If Joe Rogan of The Joe Rogan Experience, one of the top 20 podcasters, wanted to one day scale up by bringing on additional producers and podcast personalities to host multiple new shows, how much equity should he give away to investors for their investment? Or perhaps Dan Carlin wanted to turn his Hardcore History podcast into a company that published history textbooks. How much should he value his podcast if he decided to propose this business plan to venture capitalists? Basically the question is, how much is a podcast worth? How do you value a podcast and is it considered a company with a robust enough business model to value it?
While listening to the episode of Startup (the first show produced by Gimlet Media) on valuing their startup company at $10 million during their seed funding, I was curious to find out if podcasts could in fact be valued the same way as ordinary businesses. An investor might need to know the valuation of a potential podcast company. Or a podcast producer might need to know the value of their podcast if they’re looking for funding, exit, or if they want to see how their podcast stacks up against others. Or a prospective podcaster might want to know if it’s worth venturing into the world of podcasting.
In order to answer the question of how much a podcast is worth, I looked at three podcasts that provide enough financial data to work with. First, Gimlet Media, whose show, Startup, discussed some of their numbers and their valuation on their show and in the media. The other two podcasts I used are Smart Passive Income (SPI) and Entrepreneurs on Fire (EOFire) as they have consistently produced monthly income reports since the inception of their respective shows.
*Discount rate of 10% was derived using the industry standard discount rate for Advertising, Broadcasting and Entertainment as podcasting is not an established enough industry to garner a discount rate yet. Advertising has an industry discount rate of 6.6%, Broadcasting has an industry discount rate of 6.2% and entertainment has 7.9% (Source: Damodoran). An average of 7% discount rate + a company-specific risk factor of 300 bps was added as long-term success of a profitable podcasting company is too early to tell.
The average implied revenue multiple that I got from the valuation was 5.0x.
What does this mean? The multiples are certainly a lot higher than revenue multiples of cash flowing companies in general. The average industry revenue multiple for Advertising is 1.7x, Broadcasting is 2.9x, and Entertainment is 2.9x (Source: Damodoran). I suppose since podcasting is a whole new vertical compared to these traditional industries, it could be comparable to startups. Looking at startup valuations then, the revenue multiples range anywhere from <1.0x to 10.0x. In particular, digital media companies are valued between 1.1x and 5.9x (Source: Fortune).
Could 5.0x become the industry standard valuation multiple for podcasting (for the time being)?
How do Podcasts Make Money?
The value of a podcast depends on the types of income streams the podcast employs and the stability of revenue generated by each income stream. Advertising/sponsorship is the income stream that most podcasts rely on, but selling products and services catered to a niche audience is where a podcast makes the big bucks.
The possibility of coming up with a new income stream is endless. Some income streams require more creativity and don’t necessarily depend on the number of downloads (assuming they have a pretty legitimate level of audience already). And then there are other income streams where once you implement, you don’t need to keep innovating and are more predictable cash flows for the. The most common income streams and their characteristics are:
|Income Stream||Description||Avg Revenue||Predictability||Depends on Download #s||Creativity|
|Pre-roll: ~15 seconds at the beginning of the episode
Mid-roll: ~30 – 60 seconds in the middle of the episode
|~$20-$40 CPM (Cost per Mille); i.e. fee per 1000 impressions (or downloads)||High||High||Low|
|Affiliate Income||Clickable link on the website that directs to a 3rd party’s website with products and services to purchase||Wide range, e.g. $0.25 – $50 per purchase of 3rd party product using the affiliate referral link||Low||Mid||Low|
|Membership||Special privileges beyond free podcast listening||~$5-10/month||High||Low||High|
|Products & Services||Introduce new products (physical or digital) or services (webinars, online courses, in-person courses) catered to the audience||Varies depending on product/service
e.g. eBook could be $10 to purchase or an in-person course could be $1000 to attend
Download #s isn’t Everything
The good news is that you can rake in millions of dollars if you have close to or more than a million downloads per month. The bad news is that you have to get to a point where you’re drawing in close to or more than a million downloads per month. But, I won’t leave you with a bad taste. Here’s another good news: it’s that the number of downloads isn’t everything when it comes to generating revenue.
