Gaia Inc. (GAIA) Analysis
Gaia is a company with an unintuitive competitive advantage and high operating leverage. As it continues to lower customer acquisition costs through organic marketing and increase customer lifetime value, it will be able to start producing meaningful amounts of free cash flow.
Gaia was started in 1998 (Gaiam at the time) and produced yoga clothing and nutritional supplements. In 2005, it acquired media assets. In 2017 the CEO sold off all the parts of the business other than the media business to focus on creating a subscription video-on-demand (SVOD) platform for niche subjects.
Currently, the SVOD platform has four different types of programming. It has content focused on yoga, transformation, alternative healing, and seeking truth.
Yoga: The yoga segment publishes videos focused on guided meditation and yoga. They’re similar to the type of experience people would get from attending a class at a yoga studio. The online instructional yoga video market is quite competitive, so Gaia has positioned itself as offering content more geared towards people that are interested in becoming yoga instructors. Yoga used to be Gaia’s most popular segment, but the market dynamics made it less profitable than other areas, so they’ve dedicated less resources towards it.
Transformation: The transformation segment focuses on spiritual growth, personal development, and expanded consciousness. Most of this type of content is focused on helping the viewer better understand themselves and how to become a better person. Most of this content is what someone might expect when they think of “personal development and spiritual growth”, but some of the content starts to dive into topics like psychic powers and chakras.
Alternative Healing: Alternative Healing is primarily focused on food & nutrition, longevity & wellness, and energy healing. This segment discusses traditional topics like how to have a healthy diet and how to live a longer life, but also delves into topics like immortality and energy consciousness.
Seeking Truth: The Seeking Truth segment discusses metaphysics, secrets & cover ups, ancient origins, and paranormal & unexplained events. To put it bluntly, this segment is primarily focused on conspiracy theories and what popular science would call “falsities”.
Gaia has been able to create a niche in the streaming business by focusing on operating segments with smaller TAMs and fringe ideas. It originally poured a large amount of money into advertising to build up its customer base to dominate niche streaming communities so that it was large enough to acquire any potential competitor. Gaia has done a good job of levering its size relative to its peers by completing acquisitions that have brought in new communities. In 2019, it acquired an alternative healing and healthy eating streaming service for $77 per subscriber. This acquisition was in line with its customer acquisition costs from marketing, so it was able to buy subscribers for its normal price and get all the streaming service’s content for free. Gaia waited several years (until the price was low enough) to acquire the company.
Although Gaia has mitigated the threat of new entrants with its size, the real competition are traditional streaming services like Netflix, Amazon Prime Video, and Hulu. Although all the big players have substantially more resources than Gaia, they lack Gaia’s user base. An advantage of posting videos about fringe subjects and conspiracies is that the average person isn’t interested in it. The dilemma for Netflix (and other large streaming services): Gaia customers watch Netflix content, but the majority of Netflix customers are probably uninterested in watching Gaia’s content.
In recent years, Netflix, Amazon Prime, and Hulu have all come under fire for content that doesn’t have product market fit. In January of 2020, a Wired article criticized “The Goop Lab” and other Netflix titles as pseudoscience. Also, in 2020 a Vox piece commented on the negative consequences of conspiracy theory and pseudoscience content posted on Amazon Prime video. These and similar news stories reflect the recent trend to treat misinformation and/or offensive content more seriously. Recent examples: Netflix was burned when a sizeable number customers cancelled their subscriptions after the service aired the movie “Cuties”. In October, Youtube posted that misleading or harmful content would be deleted.
Gaia’s unintuitive competitive advantage-- it’s content is too hot to handle (for large streaming services).
Over the past two years, Gaia has pushed to lower its customer acquisition costs by increasing its organic advertising relative to paid advertising.
In the past, Gaia grew subscriptions quickly, but paid too much for lower quality subscribers. Originally focused on the yoga market, Gaia soon found the instructional yoga video market to be incredibly competitive and most of its yoga subscribers to have low lifetime values. The company focused its advertising on Facebook, Youtube, Instagram, and Google ad campaigns and under used organic advertising channels through member referrals and emails.
That changed in late 2018, when Gaia started to focus more heavily on increasing customer lifetime value and decreasing customer acquisition costs at the expense of a higher subscriber growth rate. After originally focusing on a 2:1 LTV:CAC, it increased to about 5:1 in late 2020. Revenue growth dropped from over 50% annually to the low 20s. Gaia lowered customer acquisition costs by boosting its member referral programs, having Gaia ambassadors, and partnering with Youtube channels. Also “Gaia” as a keyword on google searches started to draw customers. The referral program allows members to share links of Gaia videos to their friends for free. Generally, members referring friends are adding about 1 to 10 new members each. Gaia ambassadors are incentivized through profit share and are responsible for referring more than 10 subscribers. Some ambassadors have referred over 250 new subscribers. Partnering with Youtube channels has also brought down acquisition costs because Gaia gives the Youtube channels permission to show extended clips from its content catalog in exchange for promotion.
Management’s focus on lowering customer acquisition costs, but sacrificing on growth has also helped lower customer churn rate. Although the company doesn’t provide data for churn rate, my calculations suggest that churn has dropped from 87% in 2018, to below 40% in 2020. These churn rates are still elevated compared to larger streaming services who have customer churn rates in the mid-single digits.
Gaia’s management changes their goals somewhat frequently, but the general way they’d like to move forward is to grow revenue at least 20% a year without lowering the LTV:CAC ratio.
