BZFD - BuzzFeed: Sell The Pop

Summary

• BuzzFeed's stock was up 300% in less than a week.
• The recent news is not that significant, and the stock price's reaction seems very exaggerated.
• The company's financials are a disaster as it struggles to generate any profit and has a huge chunk of debt.
• I rate the company as a sell.

Investment Thesis

BuzzFeed ( BZFD ) has been a disaster since going public through a SPAC deal with 890 5th Avenue Partners. The company's share price dropped from the IPO price of $10 in November 2021 to only around $0.7 last December. Yet, reports of its content deal with Meta ( META ) and the adoption of Microsoft's ( MSFT ) OpenAI sent the stock flying. The company was up an insane 300% in just a few days, now trading at $3.87.

I don't think the rally is justified as the news is not really meaningful, and the price action is mostly driven by short-term sentiment. The financials of BuzzFeed remain very weak. A lot of its "growth" is bought from the acquisition of Complex Networks, which resulted in a huge chunk of debt. It is also failing to generate a profit as net loss widened in its latest earnings. Revenue figures also completely missed previous forecasts. There is no reason to invest in it with multiple negative catalysts, therefore, I rate the company as a sell.

Recent News

For people who are unfamiliar with the company, BuzzFeed is a US-based digital media company that provides entertainment and lifestyle content. It mainly targets Gen-Z and millennials as a lot of its distribution is done through social media channels such as YouTube ( GOOG ) and Snapchat ( SNAP ). The company currently has over 38 million unique visitors across all channels.

In my opinion, the two recent news items that sent the stock flying aren't really significant. The deal with Meta seems huge but it isn't really. According to The Wall Street Journal , the deal is valued at $10 million and BuzzFeed will help Meta generate content and train creators to help grow their presence online. However, $10 million isn't really meaningful in the grand scheme of things as it only accounts for less than 10% of its quarterly revenue. The same goes for the other news where BuzzFeed will reportedly use OpenAI to create some of its content . Besides being able to cut some costs by reducing editor headcounts, I do not see this materially changing the company. The impact of AI in this case is certainly being exaggerated in my opinion.

Disastrous Financials

BuzzFeed's financials are pretty much a disaster. The company reported revenue of $103.7 million in Q3 compared to $90.1 million in Q3 of 2021, which represents a growth of 15%. But this is only due to its acquisition of Complex Networks back in 2021, which cost $300 million. The company did not disclose the standalone revenue for Complex this quarter, but from previous investor presentations , we know that its quarterly revenue is roughly $30 million in 2021. Therefore, if we assume no growth for Complex this year and take out $30 million from $103.7 million, the real revenue this quarter should be $73.7 million, representing a loss of 18.2%. This is more in line with the reported time spent on the platform, which was down over 32% YoY.

Besides, the company's net loss widened significantly. It increased S&M (sales and marketing) and G&A (general and admin) expenses by over 45.5% and 37.4% respectively, yet revenue is still struggling to grow. This resulted in a net loss of $(27) million compared to $(3.6) million a year ago. Meanwhile, adjusted EBITDA also went from positive $6 million last year to negative $(2.4) million.

The company also completely missed its own revenue projection for 2022. According to the company's 2021 investor presentation (as shown in the graph below), it targeted FY22 revenue to be $654 million with an 18% EBITDA margin. Yet, using the guidance given in the latest quarter, the company is likely to generate only $433.3 million with a negative EBITDA margin. This represents a whopping 33% miss in revenue.

Due to the acquisition, BuzzFeed now also has a net debt of $169.7 million. The company can't even generate an income, let alone pay down debt. Yields are currently too high for borrowing, so I think we will see a stock offering soon, especially after the pop. The huge debt load will likely weigh on the company for a while.

Investor Takeaway

There is nothing compelling about BuzzFeed and the extreme pop in share price is essentially purely sentiment driven, especially when the appetite for risks seemed to have increased this month. The two news items being reported are nothing significant and shouldn't have a material impact on the company. The financials are also a mess, with revenue up purely based on acquisitions. Excluding that, revenue actually dropped quite a bit, while net loss also widened significantly. The company also carries a huge debt load and I do not know how can they pay it down when they do not generate any cash. A share offering is likely the only way but will cause a massive dilution to shareholders. I think investors should stay away from the company due to financial concerns, therefore I rate it as a sell.

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