CURI: The NETFLIX For Documentary Nerds Tilting On Future Growth

• CuriosityStream is a streaming platform that offers thousands of engaging educational documentaries, short films, and series on science, history, nature, travel, adventure, and more.
• Strong management team, insider buying, hypergrowth estimates, and attractive gross margin serve as a bullish sign for CURI.
• Risk-reward based on valuation, trading multiple, potential dilution, and execution risk are unfavorable.
• At the current price, investors aren’t getting growth at a reasonable price as we estimate the fair value to be around $13.73.

What is CuriosityStream (CURI)?

CuriosityStream offers access to thousands of engaging educational documentaries, short films, and series on science, history, nature, travel, adventure, and more. If you relished watching classic Discovery Channel and Animal Planet type of content – this streaming service is similar. The company’s ambition is to address full category service within factual streaming and become what ESPN is to the complete sports category and not just a niche within sports like a golf or tennis channel.

Examples of some of the programs on offer include:

• David Attenborough’s Light on Earth
• Stephen Hawking’s Favorite Places
• Beyond the Spotlight by Leonardo DiCaprio and Stephen David

In August 2020, CuriosityStream underwent a reverse merger with Software Acquisition Group, Inc, a special-purpose acquisition company. Proceeds from this were mainly used to cover production & promotion costs.

Solid Management

CuriosityStream’s management team is packed with relevant experience in this industry. The company was set up by John Hendricks — the founder of Discovery Communications. Hendricks spent decades building the successful factual cable network, as shown below:

 Source: Company Presentation

His track record with Discovery instills trust and confidence that he could do the same with CURI. One valid question that might bother you is why did he left Discovery or not helped them transition towards streaming? According to him, Discovery could not fully take advantage of the ongoing shift in the entertainment industry from cable to streaming due to legacy obligations and restraints; CURI does not have these problems.

In June 2018, Clint Stinchcomb was appointed the CEO of CuriosityStream. He is an industry veteran and served as a CEO and a co-founder of Poker Central. This company ran a subscription streaming service called Poker GO, which was tailored towards the card-playing community.

Jason Eustace, the CFO, was the former head of finance for Bluemercury, Pet360 & Discovery.

Multiple options to Monetize content

• The company not only acquires and produces content for its direct subscription service; it also sells content via digital providers like ROKU, Prime Video, etc.
• It also offers bundled subscriptions via cable, satellite, and internet distributors. With a wide range of distribution deals worldwide, featuring Comcast, Altice USA, MultiChoice (Africa), StarHub (Singapore), Totalplay (Mexico), and Millicom (Latin America). This category has seen astonishing growth over the last four years (see below)

Source: Company Presentation

Although this comes with lower ARPU vs.. selling directly to the consumer, according to management, it enables scalability due to its newness compared to major players like NFLX, who achieved this in a decade. ARPU (Average Revenue Per User) is about 15 cents per month, which totals $1.80 per user per year. They receive 8 cents per month from bundled distribution users, which represents a majority of their accounts.

• Corporate partnership – where they target $20BN+ Fortune 500 yearly spending on Corporate Social Responsibility (CSR). Currently, 40 companies have purchased an annual subscription and represent 140K paying subscribers.
• Educational Partnerships -it will also sign multi-year contracts with universities and colleges to build streaming libraries on their behalf. Within their advisory board representation include the president of Georgetown University and a vice provost at Stanford University (among many other universities), there is good reason to believe this may take off.
• Program sales – where they will sell existing content and pre-sell originals to global media companies

Sponsorship and Advertisement – it does sell exclusive sponsorship slots for some of its contents. This is done in the form of 15-second pre-roll ads before the start of a show. For its bundled subscription 30-60 seconds, commercial on linear networks was recently planned.

Breakdown of Revenue TAM and Estimate % of Total Revenue:

Source: Company Presentation

Insider Buying

One of the legend investors, Peter Lynch, once said:

“insiders might sell their shares for any number of reasons, but they buy them for only one: they think the price will rise.”

As corporate executives sometimes have better insights about the firm and its future, this asymmetrical information between companies’ management and investor insider buying is seen as a bullish signal. It can be seen below founder John Hendricks has been galloping some CURI share recently.

Source: Simply Wall St

 Astonishing growth and gross margin

• In 2015, when the company was founded, the management hoped to acquire five to seven million subscriptions by 2020. They were able to surpass this, and current subscribers stand at 13M. Management is aiming for a 79M Subscription target by 2023. Due to its track record, there is a high probability they might be able to pull this
• Revs up 83% YOY to $8.7M in last quarter
• >100% Y/Y revenue growth in last three years with 50% CAGR estimated till 2023
• International partnerships, i.e., Tata Sky
• CURI intends to grow from 3100 factual titles today ($1.3B estimated original production value) to around 12k in 2025. Currently, NFLX has 500. When CURI started, it had a library of about 800.
• Gross Margin of >60% due to cheaper average production cost can be sustained long term. For example, it cost $500-600k for a top-end factual documentary to be produced, while scripted shows cost around five to six million.

