2023-04-01 21:03:43 ET
Summary
- Shares of Rumble rose nicely after former President Donald Trump was indicted and after reporting strong financial results for the latest quarter.
- This move higher demonstrates the rapid growth potential of the firm, but this may not be enough for many investors.
- While growth is nice, it's difficult to see a scenario where the stock is fairly valued at current prices.
When multiple events occur in a short window of time, it can be impossible to know which event had how much of an impact on a company's share price. Take, for instance, what happened with conservative media outlet Rumble ( RUM ) on March 31st. One day prior, the company announced financial results covering the final quarter of its 2022 fiscal year. Both revenue and profitability came in higher than anticipated. But also at that time, news broke that former President Donald Trump had been indicted on what is reportedly 34 different charges, many of which will likely be felonies related to business fraud.
On March 31st, shares to the company rose, closing up 7.1%. It may seem common sense that the earnings release was the driver of upside, but it is also possible that, banking on the stoking of political fervor on the right, the market may view the aforementioned indictment as a catalyst for further growth that the company might enjoy. This case is further strengthened by the fact that other Trump-oriented businesses also saw their share prices respond favorably to the indictment. Irrespective of what the cause is, it is true that the company is performing quite well from a growth perspective. On top of it, while the company is hemorrhaging cash at this time, it does enjoy a debt-free existence and it has a significant amount of cash on its books. Keeping politics out of it, which is hard to do when discussing a politically defined company, the value investor in me is not particularly drawn to Rumble on its own. While I appreciate rapid growth, I prioritize financial stability over all else. And given the cash outflows that the company has exhibited, it's not exactly my cup of tea.
A play on the conservative movement
In its regulatory filings, you will not see Rumble define itself as a conservatively oriented company. Instead, the company describes itself as a social platform that empowers content creators, particularly when it comes to video content, and delivers that content to those who want exposure to it. The firm also has its own in-house advertising platform, and it is working on a cloud-based IaaS (Infrastructure-as-a-Service) business that is planning to launch in the future that is focused on firms that find themselves at risk of cancellation by large tech cloud providers.
Regardless of the narrative that management uses, the company most certainly is geared toward a conservative audience. This much can be seen by looking at what it calls its list of ‘top content creators’ that it has established relationships with. Examples include Russell Brand, Dana White, Steven Crowder, Glenn Greenwald, and Dave Rubin. Regardless of your political alignment, there is no denying that the company has achieved remarkable success by going this route. Consider, for starters, its own financial performance.
During the final quarter of the company's 2022 fiscal year, which was just reported on March 30th, the business reported revenue of just under $20 million. This represents a massive improvement over the $2.9 million reported the same time one year earlier. It also significantly exceeded what analysts anticipated to the tune of $9.8 million. This kind of growth has become commonplace for the company. Consider how the firm fared from 2020 through 2022. Back in 2020, the business generated revenue of only $4.6 million. For 2022 as a whole, revenue spiked to $39.4 million.
Operationally speaking, the company benefited from a growth in advertising revenue that was driven by greater content consumption by its users, as well as the introduction of new advertising solutions for creators, publishers, and advertisers. The firm also benefited to some degree from a $1.8 million rise in licensing and other revenue thanks to tipping features on the platform, as well as other things like cloud revenue, subscriptions, platform hosting fees, and more. Given that I mentioned greater content consumption as a factor, it should be noted that the company recorded 11.1 billion minutes of content consumption per month during the final quarter of the 2022 fiscal year. That's up from 9 billion minutes seen in the third quarter and it compares favorably to the 8.5 billion minutes reported for the final quarter of 2021.
This increase was made possible in part by additional content being uploaded to its platform. 10,373 hours of video content was uploaded each day, on average, during the final quarter of the 2022 fiscal year. That's more than triple the 3,278 hours reported for the final quarter of 2021. And of course, the most important driver for the company, the driver that has made all of this possible, is the surge in global monthly active users. During the final quarter of last year, this number came in at 80 million. That's up from the 71 million reported only one quarter earlier. It also compares nicely to the 33 million that the company reported for the final quarter of the 2021 fiscal year.
