hockey and Basketball and the top 6 sports because their focus as of right now is the USA and could change with an acquisition or more focus in international markets.
According to a poll conducted by ESPNabout 50% of America is an NFL fan, which leaves about more than 150 million fans eligible to purchase NFL's gamepass, which gives access to every game every week. Add to this the hundred or so million for basketball and you have easily close to 250 million football and basketball fans potentially interested in a service provided by NeuLion. We also have to take into consideration that in the USA, fans may not be able to get subscriptions to see every game of every team but are able to purchase other content for a small fee. We haven't even considered hockey, collegiate sports, soccer (USA and abroad) and other sports.
Nevertheless, I created a table below that shows what the potential revenue impact would be if NeuLion is able to increase market share in the products it currently operates.
Data = 250 million international Football and Basketball Sports fans.
*Subscriber number is in millions
*$X per subscriber is in millions
|
Penetration Rate
|
Subscribers
|
$10 per sub
|
$15 per sub
|
$20 per sub
|
|
1%
|
2.5
|
$ 25.0
|
$ 37.5
|
$ 50.0
|
|
2%
|
5.0
|
$ 50.0
|
$ 75.0
|
$ 100.0
|
|
3%
|
7.5
|
$ 75.0
|
$ 112.5
|
$ 150.0
|
|
4%
|
10.0
|
$ 100.0
|
$ 150.0
|
$ 200.0
|
|
5%
|
12.5
|
$ 125.0
|
$ 187.5
|
$ 250.0
|
|
7.5%
|
18.8
|
$ 187.5
|
$ 281.3
|
$ 375.0
|
|
10%
|
25.0
|
$ 250.0
|
$ 375.0
|
$ 500.0
|
|
12.5%
|
31.3
|
$ 312.5
|
$ 468.8
|
$ 625.0
|
|
15%
|
37.5
|
$ 375.0
|
$ 562.5
|
$ 750.0
|
|
17.5%
|
43.8
|
$ 437.5
|
$ 656.3
|
$ 875.0
|
|
20%
|
50.0
|
$ 500.0
|
$ 750.0
|
$ 1,000.0
|
From looking at the chart above we can see that NeuLion has less than 1% penetration among NFL and NBA fans located internationally. At the same token it also shows what the vast potential can be with the right marketing and price points. The management stated in investor presentations that there were 2.3 million transactions completed in 2013 and given the revenue that year the average transaction size was about $20 per subscriber and believe that number may come down as the properties that they add in the future will be at a lower price. For example, an NFL GamePass to the consumer can be purchased for $200 a year whereas for a College Sports team it could be $75 to $120 (numbers are retail). If we continue to add more College Sports teams or more TV Everywhere users it is very possible for the per subscriber number to come down as they wouldn't be as premium as the NFL, I could be wrong though.
Nevertheless, below I created a projection of what I believe the company will be able to do over the next 3 years in regards to revenues and earnings.
|
2014 |
2015 |
2016 |
2017 |
| Revenues |
$57.00 |
$69.00 |
$83.00 |
$100.00 |
| Growth |
21.0% |
21.1% |
20.3% |
20.5% |
| Gross Profit |
$42.00 |
$51.00 |
$61.00 |
$74.00 |
| GP Growth |
24.2% |
21.4% |
19.6% |
21.3% |
| GP Margin |
74% |
74% |
73% |
74% |
| SGA |
$27.00 |
$26.00 |
$25.00 |
$25.00 |
| SGA Growth |
11.2% |
-3.7% |
-3.8% |
0.0% |
| SGA % Rev |
47% |
38% |
30% |
25% |
| R+D |
$8.50 |
$10.00 |
$11.50 |
$15.00 |
| R+D Growth |
14.6% |
17.6% |
15.0% |
30.4% |
| R+D % Rev |
15% |
14% |
14% |
15% |
| D+A |
$3.50 |
$3.00 |
$3.00 |
$3.00 |
| D+A % Rev |
6% |
4% |
4% |
3% |
| EBIT |
$6.50 |
$15.00 |
$24.50 |
$34.00 |
| EBIT Margin |
11% |
22% |
30% |
34% |
| Net Income |
$3.90 |
$10.50 |
$17.15 |
$23.80 |
| NI Margin |
7% |
15% |
21% |
24% |
| Shares |
216.8 |
220 |
230 |
230 |
| EPS |
$0.018 |
$0.048 |
$0.075 |
$0.103 |
Valuation*2014 Estimates were using last 6 months run rate. 2015 to 2017 estimates are assuming an increase of 20% or more of revenue growth as the number of users and content available over this time period should increase revenues by this rate if not more. The main risk to this is if the company gets less revenue per subscriber or the subscriber uses another platform or nothing at all given the high price point.