Risks

• Rapid growth is vital for CURI – at the moment, relying on management, forecasts require a lot of execution.
• Risk of potential share capital dilution, assuming all warrants are converted, the fully diluted share count is estimated to be around 74.3M. An element market has paid less attention to, compared to its potential for profitability and growth.
• The majority of subscriptions came via bundles (12M out of 13M total subs), which have significantly lower ARPU
• Bundle subscription can cannibalize their direct offering as it is cheaper.
• What happens when competition decides they no longer need CURI on their platform or want to compete directly?
• Recent growth might be there as there were fewer sports in March and people stayed at home more (see google trends below). Can this be sustainable in the long run?

Source: Google Trends

Our Valuation case

Basic assumptions underlying the valuation model

• The perpetual growth rate of 2%
  • 5 Year Average of 10 Year UST is 2%
  • 2% is also the average of US GDP growth in recent years
• A discount rate of 15%

• Cost of Equity for NFLX us 7.4% based on Market Risk Premium of 6%, Beta of 1.06, and Risk-Free rate of 1%
• Additional to NFLX’s cost of equity, we added a Small-Cap risk premium of 7.7%. Why?

• Professor Damodaran estimated the stock premium of small-cap between 1926 and 2015 to be 3.82% on average. (You can find the study here). He also noticed the premium had a standard deviation of about 1.91%. To become 95% confident in our small-cap premium estimate, we took 7.6% as our premium (2 standard deviations from the mean).
• Liquidity Risk
• Price Volatility causing risk aversion for investors
• No previous price history, we cant estimate the cost of equity using CAPM
• Information uncertainty/asymmetry as it’s a new company

• Revenue Growth Rate – CAGR 40% divided into two stages
• Till 2025 we used management estimates Y/Y as given in its company presentation
• From 2025-2030 we took the average revenue growth rate of NFLX and Discovery channel as they entered from high growth to mature growth stage of the company’s life cycle

Company Life Cycle Framework

Source: Damodaran (2010)

• Gross Margin –Two Stages
  • 2020-2025 – company guidance around 60%
  • 2025-2030 – 60% Long term margin akin to Discovery and other streaming companies
• SG&A increases by 10% Y/Y
  • Since CURI is not capital intensive

• Operating income to FCFE conversion ratio of 60%
  • To remain conservative in our valuation

Fair value based on our valuation model

Source: MOAT Investing

Sensitivity analysis on key value drivers (discount rate and g)

Source: MOAT Investing

Multiple analysis VS peers.

As shown in the table below, CURI is trading at higher multiples relative to its peers. The market has already priced in the growth story for this stock. Implied growth priced in is higher compared to that of FuboTV, which has a similar business model. Additionally, it’s trading at a slight premium compared to Roku, which can be argued, addresses a significantly larger TAM market relative to CURI.

Price as of 5^th Jan*

Fubo and CURI share outstanding assumes potential dilution**

Source: MOAT Investing.

Conclusion

We believe that CURI is a hold at the current price (USD 16,33 p/sh as of January 8, 2021). Market consensus has aggressively priced in rapid growth. Although it offers an elevated level of growth at present, its niche business model limits its TAM. Despite management having a demonstrable track record, there is an inherent risk of executing their aggressive growth promise. That said, we will monitor this stock to see whether the company can hit its forecast (or surpass it). If they do so, it can tilt its way to becoming NETFLIX for documentary nerds, and we would eventually revise our stance on the stock!

About Antonio Velardo

Antonio Velardo is an experienced Italian Venture Capitalist and options trader. He is an early Bitcoin and Ethereum adopter and evangelist who has grown his passion and knowledge after pursuing the Blockchain Strategy Programme at Oxford University and a Master’s degree in Digital Currency at Nicosia University.

Velardo manages an 8-figure portfolio of his investment company with a team of analysts; he is a sort of FinTweet mentor, people interact with him online, and he has more than 40,000 followers after his tweets. He has built a fortune in the great tech years and put together a tail strategy during the pandemic that allowed him to take advantage of the market drop. “I did not time the market, and I did not think this was even a black sworn,” he says.

On the side of the financial markets, Velardo has a unique combination. He was a real estate entrepreneur that developed several projects in Tunisia, Miami, Italy, the UK, and many other countries and cities. But he has always been passionate about options trading. Still, contrary to the volatility player and quant trading, he always had a value investing touch in his blood. Antonio studied Value Investing at Buffet’s famous business school at Columbia University. Even though the central concepts of value investing are antagonists to the venture capital pillars, Antonio’s approach tries to bridge elements of both worlds in order to seek alpha. Velardo has learned the importance of spotting pure growth stories and taking advantage of their S-Curve position. This is an essential element of Velardo’s approach as he looks forward to embracing great tech stories at the right time of the adoption cycle. This applies to stocks but also to blockchain projects.