For instance, EOFire’s Revenue/Download was $3.53/download with ~850k downloads in the beginning of 2015. Put another way, every download was worth $3.53. Comparably, Gimlet had almost ten times the download numbers in a given month but was only able to sell $1 per download. Breaking out the income streams makes it clear that EOFire’s profitable success per download is because ~60% of their revenue is generated from additional products and services. SPI’s revenue per download is pretty healthy as well with $2.33, with ~20% of their income coming from products & services. Gimlet on the other hand isn’t leveraging their audience enough. Of course, it’s a different story because Gimlet’s network of podcast shows is more journalistic and story-telling vs SPI and EOFire, which are geared towards a niche audience of entrepreneurs. But I still think there is a lot of opportunity there for Gimlet to introduce products and services to their audience (i.e. not just to their “customers,” that is, advertisers/sponsors, selling production/editorial services).
Podcasters: How much are you generating in revenue per download? What income streams have you employed and what new income streams can you add in order to scale up?
Right off the bat, I really like EnviroStar’s story. Since 1959, the company grew from being a private distributor of laundry products to a nation-wide distributor and provider of their own products, and all because of the founder’s innovative and entrepreneurial approach to business. Their three business segments are very complementary to each other. They make their branded products. They have a franchise business. And they’ve now added the nation’s largest distributor to their portfolio, from which they will have synergies through technician efficiency, inventory management, and exposure to clientele to market their products through the distribution business.
3 Complementary Operating Segments
Pricing & Customers
Steiner-Atlantic’s customers are primarily hotels, resorts, and correctional facilities that use industrial laundry and dry cleaning equipment everyday. In addition to their proprietary laundry and dry cleaning products and equipment, such as GreenJet – a dry wet cleaning machine that is energy efficient and environment friendly – their product offering has 12 brands which also include third party hot water boilers for industrial use. They believe their products attract their customers because it is a one-stop shop. Their prices for the products and machines range from $5,000 to $1,000,000.
DryClean USA’s customers are franchisees of the brand. Initial franchise fee can cost from $80k – $500k depending on location, size, and equipment. The franchise fee they collect from each location is $15k – $30k a year and the royalty fee is $5k a year. Terms of agreement are for 10 years with renewal fee of $5k. They don’t charge a fee for advertising. Other dry cleaning franchisors charge a percentage-based royalty fee around 6%. (Source: thefranchisemall) A profitable dry cleaner could be making $500k a year in sales, which translates to $30k a year in royalty fees at 6%. The fixed annual royalty fee could be their cost-leadership style. Although I can’t see what every franchise agreement looks like, there might be missed opportunity to structure the royalty fee as a fixed up to a certain amount of sales and then a fixed + percentage if they meet a certain target, provided that DryClean support advertising fees, etc.
Dry Cleaning Industry
Industry is Fragmented
The dry cleaning industry in the US is highly fragmented. The nation’s 50 largest firms only generate 10% of the revenue in the industry (Source: First Research, Dec 2016). In 2015, annual sales of the dry cleaning industry was $9 billion, brought in by more than 34,000 dry cleaners across the country (Source: IBIS, March 2016). In comparison, Walmart brought in $480 billion in revenue in 2015 alone from ~6,300 stores (Source: Statista). With the acquisition of Western State Design, they’ve now built a stronger presence in the coin-operated laundry industry. In the US, laundromat sales in the US was $5 billion, with almost 22,000 laundromats in the country (Source: IBIS, June 2016).
When the market is this fragmented, it means there is no loyalty from its customers, which makes sense since I am not going to drive 50 miles to my favorite brand of dry cleaners when I can go to the local dry cleaner’s down the street. There are advantages of a fragmented industry, which is that you are not competing against a Coca-Cola. There are also many pockets of niche that can be created to differentiate yourself.
EnviroStar’s Competitive Advantage
For EnviroStar, they’ve certainly been smart to brand their franchise business, DryClean USA. What they are missing in this business is the unique competitive advantage. Currently, their brand is known for average price, average service, average offerings. It neither caters to those who would pay extra for a reliable, high-quality job, nor the people who need it super fast and super cheap. Unless the company gobbles up other players in the industry to become the leading brand in terms of most recognized in customers’ minds, it’ll be hard to demand customer loyalty when there are dry cleaners that pop up down the street every year due to low barriers to entry.