Revenue growth is being driven by increasing customer LTV and growing the subscriber base. Management has made a strong effort to increase customer LTV by finding ways to increase subscription fees (ARPU) and prolong the subscription length of the average customer. Up until Q4 2018, subscription fees were $9.99 per month or $99.99 per year. Since then, it created a premium live streaming offering for $299 a year, increased monthly subscription prices to $11.99, and held the yearly subscription price at $99.99. The $299 livestream subscription gives subscribers access to all of Gaia’s content library and to exclusive live streamed events in the Gaiasphere (Gaia’s live filming studio). Gaia also sells tickets to attend the livestream in person to 300 people for $750 each. Gaia’s initiatives have caused LTV to increase from $260 in Q4 2018 to about $300 in 2020. Over 50% of members have been subscribed for over two years.
Gaia is dedicated to increasing the number of subscribers (as well as their value to the company), by marketing and increased content. In the past, Gaia focused primarily on increasing its subscriber base in the United States and other English-speaking countries. Since 2018, it has done test marketing in other areas to see which countries might have the best bang for the buck.
Management has signaled its intent to focus on international expansion in 2021. Having previously added subtitles and dubbed videos in French, Spanish, and German, Gaia is now starting to produce original content in those languages as well. Several job postings on Linkedin confirm that international expansion is on its way.
Operating Leverage & Capital Efficiency
Since 2018, Gaia’s main goal has been to become a cash generating business, by decreasing customer acquisition costs, increasing LTV, growing the business, and reducing operating costs. Consider one metric, gross profit per employee: In Q3 2018, gross profit per employee was at $292,000. In Q3 2020, it increased to $513,000.
Besides the costs associated with building out the Gaiasphere, general and administrative costs have been relatively flat as Gaia has grown revenue by 100%. Selling costs have a reasonable amount of variability but continue to come down as a percentage of revenue. Management has stated they will continue to reduce all costs as a percentage of revenue other than content creation, which will be a fixed percentage of revenue.
Given that content creation will be the primary reason for reduced operating leverage moving forward, it's worth looking at the cost to produce content relative to other production studios. Gaia produces content for 500 times less per hour than Netflix. Much of this low-cost advantage is due to the nature of its content. Gaia shoots its yoga films in one location. Other content is primarily interview based. As revenues grow, Gaia will be able to scale up its content base at a lower cost than its peers.
Another example of operating efficiency is Gaia’s ability to have negative working capital. Gaia’s advertising take rate is about 30%. This allows Gaia to recover about 70% of monthly customer acquisition spend in the same month as it was spent from conversion of those leads into paying subscribers.
Financials and Valuation
Management has been quite clear on their plans for the company. Management wants to grow revenues at least 20% annually, lower costs as a percentage of revenues (other than content spend), focus more on international growth, and maintain the LTV to CAC ratio.
Below is a list of all the assumptions I made for my model. I think these are all reasonable and conservative assessments based on all information I have access to. I’ve used these assumptions for each case of the three-case analysis.
The more discretionary levers I use that dictate the differences between the bear, base, and bull case are subscriber growth, ARPU growth, churn rate, and changes in CAC.
The bear case assumes revenue growth will continue to decline as management is unable to gain subs at their required LTV:CAC ratios. I anticipate churn increasing a bit as the company increases CAC and brings on lower quality subscribers.
The base case gives management some credit for their efforts in meeting the 20% growth rate, but assumes they fall short. I assume that customer acquisition costs don’t derive further benefit from organic marketing. I also assume that churn continues to decline at a lower pace than previous years.
The bull case gives management credit for all their efforts that have shown merit. Subscriber growth rate stays at about 20%, ARPU grows as more customers join the livestream premium subscription, customer acquisition costs decline as organic marketing continues to perform, and the churn continues to drop at the same pace as previous years.
Based on the assumptions, the valuation model looks relatively favorable. I think the distribution of future outcomes is wider than the three-case scenario analysis implies, but the trajectory of the business would have to materially change for me to underwrite them.
I’ve decided to not include cash in my price target as I’m not confident on management’s intentions for cash usage.
Why Does This Opportunity Exist?
Whenever my analysis determines that a stock has the potential to generate a high IRR, I think it’s important to understand why the market hasn’t picked up on the opportunity. GAIA is a microcap company that has been losing money for years (the stock doesn’t screen well). Without understanding its competitive position, analysts may be quick to write it off as being unable to compete against larger streaming services. I also think analysts may not be able to notice the high degree of operating leverage that Gaia has.
Gaia faces risks in advertising, employee retention, customer churn, and management decisions.
Advertising Risk: Advertising is crucial for Gaia to grow and some of Gaia’s content is generally looked at as being misinformative. Large technology companies are starting to focus on stopping the spread of misinformation. This could lead to Gaia being unable to advertise on certain platforms.
Employee Retention: After reading through several employee online reviews and interviewing prior employees, the work environment of Gaia isn’t optimal. Some employees have issues with some of the content Gaia publishes and management is seen as being too focused on financials. Many of the critiques are aimed at upper management and their inability to breed a positive corporate culture.
Customer Churn: According to my calculations, churn is roughly 8% quarterly (36% annualized). This is quite high compared larger SVOD peers, which average in the mid-single digits. If churn is unable to be brought down, Gaia will have a difficult time creating high profit margins.
Management Risk: Jirka Rysavy, the CEO, owns over 30% of the shares outstanding. He has significant influence over the company’s future. Although Jirka’s background suggests that he’s highly competent in running a company, there have been several failures throughout his career. Jirka was forced out of Corporate Express in 1999 for making bad acquisitions. Gaia has also made several bad acquisitions in the past that were spun off and subsequently had large declines in their stock prices.
Base Case Valuation Model
Gaia’s Youtube Statistics
Gaia’s Facebook Statistics
Website Traffic Statistics
Disclosure: I own shares of $GAIA.
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