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Gaia: A Booming New-Age Streaming Service Run By A Zen-Monk CEO

When the median market PE multiple is at its highest level in history and heading higher, it’s nearly impossible to find investments that have long-term holding potential. Stock market tops are a trader’s purgatory — it’s far too early to start shorting, but going long is just as much of a crapshoot.

With that said, there are still some hidden value/growth opportunities that are improperly discounted by the market. To find them you just have to sift through the more overlooked areas of the market, which often means diving into the microcap space.

This involves digging through hundreds of junk stocks to only occasionally find a diamond in the rough, the one that has the real 10+ bagger potential.

After digging through hundreds micro cap stocks over the last month, I’ve come across one that has huge potential. The company is called Gaia and it’s run by an unusual CEO.  

I remember digging into this company a few years ago. At the time, I thought it was interesting but lacked direction, so I passed on it.

But over the years it’s stuck with me and I’ve continued to check up on it from time to time. The reason I do so is because of the founder and now CEO (he’s recently returned to lead the company after an 8 year hiatus).

That man is Jirka Rysavy, and he’s unlike any other successful CEO you’ll ever read about.

Rysavy originally hails from Czechoslovakia, where he was a national champion hurdler. He escaped Soviet rule during the 80’s and fled to America where he spent a good deal of time walking across the country and sleeping on park benches.

In 1984, with hardly any money or formal business training, he started an office supplies distributor.

He took a page from Sam Walton’s playbook and sought to revolutionize the highly fragmented office supplies space by selling cheaper and more efficiently than anyone else. In this vein, he was highly successful.

In under a decade his company “Corporate Express” became the largest office supplies distributor in the world, as well as a Fortune 500 company. In 98’ Rysavy sold Corporate Express to a Dutch firm for $2.3B.

During this time Rysavy also started a number of other companies that ranged from an organic market (which later became Wild Oats and was bought by Whole Foods) to a solar power company and nutritional supplements maker, all while still finding time to train for the Olympics with his native track team. Simply put, the man is a serial entrepreneur and an unusual one at that.

Even after accumulating a net worth that’s in the hundreds of millions, Rysavy chooses to live on a small secluded plot of land in the mountains of Colorado. It’s a tiny log cabin with no running water and little in the way of amenities — he sleeps on the ground in a sleeping bag. Once, when asked in one of his very few interviews, why he chooses to live so frugally, he responded “I have everything I always wanted. Just because I have money, why should I buy extra stuff?”

You can read up some more on one of America’s most interesting CEOs here.

I’m putting emphasis on Rysavy because the trade thesis behind Gaia is largely a case of betting on the jockey.

An exceptional jockey (management, leader) can make up for a lot of the present day shortcomings of a company. Just like great stocks, exceptional management is tough to come by. There’s only so many Steve Jobs, Mark Zuckerbergs, and Jirka Rysavys in the world.

When the opportunity arises where you have a rock star leader and a company with a long runway and low stock price… you get an amazing investment opportunity.

That’s what we have here with Gaia.

Gaia was started by Rysavy in 1998 immediately after he sold his office supplies company. It started off as a lifestyle brand that produced yoga clothing and nutritional supplements. At its peak 10 years ago it was doing roughly $300 million in revenue a year. But in 2008 Rysavy stepped down as CEO and the company lost direction. As a result, it saw sales and earnings decline.

This past year, Rysavy, apparently tired of meditating in the mountains and practicing his sun salutations, returned as CEO and has completely pivoted and refocused the company.

He’s sold off its large branded yoga apparel business for $167M and its travel business for $12M, leaving just a video streaming business and a large pile of cash. Gaia used some of that cash to buy back 40% of the company last July. Rysavy now owns 38% of the company.

The new Gaia is gunning to become the Netflix for the “New Age”, making it a play on the trend towards distributed and specialty programming in television. It’s creating a platform subscription business. I love these types of businesses.

Gaia’s content ranges from guided meditations and yoga, to holistic nutrition, parenting, spirituality, and some paranormal shows that are really out there (they make the History channel’s Ancient Aliens look like sober academia).

It’s safe to say that Gaia is going after a niche market. But because of its online streaming platform and global reach, this niche is potentially very large.

Gaia produces the vast majority of its content in-house. It has a number of Gaia stars or “gurus” that are paid on the number of subscribers they attract to the platform. This makes for low-cost customer acquisition and aligns incentives between the platform and its content creators.

