Libsyn (LSYN): A Pretty Cheap and Very Fast Growing Podcasting Company in an Industry with a Ton of Competition
This is a complicated one. So, I’m going to do my best to boil it down to the things that really matter. That’s a judgment call. And it means I may be focusing on the wrong things. I may not be telling you enough about some things that do matter a lot and fixating instead on some stuff that turns out not to matter as much as I think.
Libsyn is one of the biggest and oldest companies in podcasting. It has been there since the beginning of podcasting basically. And unlike almost every other company in the industry – it’s profitable. It’s been profitable for a while. And it’s likely to continue to stay profitable. This company (Liberated Syndication – ticker LSYN) also owns another Pittsburgh, PA company called “Pair”. Pair is a website host (and domain registrar) that is also very old and also profitable. Pair has been around since the mid-1990s. Libsyn has been around since the mid-2000s. Both have basically been there since the start of their respective industries. As I write this, Libsyn (the podcasting company) accounts for maybe 60% of the gross profit, EBITDA, etc. of the combined company and Pair for the other 40%. However, I’d personally appraise Libsyn as much more than 60% of the combined company’s intrinsic value, because I think it’s likely to be a fast grower.
Why?
Podcasting is a very, very fast growing industry. It’s hard for you to realize just how fast growing it is. As investors, we’re used to thinking in dollar terms. We look at revenue and gross profit and so on in terms of dollars. We aren’t managers and often don’t see the underlying unit growth. Unit growth is the physical – of course, in this case it’s actually intangible – growth in the industry. The number of podcasts, podcast episodes, monthly audience figures, etc. is the “unit growth” in this industry. It’s the growth independent of pricing. Most industries in the U.S. – if they are growing at about the same rate as the overall economy – only grow at a rate equal to population growth plus output per person. So, before inflation, an industry that’s growing at a healthy rate might be doing 3% unit growth a year. This means it will double in real size about every 25 years. A fast growing industry – something more like electric vehicles and hybrids and so on – might be growing at like 7% a year. This means it will double in real size about every 10 years. Podcasting is growing much, much faster than that. In recent years, most of the key metrics that Libsyn tracks have been growing at about 20% a year. This means it doubles in real terms about every 4 years. To put that in perspective, at the rate podcasting is growing in terms of number of shows, number of episodes, number of monthly listenership, etc. we are talking about something that will double in size by 2024, quadruple by 2028, and increase eight-fold by 2032. I like to look at 15 years max when analyzing a company. That’s hard to do here – because, unless and until podcasting slows down a lot, you’d be looking at a company (Libsyn) that would go from having about 110 million listeners a month (it’s actually higher than that now, but that’s what it was last year) to about 1.7 billion listeners a month in 2035. Now, of course, that doesn’t mean that 25% of the world’s population will be listening to a Libsyn hosted show in 2035. Some people who listen to podcasts could listen to several Libsyn podcasts a month. But, that’s the kind of growth we’re talking about here. We’re talking about the kind of growth you saw in radio, movies, TV, etc. in their early decades. A business growing that fast should be worth a high multiple of EBITDA if it will continue growing very long at all. Libsyn doesn’t have a high EBITDA multiple.
Libsyn – the combined company – has about 30 million shares outstanding. The stock price is $3.10 a share. So, that’s a market cap of $93 million. Net cash is about $9 million. Let’s round off the enterprise value and call it $85 million. Recently, EBITDA was about $7.5 million. Other than taxes – which Libsyn is now paying (in fact, an IRS audit showed it should’ve already been paying taxes) – this company has very little (almost no) cash expenses below the EBITDA line. As it grows, it also generates some float. So, free cash flow here should be roughly EBITDA times one minus the tax rate. If taxes are 21% in the U.S., then 0.79 times (let’s call it 0.8 times) EBITDA should be normal free cash flow. That’s $7.5 million times 0.8 equals $6 million. So, you have a business valued by the market at $85 million doing about $6 million in “owner earnings” in one of the fastest growing industries around. It’s trading at a P/FCF of like 14. Let’s say 15 is normal. Let’s say Libsyn is trading at around 15x P/FCF. You are paying nothing here for the fact earnings are going to grow much, much faster than stocks in other industries. This looks like an amazing investment.
