Online video is competitive, but poised to continue to grow. Is BBTV a good proxy for the sector?

As part of The Academy, I break down my thinking and experiences in Business: Entrepreneurship, Finance & Investment, Marketing, Management etc. In this series, I explain how I view stocks based on my time horizon, risk profile, and other personal criteria. Today we look at Broadband TV, or BBTV (TSX: BBTV). 

As a veteran of online video, I have seen a lot of companies and trends come and go. MCNs – or Multi Channel Networks – burst on the YouTube scene once it became clear that the number of creators on the platform would soar along with the volume of videos uploaded.

I’ve been prone to say that what scales quickly isn’t necessarily sustainable, and what is sustainable doesn’t scale overnight. That is a perfect description of MCNs.

Some of the early MCNs ended up finding corporate homes and delivered big payoffs to investors. 

Maker Studios sold to Disney for $500 million and with earnouts ended up representing a $750 million payday. But, it basically shut down later on.

Fullscreen sold to Chernin; once AT&T bought out Chernin’s stake in their Otter Media joint venture, then was swallowed into the WarnerMedia apparatus. But, once AT&T sought to reshape WarnerMedia empire to reflect its own DTC aspirations and goals, Fullscreen’s raison d’etre was unclear.

These are world colliding: the IP and talent that Disney and Warner Media nurtures, develops and grows are traditional; the talent on MCNs tend to largely be young creators who start on YouTube but over time evolve and expand onto Snap, TikTok, Facebook etc.

As of now, there remain a few MCN survivors. Studio71 (fma Collective) is based in LA but a wholly-owned subsidiary of German broadcaster ProSieben. But, by virtue of being in Hollywood, Studio71 diversified by adopting more of a media approach, built IP via content and shows. 

BBTV, meanwhile, was founded by Shahrzad Rafati, an Iranian-Canadian with a background in technology, and based in Vancouver, it was not surprising to see BBTV grow via technology solutions and building on top of YouTube’s API.

BBTV recently had its IPO, pricing itself at the low end of the range and debuting in the mid-teens, falling since below $10, before bounding back into the $12’s.

Mistakes, I’ve Made a Few

I have learned not to try to time the market. Once I saw the lacklustre IPO, I said that if the stock dipped below $10, I would consider buying some shares.

I’ve also learned that it’s ok to forego the first 5-10% of a stock’s possible uptick if it means you avoid a falling sword and increase the chances that the rally is legit and sustainable.

Lord knows I have enough exposure to YouTube via my direct stake in the privately-held WatchMojo (one of the biggest brands built on YouTube); but, I also think that the global macro trend of ad dollars flowing to YouTube is an overwhelming wind in its back – though it doesn’t mean it doesn’t come with risks.

Since the company’s business updates, I decided to proceed and build a small position in BBTV. This past weekend, a couple of research shops have come out with $22.50 and $24 price targets. While a risky bet, the following breakdown explains my rationale.

Business SWOT

Strengths

  • Big presence on Google – arguably ground zero for video advertising.
  • Tech offerings buffers it a bit from the downward spiral nature, lowest common denominator nature of MCNs. 
  • Reach, reach, reach. Ad dollars follow audiences. 

Weaknesses

  • BASE (plain vanilla MCN business) is majority of revenue, all factors being equal, not the most defensive of businesses. 
  • The company has spent $200 million to get to its IPO, but still not a money-maker, and MCN’s intrinsic nature makes profitability hard.
  • PLUS (the SaaS like offerings they provide marquee clients and larger creators) is a small minority.

