I have a confession – I rarely watch TV. Unfortunately, I have the attention span of a 5-year-old which means that I can barely make it through a movie without checking my phone (or falling asleep). When I do watch something on TV, it’s nearly always factual content (streamed from an app on my phone). Though my habits may be somewhat peculiar, it has get me thinking about the broader TV-on-demand market and how it’s being disrupted in a major way.
TV-On-Demand is a fast growing market
The TV-on-demand market is projected to reach $171bn by the end of this year, boosted by apps such as Netflix and Prime, that have made our TV watching less painful. The market for TV Streaming has been growing at a spectacular 30% compounded rate over the last nine years and it isn’t stopping there. By 2025, it’s expected to more than double in size.
Stealing market share
What is interesting is that Total Revenues in this market are not actually getting much bigger. Instead, TV streaming services have been stealing market share from Traditional TV broadcasters, as more people ditch scheduled TV programs, in favor of on-demand shows they can simply watch/stream on their Smart TV’s.
TV Streaming as a secular growth trend
Surprisingly, watching TV on demand is not something that’s unique to a certain age group. TV streaming has penetrated all age groups and approx. 50% of people use TV streaming services on a daily basis (and for most, at least several times per week).
For a bit of context, every month during quarantine, US Netflix subscribers alone were streaming six billion hours worth of TV content. That’s 16 hours per month, per person, living in the United States. In fact, six major new streaming services were launched during the quarantine period alone.
If you’ve read my previous articles you will know that this is a type of industry that I like to invest in. TV streaming has shown both that it is disruptive and that it is experiencing secular growth. And resultingly, we can see that nearly all major TV streaming services have experienced phenomenal growth over the years.
Competing for content
Traditional TV broadcasters have seen the writing on the wall and have launched their own competing TV streaming apps (e.g. HBO+, Disney+, Peacock). Resultingly, the new form of competition in this market is about who can get the best content (and exclusivity) on their platform.
We’ve seen this play out with businesses like Comcast (NBC) and HBO Max (Warner Media) taking exclusive content away from Netflix to host these on their own TV streaming subsidiaries. In the last year alone, Netflix lost ‘Friends’ to HBO max and then ‘The Office’, to Peacock. Amazon has spent $1.2bn/pa to get exclusive access to live stream the NFL and companies like Disney + have taken away nearly all proprietary content from competing platforms.
Niche content providers
Unlike in the last few years where we have seen ‘Tier 1’ providers that provide streaming services experiencing the greatest share of growth (e.g. Netflix, Prime, Hulu), I think the future of this industry belongs to ‘Tier 2’ companies that instead, focus on producing the best content (to stream).
This is when I came across ‘Curiosity Stream’ (Ticker: ‘Curi’).
Curi is a media streaming platform, with a focus on factual entertainment (such as documentaries and seminars). Their business model is focused on creating (and licensing) factual based entertainment and incorporating these onto TV streaming platforms.
As it stands, they have +16m paid subscribers (of which over 75% are on annual plans), host +3,000 titles and have been growing at over 100% CAGR over the last couple years.
Why is factual entertainment the perfect niche?
Before drilling down on Curi’s business model, I must say that I think that factual entertainment is probably the best niche to be in if you’re competing over content.
This is because documentaries don’t have the same problems that other types of programs have; they have broad based appeal across age groups and language groups (as they don’t’ rely on scripted content that’s hard to localize), they stay relevant across a longer period of time (documentaries take a lot longer to age) and have much lower costs of production.
As a point of comparison, one of the most expensive documentaries ever produced was BBC’s ‘Planet Earth’, which cost ~$2m per episode ($25m over five years and eleven episodes). Meanwhile, in the final season of HBO’s hit series ‘Game of Thrones’, each episode was costing $15m to produce. Yet despite costing 7x as much, both shows had a similar average viewership across all episodes.
Curiosity Stream’s Business Model
Unlike other TV streaming providers such as Netflix and Disney+, Curi does not rely solely on Direct-To-Consumer (DTC) subscriptions. Instead, Curi is tapping into the market for ‘Bundled Distribution’, which means that it sells its subscriptions to a larger service provider, such as Sky, who would then combine this with other TV services and then sell these directly to the consumer (as a bundled package).
