Several years ago, Tom and David Gardner at the Motley Fool had a pitch called “The $2.2 Trillion War for Your Living Room,” all about what they described as both the “Death of TV” and “Television 2.0” — it was widely distributed and they used roughly the same ad, off and on, for about four years.
That particular spiel was for the Motley Fool’s flagship US Stock Advisor newsletter, and I last wrote about it here … but now their colleagues North of the Border are using essentially the same spiel and the same trend to pitch a very different kind of investment.
So today’s teaser unveiling focuses on Motley Fool Canada, which publishes Motley Fool Stock Advisor Canada… and has at least a little credibility when it comes to “find cool young stock” dreams because of their enthusiasm for Shopify (SHOP) last Summer (though SHOP was apparently also picked by David Gardner earlier last year for one of his US letters, and both the US and Canadian Foolies have been going bonkers over SHOP shares in their ad pitches for much of the ensuing 11 months — I also own shares personally, for full disclosure).
And the ad for the Motley Fool Stock Advisor Canada, which is now signed by Taylor Muckerman, one of their analysts, essentially takes the same tack as the prior “$2.2 Trillion War for Your Living Room” ads — traditional TV is dying, consumers are cutting the cord, but consumers still want their favorite video content and streaming services and content owners are going to find a way to profit. Those trends all seem to be accelerating at least a little bit, though the “winners” are not at all clear yet (at least to me).
The US version of the ad that ran for several teased the content owners, Disney (DIS), Scripps Interactive (SNI) and Discovery Communications (DISCA, DISCB, DISCK), but this pitch is not really about the content owners — it’s about a technology company that helps those content owners go “over the top” and stream their own video online.
So who is it? Let’s sample a bit of the ad to get us started:
“THE $2.2 TRILLION WAR FOR YOUR LIVING ROOM BEGINS NOW
“It’s a war with a lot more than two sides. And we think the winner will take most investors by surprise.”
They first pose a straw man question, “which cable TV killer could turn into the most valuable investment” with the options being Netflix, Amazon, Time Warner and Google, but then go on to spring a smaller idea on us:
“Which of these companies will be the ultimate cable killer?
“Surprisingly, we don’t think it’s any of them!…
“… we think the real riches could be claimed by a single company that is quietly flying under the radar…
“A small-cap that counts some of the biggest blue-chips in the world as its customer base:
[here they insert a graphic that includes lots of logos, including the NCAA, NFL, NBA, MLS, UFC and Univision along with many well-known technology and consumer electronics brands like Cisco, Microsoft, Samsung, Broadcom, etc. etc.]
“And yet, despite having incredible partnerships and seeing jaw-dropping revenue growth (roughly 34% annually over the last two years), this company still trades like a dirt-cheap penny stock…
“And – as we speak – we think they’re perfectly positioned for an estimated $2.2 trillion invasion of the instant content-on-demand business.”
So that sounds a bit interesting, right? A penny stock that has lots of high profile customers? What other clues do we get?
“The company that I’ve been talking about – the company that Stock Advisor Canada just recommended to members – is still flying under the radar.”
OK, that’s no surprise if it’s “trading like a penny stock.” What else?
“… it’s benefiting from some of the largest catalysts in the world… cord-cutting, live-streaming, mobile viewing, and on-demand content.
“And it hasn’t tried to just ‘corner’ one piece of the market – it’s literally a fully integrated tech company that can be a turnkey solution for any content provider out there.”
They also include a graphic, which shows usage going from 82 Petabytes streamed using this company’s streaming technology in 2012, to 307 Petabytes in 2015.
And they include a couple other clues:
“This $310 million hidden gem has been around for over a decade, slowly honing in on one of the biggest tech revolutions in the last 40 or 50 years….
“It’s capital light – it doesn’t have the infrastructure costs that the big cable companies have, nor the insane expenses of the content creators like Netflix (no writers, directors, illustrators, or producer fees!).