Subscribers can watch Gaia’s content through its newly optimized VSOD site or through one of its many partners like: Apple TV, Roku, Amazon, Hulu, Comcast and Verizon. On average, users pay $10 a month for a subscription.

Like Netflix, the investment thesis is all about growth potential. So what does that look like so far?

As of last quarter, Gaia saw subscription growth of 52% over the year prior, bringing the total subscribers to 202,000 with members in 140 countries.

Given that Gaia started from scratch just three years ago and streaming video was just an afterthought of the business until last year, that’s impressive growth.

One of the many great things about the online platform business model is that the trend growth is not linear, it’s exponential. That’s how Netflix was able to more than 3x its subscriber base in under four years. Gaia can do the same.

According to Bespoke Research Group, there’ll be an estimated 300 million video streaming customers around the globe by 2020. Out of those 300 million, 55% are interested and willing to pay for at least one Gaia topic.

Gaia will only get to a fraction of the total addressable market, but that’s all they need for the stock to rise by a few multiples.

Right now, the company is projecting 80% subscriber growth for this year and the next. They expect to hit 1 million paying subscribers in 3 years time. With their expected margins, they should reach $60 million in pretax earnings within 5 years. With only 15.1 million shares outstanding, that would give the company an earnings  per share of $2.50.

And here’s the thing, we think these growth projections are on the conservative side. Rysavy has a long history of under promising and over delivering.

The company is currently losing money, but this is by design. Gaia has to expense all the costs of acquiring new customers as they’re incurred, but revenues from new customers are realized over their lifetimes, creating a mismatch between expenses and revenues. They could be profitable at current subscriber levels, but are foregoing current profitability to focus on growth, which is the right strategy.

Even though Gaia is unprofitable at the moment, they’re fully funded and shouldn’t have to access any additional financing as they grow. In fact, there’s a lot of safety in buying the stock at current levels.

Currently the company has $50M+ in cash that covers nearly 40% of its market cap. Gaia also owns a large campus that is less than 20% occupied by the company. The property and land values are estimated to be worth at least $20M. They also have 77,000 titles in their video library equating to around 7,400 hours of content, which is worth approximately $20M.

This means that at the current market cap of $132M, roughly 60% of the market cap is covered by cash and property alone. With no debt, our downside is protected.

Assuming Gaia is able to hit its conservative growth targets over the next four years, and given a very modest 10x multiple on those assumed earnings, we arrive at a market cap of approximately $350M… roughly 3 times what it is today — and that’s our conservative case.

Simply put, with Gaia you get a niche company with little to no current competition, that’s run by a serial entrepreneur who owns nearly 40% of the business (major skin in the game) and who has a long track record of being able to rapidly grow businesses. This trade is undiscovered for the time being, but once other investors see the potential here, the stock should take off. A three bagger is our base case.

Want to find another potential 10-bagger like GAIA? Then check out our Explosive Stocks Cheat Sheet here.

 

 

The Most Explosive Stocks of 2017

The Most Explosive Stocks of 2017 (IPI, LPG, WLL, CCJ, URRE, CENX)

Wanna buy SPY? You’re better off torching your cash instead. At least you’ll get a viral instagram video out of it.

The largest 500 stocks have been uptrending for the last 8 years and have little room left to go…   Read more

Woof Woof Long Trupanion Inc

Woof Woof – Long Trupanion Inc. (TRUP)

Trupanion Inc. (TRUP) is a momentum play breaking out of a 19-week ascending triangle. Read more

the end of apple

What’s Really Driving Apple?

Narratives are a fundamental part of our human existence. They’re the key to how we process information. Just as the mind instinctively searches for visual patterns in nature, it also seeks to derive patterns and meaning from information flow. We create stories to help us understand.

We see this in financial markets all the time, though it’s not always a good thing. You’ve heard the talking heads on CNBC. They hop on camera and try to attribute every little market gyration to one news story or another. This type of narrative creation doesn’t make much sense. Most of the day-to-day movement in the markets is just noise.

But pull back a bit and you can see where narratives become useful. For example, why has gold been on a tear since the beginning of the year? Its narrative revolves around the loss of faith in central banks. Investors have stopped believing in their ability to support and stabilize markets and the currency. And so they turned to gold for safety.  Read more

Workday Short

The Cloud Breakup – Workday Short (WDAY)

Ah… Valentine’s Day. A day to cherish your significant other. Take them out to dinner. Sip some bubbly. Or wine if you prefer. Whatever you do, you just have to show your love. That is… if you actually remembered what day it was today. (You’re welcome for the reminder.)