Arguably this is a lower margin business but it is a vastly bigger opportunity and de-risks the platform from the same issues that Netflix has experienced competing against Disney+ and Comcast. This is because contracts for Bundled Distribution are multi-year (multi-million-dollar contracts) and allow Curiosity Stream to focus on it’s core business of creating the best content, leaving the distribution to larger players.
As of right now, over one third of Curi’s 3,000 titles are home produced content whilst the rest is licensed. This is above the industry average of 22%/78%. What is more impressive is that Curi is beating the industry average at such as early stage of its growth trajectory, where arguably cash is likely more constrained (due to less paid subscribers). For context, Netflix spent 17x Curi’s entire market cap in original content creation just last year.
The reason I think Curi has managed to cement such a strong grounding is because it has a very solid management team. The Founder of Curiosity Stream was the ex-founder of Discovery Channel, John Hendricks. He launched Curiosity Stream in 2015 to be the leader in factual content streaming. The COO and CEO both have nearly 50 years of experience between them and are also ex Discovery Channel employees so it’s safe to say they know the business well.
Curi’s strategy is to first create superior content and then increase the amount it charges for it’s products (through Bundled and Direct-To-Consumer packages). As such, it is still significantly cheaper than it’s competitors and I expect it will continue to gain market share from its rivals during this phase of growth (though still with sizeable Gross Margins, which I will discuss below). Ultimately, this should only serve to generate more cash flows to put back into content creation and cement Curiosity Stream’s unrivalled value proposition.
In 2020, Curiosity Stream had an average 61% Gross Margin (and 58% in Q1 2021). By way of comparison, Netflix, the biggest TV-on-demand provider, has 39% Gross Margins. These are outstanding margins particularly when most of the economies of scale are still largely untapped for Curi.
The second thing that stands out to me is that Curiosity Stream’s business model relies on annual/multi year subscription plans. The advantage this has is that it makes forward revenues much more predictable (as management have a good sense of what they will earn in future months based on these ‘locked-in’ subscription plans). In their last report, management claimed to have 90% visibility on all future revenues, which allows for much better financial projections.
Stock Price Model
On that note, management forecast revenues of ‘at least $71m for the current financial year’. This would imply at least 80% y/y revenue growth (and 120% revenue growth the year prior).
Assuming Curi is able to achieve growth of just 45%-55% over the next five years (at a compounded rate), and optimized margins of between 18-23% (management expect closer to 22%), a price to (implied) earnings multiple of between 15-20x in year five, Curi stock looks to have 40% upside at current levels. In the worst-case scenario (assuming bottom of those ranges), it has 40% downside.
Arguably, this isn’t the best risk/reward (especially when compared to the companies I have analyzed in previous posts) and this is largely because the stock price has been running significantly higher the last couple weeks.
Nonetheless, there are two key catalysts here which I think have provided an excellent entry point for new investors.
During Curiosity Stream’s first quarter results, the company reported revenue of $9.9 million. Management reaffirmed guidance that they will hit $71m for the financial year (see note about visibility above) but investors bailed and the stock was down 27% at one point following the earnings release. The sell-off was a clear overreaction since management reaffirmed its full-year guidance for $71 million in sales. Since then, the stock has bounced back from it’s lows but still remains significantly down for the year.
This year, Curiosity Stream acquired One Day University, which is a platform featuring over 500 unique talks and lectures from professors at over 150 colleges and universities. I think this is a great addition to the platform (at very little cost) as it allows Curi to move into e-learning verticals and we are yet to see this reflected in their financial projections.
Admittedly, I have been a bit late in sending this report out. I came across this business a month ago and decided to buy a combination of stocks and call options after the post earnings sell-off (I have now liquidated my call options positions), before I got the time to put out this report. I’m also a sucker for documentaries and I do have a strong preference for buying stocks in businesses where I personally love the product.
However, despite this recent run, it does look like there is still sizeable upside based on management estimates and using very conservative financial projections (on multiples and revenues growth, as I have above). As a result, I will be looking to add to my position around here, and will dollar cost average on any pull backs in the share price (which would get me to a >1 Risk/Reward on this position).