DryClean USA’s franchise cost in upfront fees and annual franchise & royalty fees are in the middle of its peers (Source: Entrepreneur, thefranchisemall). So, the pricing they enforce or encourage their franchise stores to charge consumers depends on the profitability of the franchise stores and EnviroStar’s wiggle room to charge less royalty fees but with the strategy of putting more franchise stores across the nation.
One competitive advantage they have with their line of products that they sell directly to industrial and commercial customers, such as hotels, is that their products have been known for a long time as environmentally friendly and energy efficient. In this fragmented industry, if they continue to introduce new versions of products that are proven to be even more energy efficient and environmentally friendly, they’ll be able to position themselves to gain customer loyalty.
Surviving a Declining Industry
Unfortunately, what is working against them is the lack of growth in the industry. The annual growth of the last 5 years was -0.2% (Source: IBIS). Further adding to the decline of the industry is that clothing manufacturers are producing less clothes that require “dry cleaning only.” And there are more and more advanced washer and dryer for the home that will give you similar results from dry cleaning (Source: Capital, Jan 2016). Fortunately (but not really), the laundromat industry had a slightly better performance with 1.2% annual growth in the last 5 years (Source: IBIS).
EnviroStar – Last Man Standing?
On that note, Western State Design was a smart move – adding a portfolio of customers to its distribution network. Was it a fair price? We’ll find out in their next financials. But with a purchase price of $28 million, we should expect to see around ~$30 million of sales added every year, with an average multiple of about 1.0x sales (Source: Fulcrum). It has certainly helped with international expansion, i.e. to the Caribbeans and Latin America. Western Design is located in Calirofnia, which plays into the strategic location to reach into their distribution network since EnviroStar is located on the opposite side of the country in Miami, Florida.
We should be seeing more transactions involving international reach in the coming years if Management’s buy and build strategy is in full force.
The market really seemed to like the acquisition, helping the stock jump 225% in 3 months since their announcement of the acquisition in September and still 2 months after the completion of the acquisition.
As part of their buy and build strategy, in addition to businesses they are looking to acquire, they are exploring technological advancements to make their current operations better.
Currently, apart from the “technology” of their products, EnviroStar hasn’t implemented new faster, better, and smarter way of doing business that gives them a competitive advantage via technology. For example, with the network of franchisee partners, they are more suited to head a consumer-based pick-up/drop-off drycleaner service mobile app than Flycleaners, who has to cut a margin to their partnered facilities (Source: Business Insider).
EnviroStar could also be implementing technology into their advertising and sales. Are they doing any online targeted advertising for their franchisees? Are they doing any digital advertising to young people who are looking to become entrepreneurs via franchises? Do they have an enterprise software where franchise owners can use it to manage multiple locations?
There is a lot of room for improvement in technology.
The Management Team is currently comprised of:
Previously served as CEO of Chemstar Corp, a provider of food safety and sanitation solutions. Before becoming CEO, he held Executive Vice President and Strategy position at Chemstar. Prior to Chemstar, he served as Director of Corporate Development at Watsco, Inc, the largest distributor of heating, air conditioning and refrigerated products.
So, he’s a corp dev guy – no wonder as soon as he came on board EnviroStar, he’s implemented the buy and build strategy. Or conversely, the previous CEO, Michael Steiner, and the board may have been looking for new management to expand the business by way of acquisitions in his efforts to leave a legacy after his exit. In any case, for the buy & build strategy, he seems to have the right experience. However, after having servied as EVP for Chemstar since 2008, he left his CEO position not long after assuming the new role, which raises some questions. Although his experience has not directly been involved in laundry and dry cleaning, it has always been in industrial products and distribution, so it is somewhat aligned. A small, albeit, important finding is that the culture at Chemstar is such that employees did not approve of the CEO – most of the reviews are for after Nahmad left Chemstar, but there are some reviews for during Nahmad’s tenure as CEO there. And even if it is for after Nahmad had left, it does question the state of the company’s culture he had left it in (Source: Glassdoor).
Has been President of Steiner-Atlantic since 1988, and during his tenure, was involved in growing the business in many different facets. It’s reassuring to see that one of the company’s veterans is staying in Management after control of ownership.