But, there are problems. The board is currently split 50/50 between an activist investor (Camac Fund) and presumed supporters of the CEO (Chris Spencer). The SEC brought a complaint against the CEO. If you read that complaint – I’m not going to link to it or talk about the details, because I don’t know what is true and isn’t and don’t want to criticize someone by name (one of Buffett’s best rules for life) – you’ll see that it’s a very, very serious complaint. Technically, Libsyn is a spin-off of FAB. And this also presents problems, because there could one day be legal issues due to what FAB did. Again, just look for the SEC complaint. Judge for yourself.
There are also some little things about how the company is run that are interesting. It’s a Nevada corporation. It’s technically a spin-off of FAB. The former CFO and current CEO had a very serious SEC complaint involving them. The company settled in a way that split its board. It had tax problems related to that IRS examination I mentioned above. The current CEO seems like a part-time or at least “remote” CEO from what I can tell. Not that that’s necessarily a negative if you read the SEC complaint. The company also seems to keep almost all of its cash – at times, this has been like $17 million – in basically just one bank account. There’s almost certainly nothing nefarious about that. But, it is unusual for a company sitting on that much cash – and adding more than $100,000 a week to the cash pile – to have the same “treasury management” operations as like a tiny business. The company did just announce a new CFO hire. So, many of these things may change. It’s also possible the split board is focused on more contentious stuff than where the company parks its cash.
On the other hand, I kind of do like management here. Not top management. But, the management one to two layers below. The company has a President who runs both Libsyn and Pair. Andrew has spoken to her. She seems diligent, knows her stuff, and is on site in Pittsburgh. A level below here you have a really excellent and knowledgeable podcasting pro who heads up podcaster relations at Libsyn named Rob Walch. Listen to his podcast “the feed” (I’ve listened to dozens of episodes) to get some good insight into how podcasting works. He’s very good. The management bench here is deep with people who are perfectly good at what they do. The top podcasting people at Libsyn are very involved in industry events, trade magazine type online stuff, etc. They are long-tenured, industry veterans. They are active, well-connected, etc. If the podcast industry is lobbying for or against something, doing some industry trade group type PR stuff, etc. – expect people from Libsyn to be part of it.
The business has amazing economics. But, the industry has a really weird competitive situation. Libsyn (now, I’m talking about the podcasting side) gets 64% of revenue from podcast hosting fees and 17% from bandwidth charges. It also gets a few percent from apps. Ad revenue is less than 15% of revenue. This is completely different from all its competitors. And the last time there was an industry shake out – following the 2008 downturn in ad revenue, VC funding, etc. – a lot of competitors died out.
The Libsyn model is durable. The model used by competitors – some of which have better user interfaces, way better funding than Libsyn, and some pretty fast growth – is not very sustainable. Competitors generally use a “freemium” model and burn lots of cash. They seem to hope to eventually develop a big ad supported side to their network of podcasts or to sell out to a bigger company.
Everyone interested in Libsyn seems to be interested in the company selling out to a bigger player who wants a foothold in podcasting. That wouldn’t be expensive. You could spend $100 million to $200 million and suddenly be the host for maybe a fifth of the major podcasts out there. But, personally, I think selling out would be a really bad way of monetizing this company. If you look at Libsyn as a business, it will produce a ton of free cash flow that could be used year after year to buyback its own stock. The company could support some debt (it certainly doesn’t need excess cash). It could spin-off Pair. However, that’s unlikely at present as Pair was only bought like a year ago.
Andrew and I use Libsyn for our podcast. It’s the way we’ll be delivering the new Focused Compounding app we’re doing. Libsyn prides itself on its customer service. But, our experiences with customer service at the lower levels of the organization – and this is just anecdotal info about a sample size of one – have been extremely poor. On the other hand, any interactions with the upper levels of the company – including just for help with the podcast – have been truly excellent.