Opportunities

  • Great proxy for shift of TV ad dollars to Web > streaming > AVOD.
  • That means, converting Base to Plus represents upside.
  • Moving more and more accounts on YouTube Select can unlock revenue upside
  • Stock gives company a currency for M&A, although stock is risky, since:

Threats

  • Company issued guidance for Q3 and outlined Q4 to be profitable, but as Q1 is the weakest quarter, the chances the company dips back in the red remains considerable. Normal to see great momentum in Q4, but Q1-2 will likely dip back into the red. While the long-term attractiveness of the market won’t change, the near-term P&L will be under pressure in weaker quarters with overhead costs remaining fixed.
  • MCNs are not defensive; with annual contracts up for renewal regularly, this is a native threat to the business.
  • Unlike Studio71, BBTV has not really invested as aggressively into content and real defensible content  IP – normal since Studio71’s base in Los Angeles naturally gravitates towards content.

Bottom line: 

The elephant in the room: Germany’s RTL (a subsidiary of Bertelsmann) had bought 51% of the business in 2013 for €27 million and subsequently poured additional debt (€19.8 million in the form of convertible notes).

But, when push came to shove, RTL did not exercise their Call options to buy the rest of the firm and sold their stake in the IPO. On the one hand, that’s as big of a risk as any: why would a company with all of the info possible balk? Why? I asked Ms. Rafati in anticipation of this article but didn’t hear back.

I think for many traditional media, their expectations for what firms like Maker and Fullscreen could do was very high (RTL had expectations for Broadband to fetch $1 billion) if they were hoping that “digital quarters would replace analog dollars.” But Maker and Fullscreen’s eventual demise had less to do with those businesses, but rather, how those units resonated within the bigger Disney and Warner Media empires, especially in the brave new DTC world. Don’t get me wrong, MCNs remain a challenging business.

So much of business success boils down to timing. Is it possible that now that BBTV has persevered to IPO, it can ride into a profitable future? Maybe. But the jury’s out. 

As with all IPO shares, the lockup period is a restriction that prevents shareholders of a company from selling the stock before and after the company goes public, it can range anywhere from 90 days to 180 days after the IPO. So, expect some downward pressure. But based on one’s time horizon, that may be a manageable and worthwhile risk.

Valuations are a reflection of many things. Aside from financial fundamentals,

  • for private companies, valuation boils down to demand and supply (i.e. how many bidders a company attracts);
  • for public companies, it boils down to multiples (and thus an attractiveness of the market). At a market cap of $200 million, it’s plausible to envision how BBTV can appreciate in value. Of course, if the company doesn’t achieve sustained profitability, then there’s the risk of stock dilution or debt. 

As Studio 71 is a unit within ProSieben and investors can’t directly participate in its story, BBTV is an intriguing proxy for online advertising, which remains a bright spot.

If you want exposure to Google/YouTube, BBTV is a good proxy as buying Alphabet / Google gives you less exposure to YouTube (with a market cap of $1.7 Trillion, Google generated $134 billion in 2019, with YouTube contributing $15-20 billion of that).

Now granted, not only BBTV is not Google/YouTube, it also pays out a higher revenue share to partners versus what YouTube shares. In other words, this is a risky bet despite online advertising’s momentum towards video. But, at a market cap of $200 million, I like the possible long term upside. I can also imagine a number of acquirers who would eventually want to own an asset like that: access to creators, technology, and YouTube know-how.

While MCNs scaled quickly, they weren’t sustainable businesses. But in all markets, the survivors can eventually get the model right. Broadband’s CEO remains a highly visible leader who will command investor and media attention, but ultimately, whether or not Broadband delivers results for investors will boil down to the company’s ability to execute and adapt to move beyond being a mere MCN.

Disclosure: Since the company’s business updates, I decided to proceed and build a small position in BBTV. This past weekend, a couple of research shops have come out with $22.50 and $24 price targets. Here’s a link to my anti-portfolio which includes my investment thesis and a link to my current portfolio.

Disclaimer: This is not investment advice and is instead intended for informational and entertainment purposes only. As part of The Academy, I break down my thinking and experiences in Finance & Investment, Marketing, Management. In this series, I explain how I view stocks based on my time horizon, risk profile, and other personal criteria. Please consult a professional before making any investment decisions.