Their financials ending Sep 30, 2016 is a bit cheeky. They had an outstanding revolving credit facility of about $2.2 million, which they wiped clean before September 30, so they declared debt to be $0 at the reporting date. But a week later, on October 6, they refinanced the debt into a $5 million term loan and a $15 million revolving credit facility. Of the $20 million available credit, the company took out $12.6 million to help pay for the acquisition of Western State Design. As a result, what is reported on their balance sheet looks ostensibly healthy, but their leverage ratios reveal otherwise.
Again, the median of its peer multiples was in line with EnviroStar’s implied trading multiples before the inflation of its stock price following the announcement of WSD acquisition announcement. However, in the last 3.5 months, the stock price became way too inflated and now it is extremely overvalued.
|Positioned themselves to provide complementary products/services within their space. They target the commercial and industrial customers, which is easier to reach with their salesforce than individual customers. However, it is still a highly competitive industry.|
|Declining industry, i.e. -0.2% annual decline in the last 5 years; highly fragmented – no customer loyalty. Competitive forces come from outside its direct competitors such as consumer-based washer and dryer products that can replace dry cleaning. Opportunity lies in international expansion and implementing its buy-and-build strategy until its captured most of the demand that it could.|
|EnviroStar’s had a long history of innovation, not so much reinvention. When the company started out as a distributor of laundry and dry cleaning products, the founder, Bill Steiner, saw the opportunity to fill the gap in the market with more energy-efficient and environmentally friendly products. Henceforth they started providing their own products to industrial and commercial customers. EnviroStar saw the opportunity to enter the franchise market and now boasts ~400 stores. Since then, they have been building their distribution network and franchise segment, both organically and with the acquisition of Western State Design under the new CEO, Henry Nahmad. Their innovation and reinventing strategy will be more important than ever going forward with competitive forces at play in this declining and fragmented industry.|
|They don’t currently have technology implemented into the way they do business. A part of their buy and build strategy does mention that technological capabilities is one area they will explore in potential investments.|
|The company has the right mix of old and new. Steiner, the veteran of EnviroStar who grew the company to what it is today continues to assume leadership of Steiner-Atlantic. Meanwhile, Western State Design’s founder and EVP have now joined the team to build the distribution network, which in this highly fragmented business and where sales depends on distribution, is key. Furthermore, although the new CEO, Nahmad is young and lacks experience in the CEO role, his previous roles were aligned in a similar industry and his experience in corporate development/M&A could be what EnviroStar needs to expand.|
|Strength of Financials||
|High leverage ratios, but we are not sure how Western Design is going to contribute to working capital. It is a loose grade of C for now until the next 10Q.|
|Right now, the stock is overvalued. However, that is not to say that the company does not have potential to be strong. I believe the company has a robust intrinsic valuation. It appears the stock is overvalued (but we will have to see WSD’s financials to comment further).|
|Strong company but currently overvalued. Wait to see WSD’s contribution to the consolidated financials in the next 10Q.|
Among average individual investors, microcap stocks are never the hype of top stock tips. The primary reasons are that microcap companies are not talked about in the media so investors have no way of knowing which microcap company stocks to invest in unless they did research on their own. There is also low trading volume leading to a greater liquidity risk. This also leads to the risk of trading schemes where frauds give misleading information to the public, inflating the stock price, and then selling them when the stock price is high. However, this creates an opportunity to get in on an undervalued microcap company that is flying under the radar and ride its growth wave. The top reasons to invest in microcap stocks are:
Microcaps have a low correlation to the S&P 500, so while large cap stocks move together in response to certain economic events, microcap companies do not move along with them. And what’s more, during a down market, this correlation is observed to be lower, because the small pool of investors who own microcap stocks know the value of their microcap companies, so they don’t sell them off in reaction to negative news.
Historically, microcap stocks have returned an annualized 11.7% since 1926, versus large caps at 9.4%, which is a spread of 230 basis points. Over time, the compounding of the spread has a significant return.