Our team at Foundation almost never forgets this made-up holiday. We are gentlemen and scholars. And also very smooth, much like Teddy Pendergrass. But hey, it wasn’t always like this. We remember the days back when V-day used to make us sweat.

We’re a bit nutty over here, so we see everything in terms of markets. V-day used to always be a giant inflection point for us. Sort of like a company’s earnings release. Do you want to hold through earnings, or do you want to cut your position and run? Same with V-day. Do you really like this person? Because if you successfully perform the whole Valentine’s gig, you may be stuck with him/her for a while. So if you don’t like that person too much, you should probably cut and run before the big day.      Read more

Expectations Blockage – Short Spectranetics Corp (SPNC)

It’s important to understand how to evaluate a company. But it’s even more important to know how to evaluate other investors.

It all comes down to expectations. What is the majority expecting? How can they be surprised? These factors are what move a stock’s price.

And nowhere is this phenomenon more prevalent than in growth stocks. 

Take The Spectranetics Corporation (SPNC) for example. From 2012 to 2015, this cardiovascular medical device maker rocketed 345%.  

How’d this happen? Did it have consistently strong earnings? Read more

Short UPS: What Brown Can't Do For You

Short UPS: What Brown Can’t Do For You

  • Amazon’s potential delivery service is not a significant threat to UPS.
  • The real problem they face is a slowdown in the economy.
  • The faltering economy along with lower oil prices and a stronger dollar are tanking UPS’ stock price.

When it comes to the United Parcel Service (NYSE:UPS), investors love talking about the threat of Amazon (NASDAQ:AMZN). There’s constant chatter that Amazon is creating a delivery network to crush UPS. And that’s why you should sell.

Yes, it’s true. You should sell UPS. But not because of Amazon. Amazon may be a long-term threat, but investors are blowing it out of proportion. The real reason you should sell is because of massive macroeconomic headwinds. These macro drivers trump any problems Amazon may cause.

UPS is in the business of making deliveries. They’re the busiest and most profitable when the economy is booming. But that’s not what’s currently happening in the US. Our economy is slowing.

The faltering economy along with lower oil prices and a stronger dollar are killing UPS.

But before we get into that, let’s first clear up the confusion about Amazon. Read more

ConocoPhillips: The Dividend Isn't Worth The Potential Squeeze

ConocoPhillips: The Dividend Isn’t Worth The Potential Squeeze

  • A bet on ConocoPhillips is a leveraged bet on oil.
  • Why there’s a good chance the dividend will be cut.
  • There are safer plays for a dividend investor looking to put money into an E&P.

I’ve heard many income investors pitching ConocoPhillips (NYSE:COP) as a great value at its current price and 6.4% dividend (one of the higher yields among large E&Ps). Their analysis relies on two assumptions. First, current oil prices are unsustainable and will soon rebound. Second, ConocoPhillips’ dividend is sacred to management and is therefore safe from being cut.

I believe these investors have fallen prey to a bit of recency bias and a lot of wishful thinking. Dig into the assumptions and you find that buying ConocoPhillips as a value income play is far from a sure thing – and in fact comes with quite a bit of downside risk.

A bet on ConocoPhillips is a bet on the future price of oil. Read more

Apple: There Will Be No Asian Miracle

 

  • Although cash flush, AAPL isn’t exciting investors anymore
  • Its growth story hinges on China, where the macro picture is deteriorating
  • India shows lukewarm demand as well
  • AAPL isn’t innovating like they used to and is instead depending on stock buybacks

Read more

Drop That Chicken! (BRFS Short)

  • Brazil’s economic and political climate are toxic for its companies.
  • BRF is closely tied to Brazil’s economy. Where Brazil goes, so does BRF.
  • BRF’s margins are being attacked on all sides which has in turn hurt its bottom line.
Brazil is a mess. With a toxic economic and political environment, it is not a good place to put your money. But that doesn’t mean you can’t profit from the those who do invest there.

Brazil is currently facing its worst financial crisis since the Great Depression. As seen in the graph below, GDP shrunk 4.5% in the 3rd quarter from a year earlier. This is the 6th consecutive quarterly contraction. It’s also the lowest number recorded since Brazil started using their new GDP system in 1996.  Read more