What would be a fair valuation to give a company that has a 40% market share in its industry; growing revenues 20% with 70% gross margins, expanding Operating and net income?
Here is the current valuation of the company today and for 2015:
|
2014*
|
2015*
|
|
Share price
|
.88
|
.88
|
|
Shares Outstanding
|
217
|
217
|
|
Market Cap
|
193mm
|
193mm
|
|
Cash
|
14mm
|
14mm
|
|
Enterprise Value
|
179mm
|
179mm
|
|
EV/REVENUES
|
3.14x
|
2.59x
|
|
EV/EBITDA
|
17.9x
|
9.42x
|
|
P/E Ratio
|
55x
|
19.5x
|
*Projected using my model above
Given the company's current stock price the valuation of the company for 2014 and 2015 seems to be appropriately valued assuming 2015 projections are accurate. However, I think that over the next 2 to 3 years the company could easily deserve a market cap of at least $500 million or $2.50 USD a share if the company is able to maintain or increase its growth rate of subscribers and content providers all over the world.2013 and so far in 2014, the company is executing consistent growth north of 20% per year and don't foresee any significant decline.
Let's consider some history for a moment. Netflix in its first 5 years of business (1998 to 2003) was growing more than 100% a year (albeit massive cash burn) and that was in an old legacy business of renting DVDs via snail mail. Keep in mind that their streaming service didn't really kick off until about 2007. In 2014, the company is growing 20 to 25% a year and the company's valuation is at $21 billion. NeuLion is growing just as fast with higher margins and market share with the potential to improve if more consumers begin to shift their cable and satellite subscription dollars to custom sports programming.
Bear Story
I understand that this article is overwhelmingly positive so in this section I am going to bring out all of the negatives and potential risks that I see with the company in the future.
- Partners like the NFL (two customers represent 33% of revenues) could do a cost benefit analysis to decide whether they should build their own platform and cut out NeuLion. For example, the NFL on year X sends a check to NeuLion for $50mm and realizes that they could build their own development team for about $20mm and decide if it is worth the risk to save NFL owners $30mm a year or about $1mm per team. Losing the NFL could snowball into others following as well.
- Company isn't able to increase the average revenue per transaction from $20 USD as estimated in 2013. The company could continue to add more users but if the transactions rate trends down then the revenue growth will not be as strong as projected.
- The management team starts to lie about their revenues. Chairman Wang was involved with Computer Associates and to be honest we don't know if he may do the same with NeuLion.
- The company continues to dilute the shares outstanding due to the acquiring companies with stock and compensating everyone on the board and management team with options instead of cash. The dilution from 2012 to 2013 was significant because of a convertible debt deal and the amount of options for compensation outstanding is more than 14 million shares. So, expect to see more dilution going forward which I believe could limit the stock price of the company.
- Company fails to get listed on the NASDAQ. This means the company's valuation will be capped given the limited exposure from the investment community. I believe the company will get listed on the NASDAQ since I see companies with smaller market caps listed with worse revenue and profits.
- Three largest shareholders begin to liquidate their positions. This is more of an overhang than a bear case but do consider that you have no power or voice when you buy a single share in this company.
Nevertheless, given these risks mentioned I believe that an investment is worth making today as the positives outweigh the negatives. I do believe that most of these risks are priced in given the valuation of the company compared to its peers. For example, not being listed on the NASDAQ is a severe penalty to the valuation, which is why I think it is the short-term catalyst that will cause the stock price to rise in the near term.
Conclusion
NeuLion's technology and relationships in the sports and media industry will help it continue to grow for a long time, I honestly feel like the company has just gotten started. Yes, there are some red flags with the history of the Chairman but looking past that I commend the management in growing the business and turning a profit in 2014. The only regret I have is that I didn't buy the stock in 2012 when it was at about 25 cents a share.
Note: if you are interested in purchasing shares you may do so through any of the brokerage companies (I use TD Ameritrade) but needed to submit the order via limit if you use the USA ticket symbol NEUL. Keep in mind that you need to track the Canada ticker symbol NLN.TO so if the price is up or down you need to adjust accordingly given exchange rate from CAD to USD.
Disclosure: The author is long NEUL. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.