Activist funds are funds that invest in stocks with the intention of actively providing their opinion about how the company should perform to the company’s Management and Board of Directors. Often, the media only gets wind about the nasty letters they send to the company and the back-and-forth angry letters between the company and the fund that ensue thereafter. This may have created a negative stigma around activist funds, but on the flip side, activist funds are made up of some of the smartest money managers with a lot of experience and exposure to many different companies, so really, it’s like free advice. Of course, because activist funds are just like the rest of the investing public, they aren’t privy to insider information, so when they try to overstep their boundaries and direct their opinions to Management about how they should run the company, they’re doing so without being visible to the long term vision and strategy that the company has put in place. But, because of the lack of resources smaller companies have, there is value in getting input from activist funds. As a result, more activist funds are targeting microcap companies. And for the regular investors, the advantage of this is that they know that Management and the Directors of the company whose stocks they’ve invested in won’t try to manipulate the stocks artificially, because activist funds that have invested in them as well would more than put in a word or two.
Because microcap companies are not covered by many analysts, there is less buzz around them, which leads to a higher probability of discovering those that are undervalued.
The smaller the company, the higher percentage of shares Management owns. As “agents” of the company, Management’s goals are better aligned with the company’s goals when they hold a large stake in the company. And such is the case with microcap companies. Due to this alignment of goals, the agency problem is reduced.
With any stocks, accompanying advantages to invest in them are risks as well. Every investor should do their due diligence and only invest in companies that make sense to their risk tolerance level. Does the company have sound Management? Are their products and services unique in their industry? Do they have strong financials? Look up microcap companies covered here to see where each company stacks up against these questions, i.e. the risks and opportunities.
Image Source: Damodoran
First off, I am impressed by the level of detail Neonode’s 10K goes into in terms of its customers, the market it operates in, and the very relevant risks to the business. One of the key criteria that Buffet looked for in his fundamental valuation of companies was whether the company’s management gave detail on the drivers for the industry and their company. So, I was excited to see that Neonode was asking and answering the right questions preemptively. My hope was then shattered when I dove deeper into their numbers. The company is clearly trading on its future potential. But this is not a discussion of stock price, but a stripped down analysis of whether the company has substantial value. Let’s begin with who Neonode is and what they do.
Brief Company History
Products & Solutions
Core Business: Touch Technology Licensing
AirBar: Neonode’s First Hardware Product
A lot of heavy hitters for partnerships, but that isn’t reflected in their financials.
Risks & Opportunities
So, as I continued to dig deeper into the company, I became less and less excited. First of all, they operate in a very competitive space, as evidenced by them losing Amazon as a customer for the Kindle e-readers, which affected the business by a -48% decline year over year.
Revenues from engineering consulting fees have been about ~$800,000 a year. It’s not a bad idea to build this division out as it relates to optical technology implementation and vision consulting. It would be a more robust way to secure sales
The launch of their first consumer product, AirBar, is very timely as it coincides with Apple’s new “touch bar” on their Macbooks, so they’re riding the coat tails of Apple’s marketing as an introduction to the product. But it is still not widely known, so they need to be doing some more online marketing of their product. As they stated in their filing, they’ve never mass manufactured products before, and they’re about to find out how good they are at it.
Neonode has put themselves in a very interesting position. If they’re successful at marketing AirBar and PC users adopt this in lieu of Macbook with touchbar functionality, they can leverage their presence in the consumer market to launch new products using their optical technology, especially in the augmented reality/virtual reality space. It’s promising that they’re developing a human interface product with tier 1 automotive OEMs at the moment, but this will take 4-5 years as they said. If they’re smart, they’re probably working on an AR/VR product development as well, but this is also going to take at least a few years. So, the company can go down a few paths from this point on as I see it:
Regardless of their path, I don’t see this company failing anytime soon. Even though they’re operating in a highly competitive space, they’ve positioned themselves very well in the market with OEM partnerships and there are ample opportunities for their technology to be used in various avenues. I’m keeping my eye on Neonode.