“Best of all, its revenue, which has been growing at a compound annual growth rate of over 28% over the last three years – is mostly recurring.”
So who is it? The Mighty, Mighty Thinkolator is on the case, and we can confirm that this is NeuLion (NLN.TO, NEUL OTC in the US), which is headquartered in New York but has its primary listing in Toronto (Stock Advisor Canada insists that half of their recommended stocks have Canadian listings).
NeuLion has grown up mostly as a technology provider for companies who want to stream sporting events, there’s a pretty good basic article about them from Newsday last year if you want an overview.
They are competing with several companies that offer different technologies for streaming, which is obviously a surging sector, and some of those companies have much heftier backing than NeuLion (like BAMtech, which was spun out of Major League Baseball, an early sports streaming pioneer, and boasts both an ownership stake by Disney and a CEO who built Amazon’s video streaming), so that makes me a little wary of trying to pick a small cap player as a future winner in this space… but they have been around for ages and they do have customers and revenue and at least some revenue growth.
I don’t think I’ve written about NeuLion before, but they also acquired DivX about two years ago and that was a stock, owner of a popular video transmission standard, that was teased by another newsletter back in 2007 as “The Next Cisco”. If you want to be reminded of the vicissitudes of the technology universe, just note that DivX was a company with a market cap of roughly $750 million in 2007 (they went public in 2006, at a time when it seemed like they were trying to “legitimize” and better commercialize the divx standard that was apparently also used for a lot of pirated material), and it was bought by NeuLion for roughly $60 million in 2015.
NeuLion itself has also been falling sharply this year — they were a C$310 million company as recently as early February, but have since dropped down to about C$220 million at a share price of 79 cents in Canada (the US OTC shares are at about $155 million and 56 cents, in case you’re keeping track). Presumably that’s because their 2016 financial results were less than inspiring, with year over year declines in both revenue and income for the fourth quarter, but I haven’t reviewed all of the financials so I’m not sure what exactly is going on.
They do have a good chunk of cash on the books, roughly C$50 million at the end of last year, and as of their last report they were about 3/4 of the way through their $10 million authorized share buyback… and they are getting close to break-even, but that’s been true many times over the past decade — over the past ten years they’ve even posted a small profit a couple times, and over the past five years their bottom line has always been within $10 million of break-even on the year (meaning they’ve not had real profits or losses of more than $10 million in a year, absent some one-time tax adjustments).
So from skimming the financials, it looks like a company that can probably keep chugging along… if you want to believe that they are going to spurt forward in leaps and bounds on some kind of growth curve, that belief will have to come from the ‘story’ of the stock, which means you’ll have to research them a bit more deeply, review their filings for at least a few quarters, and get familiar with where they might be growing and why that growth is not currently very dramatic (the growth in recent years looks much more dramatic, incidentally, if you look at the Canadian filings — over the last three years the US$ revenue has risen from $47 million to $99 million… in Canada the move was from C$48 million to C$132 million, mostly because the Canadian dollar was near parity with the US$ a few years ago but has since dropped down to about 73 cents US).
I don’t know the story beyond the basics, but stocks like this that have told much the same story for several years without great results make me a little nervous — they have been increasing their revenue in a meaningful way over the past few years, though 2016 really saw pretty flat numbers compared to 2015, but I wouldn’t feel compelled to buy a little company like this unless I saw some reason for the revenue growth to accelerate. “Streaming is growing” is probably a persistent trend, but I’m not clear when that trend turns into accelerated growth potential (or, dare we hope, actual profits) for NeuLion.
Which isn’t to say that potential isn’t there, it’s a very small company and I haven’t dug deep enough to find it yet — if you’ve got a burst of either optimism or pessimism to share about NeuLion, feel free to let it out with a comment below. And if you’ve subscribed to this Canadian offering from the Motley Fool, please click here to share your experience with your fellow investors. Thanks!