The company is also working on other initiatives that it believes will increase revenue moving forward. On March 30th, for instance, the company locked in two additional sports leagues onto its platform, further increasing its exposure to live-streaming action sports. The first of these is Nitro Rallycross, while the second is Street League Skateboarding. A diversity of content should help to further fuel the company’s growth, since it will give users more reasons to come back to its platform regularly. In addition to this, on March 28th, the company announced that it was launching supporter badges and monthly subscriptions. At a price of only $5 per month, the monthly subscription badge that the company offers will monetize a creator's channel and will eventually result in the removal of advertisements for subscribers. However, this is most certainly a longer-term play, since the company said that, through the 2023 fiscal year, creators will receive 100% of the proceeds from these subscriptions.
It's great to see an opportunity for growth for any business. However, this growth is not exactly cheap. The company went from generating a net loss of $1.3 million in 2020 to generating a loss of $11.4 million in 2022. For the fourth quarter alone, it's worth mentioning that the company did essentially break even, with profits per share totaling $0. That beat what analysts anticipated by $0.02 per share. But with growth being a costly endeavor, it remains to be seen whether the company can continue to improve its bottom line. Over the same three-year window, operating cash flow went from a positive $0.1 million to a negative $32.3 million. Meanwhile, EBITDA went from negative $1.2 million to negative $32.9 million.
The good news for shareholders Is that the firm has no debt and it enjoys $338.3 million worth of cash and cash equivalents. This means that it has plenty of fuel that it can utilize before having to become cash flow positive. But this doesn't necessarily mean that the company makes for a great opportunity at this moment. Yes, I suspect that growth will continue for the foreseeable future. And eventually, the company probably will be on solid footing. But at the end of the day, it matters what price investors are paying for that growth. Because the company is in a net negative position from a cash flow perspective, you can't really value it. But you can figure out what kind of cash flows it would require in order to be at least fairly valued.
In the table above, you can see three different scenarios. The first of these looks at the operating cash flow and the EBITDA that the company would need to generate in order to be trading at either a price to operating cash flow multiple of 10 or at an EV to EBITDA multiple of 10. The second scenario calculates the same thing, except for a multiple of 20, while the third scenario applies a multiple of 30. Given the rapid growth the company has demonstrated itself to be capable of, in multiple near the higher end of this range probably would not be unrealistic. But even in that case, the amount of cash flow needed far exceeds even the revenue the company is currently generating. So it will take years before the company can be in a great position from a valuation perspective.
* $ in Millions
Of course, this doesn't mean that investors shouldn't buy either. This is clearly not a value opportunity. But for those who don't mind taking on risk and who don't mind paying a lofty price now for the prospect of additional growth in the future, I can understand the desire to pull the trigger. For those who do move in this direction, the common stock is logical to consider. But if I were in that position, I would be more interested in the warrants. At present, the company has warrants that are trading at $2.29. They have a strike price that equates to a common share price of $11.50 and they expire in September of 2027. If you were to invest $1,000 into shares of Rumble right now, and shares ended up moving to $40, you would end up with a profit of $3,000. But investing that same amount and the warrants would yield a profit around four times that in the same scenario.
The Trump effect
As I mentioned in the introduction to this article, it's impossible to know exactly what had the primary impact on shares of Rumble moving higher for the day. Clearly, the company performed well compared to what analysts anticipated. At the same time, there was news of the Trump indictment. The theory here is that his base is so ideologically committed that they will rally around anything that could be perceived as a threat to him and his political hegemony. In the past, this has played out in other scenarios.
Another company that saw its share price rise materially in response to this news was Digital World Acquisition Corp ( DWAC ). This is the entity that will be bringing Trump’s Truth Social platform onto the market is a publicly traded firm. On March 31st, shares of the company jumped 7.6%, almost certainly because of the idea that the indictment will push supporters to the platform and will create additional traffic that should generate advertising revenue and additional growth opportunities. Of course, with a more modest 2 million monthly active users on its platform, Truth Social is a far smaller entity than Rumble is at this time. But it could offer investors an alternative to Rumble depending on how things go moving forward.
Takeaway
Right now, Rumble has established itself as a leading voice in the conservative movement. Irrespective of your own political views, this is a monumental achievement and the trend looks set to continue working in the company's favor. I don't know what the primary driver was behind the share price increase for the firm between the two factors I noted throughout this article. More likely than not, it was a mixture of the two. When it comes to whether or not the company makes for a good investment, I will say that value investors may be wise to stay clear. As a value investor myself, that makes me compelled to rate the company no higher than a ‘hold’ at this time. But for those who desire growth, I can understand a more bullish stance.
For further details see:
A Trump Indictment And Strong Earnings: A Recipe For Growth For Rumble