I just can’t get to a positive free cash flow.. Their net income barely hangs on in the positive, but after accounting for capex and likely scenario in each year of their production and sales, their valuation looks dismal. Let’s start from the beginning…
Craft Brew Alliance (CBA) was formed in 2008 through a merger of Redhook Brewery, Washington’s largest craft brewery (founded in 1981) and Widmer Brothers Brewing, Oregon’a largest craft brewery (founded in 1984). They also added to their portfolio in the same year, Hawaii’s oldest and largest brewery (founded in 1994), Kona Brewing Company. CBA has 5 brands:
Management has been stable with the original CEO from the merger, Terry Michaelson, transitioning out of the role in 2013 but acting on as a senior advisor. The CEO that took his place, Andy Thomas, had been with CBA since 2011, and his prior experience includes executive position with Heineken. The Widmer brothers stayed on the Board but both have recently retired and the longevity of the Widmer brand remains to be seen, especially without the founders pushing for the marketing of their brand.
CBA distributes to retailers through wholesalers in the Annheuser-Busch network, and more than 90% of their sales come from this channel. A lot of risk in having the majority of their sales dependent on one distributor/wholesaler network…
CBA is riding the wave of the craft brew trend, but competition in this space is fierce, due to low barriers to entry (many local breweries can start with a business loan from the bank) and the attraction of a relatively high margin. In fact, in the last decade, the craft brew market has seen a double digit growth year over year. Craft brew now makes up ~21.7% of the total US beer market (as of Sep 2016). US craft beer production grew 20% CAGR from 2010-2015:
Source: WSJ Article
Breweries Association reported that in Dec 2015, the number of breweries in the US surpassed the previous record in 1873 with 4,144 breweries, many of which came online in the recent part of the decade. But, craft brew supply has now reached the demand, and we will likely start to see a plateau. The larger brands (Boston Beer, Sierra Nevada, New Belgium) have become stagnant because of so much volume in the marketplace, and it’s now the local breweries driving the growth of the market as opposed to the large brands. The 2 driving forces left in this competitive market to out-win competition are quality/innovative beers (such as introduction of nitro-infused beer) and lowering prices. (Source: Bevindustry.com Article)
Basically, craft brew has had a nice run, but we will be seeing more breweries in the near future, with the number of breweries starting to stagnate and decline in the next decade or two to come. And only the most innovative and creative/effective branding brew companies will survive.
Overall volume shipment of barrels has decreased in the last 2 years since 2014 because of declining popularity of Widmer and Redhook brands.
Even though overall volumes have decreased, net revenue has increased because of a higher average selling price from shifting from draft to packaged goods sold. The Company unfortunately probably won’t benefit much more beyond the current draft to packaged ratio, and in fact, recent quarterly filing saw a slight shift back to draft:
Therefore, a similar level of draft to packaged goods ratio and therefore a similar level of average selling price per barrel are assumed in deriving revenue.
The only noteworthy things to mention in the above valuation are:
And… now we’re back to square one. I am completely dumbfounded that the Company has been operating with a negative free cash flow. Clearly, a DCF valuation is not working here.
Key Risks & Opportunities Summary
Here’s my take. Widmer and Redhook brands have been around for a long time, but they never gained popularity outside of the Pacific North West (and a bit of lower West Coast). With a crazy influx of craft breweries in the last decade with local brands winning the hearts of beer fans in their communities, older brands just can’t keep up with the competition. Kona brings something unique, because it comes from the island, so it will be around for a while. And, CBA was smart to introduce Omission and Square Mile – something unique to the table. They better continue to introduce unique beer and grab niche markets, because the fate of Widmer and Redhook doesn’t look pretty. Either that or they better be keeping a watchful eye on undervalued brands that are sweeping the craft brew nation to acquire in the next couple of years.
It is slightly of concern that Annheuser-Busch is CBA’s exclusive distributor and that over 90% of their sales come from this partnership. But, it is not too alarming, because that’s just the nature of the business, and it is unlikely that A-B will suddenly raise their fees to ridiculous levels.
CBA’s capex levels have been pretty high and their expansion of the breweries for ~$20million a piece is scary. Their opportunity to fill the new increased capacity will come from increasing their international sales efforts and if they acquire or introduce a new unique brand.
What I see happening that is likely is that in a few years, CBA dismember their alliance of brands and either (1) operate as a lean company of one or two brands or (2) sell off their then-underperforming breweries for pennies and sell their more popular surviving brands to bigger brew companies like Boston Beer.
Source: Google Finance (Link)
Key Risks & Challenges
Key Opportunities for Upside