Libsyn’s technology, user interface, etc. are not cutting edge. It seems a bit behind the times in user friendliness especially for podcasts just getting started out. The company has a very high retention rate. I assume most podcast hosting companies also have very, very high retention rates – we haven’t found many podcasters who have switched from one host to another. And we can’t find anyone really who has switched between more than a couple hosts even if they’ve been podcasting since pretty much the start of the industry.
Andrew and I went to Pittsburgh. Due to COVID, we were unable to meet with the management there and see the offices on the inside and stuff. We did drive past the company’s locations in Pittsburgh. This is a cost conscious company. It’s probably not a very innovative company. The rent they are paying in Pittsburgh is very low on the office space they use (between $1 and $2 per square foot per month). Total rent here is like $550,000 a year. Items broken out specifically as “technology” are not large expenses.
The economics of the business are excellent. Both website hosting and podcast hosting have high retention rates. Gross profit margins are like 85% in these businesses. There is a misleading line in Pair’s accounting which is amortization. So, EBIT is not accurate here. You need to use EBITDA. For example, I’d estimate that in each of the next 5 years, Pair will take amortization which – even after taxes – is equivalent to a charge of more than 3 cents per share. These are non-cash charges applied to amortizing customer relationships, trade marks, and non-compete agreements. If you use EBIT – you will vastly underestimate free cash flow. My advice is simply to assume that about 80% of EBITDA will be free cash flow.
Bandwidth has economies of scale. The company gets lower and lower prices per unit of bandwidth as it uses more and more bandwidth. It passes some of these savings on to heavy consumers of bandwidth (the bigger your podcast, the less you pay per unit of bandwidth). But, being a bandwidth “middle-man” is a good spread business that only gets better as you grow in size.
This company has a ton of customers. It had 28,000 podcasts in 2015, 35,000 in 2016, 44,000 in 2017, 57,000 in 2018 and now probably a bit over 70,000 podcasts today. Listenership per podcast doesn’t really grow that much over time. But, the rate of growth in the industry is basically the same as the rate of growth in the number of podcasts.
The company is basically run with just 85 full-time employees across both Pair and Libsyn. It’s run out of just one main office of about 35,000 square feet in Pittsburgh. There is a corporate office and a back-up facility. But, we’re really talking about both sides of this company being just 85 people working in 35,000 square feet in Pittsburgh.
Having used Libsyn ourselves for The Focused Compounding podcast – it feels like that. It feels like a smaller, older operation. And I wouldn’t be surprised if a lot of new podcasters are attracted to the “freemium” models of newer and cash burning competitors.
I’ve never invested in an industry with this much competition. And I’m not sure I’ll start now. The very long-term upside here looks huge. This is a company that you could see being a ten-bagger as a stock (the best way to do this would be to use almost all free cash flow to buy back the stock and probably to divest Pair). But, it’s also an industry with a lot of competition. It is a tech business. And Pair’s tech is not necessarily the best in the industry. It may not have a habit of paying its people the most, spending the most on office space, etc.
A lot of that stuff worries me.
But, it’s the most stable and profitable and cost conscious company I know of in an industry that is almost certain to grow over time. Libsyn isn’t focused much on the ad side of things. But, advertising in podcasting is going to grow a ton over time. Ad rates for mid-roll host read ads – imagine Andrew stopping at the fifteen minute mark in one of our shows and doing an ad in his own voice and then going right back into the show – have some of the highest ad prices relative to listenership of any ads I know of. This is because they are way more effective than any kind of “broadcast” advertising on a per person who hears the ad basis. Podcasts are like special interest magazines. They are a very lucrative form of media to insert highly targeted (by industry, interest, etc.) ads into. I guess you could call the upside from ads the “lottery ticket” at Libsyn. It’d still be a decent growth company even if it decided to stop running ads in all of its shows tomorrow. Libsyn does make money from advertising (it shares with the podcast producer). But, it’s just not a mainly ad supported business. So, I think you can analyze the company’s earning power independent of ad spending on podcasts and then view any ad spending growth Libsyn gets as unanticipated upside. Certainly, the stock’s price today wouldn’t be the least bit expensive if ad revenue never grew at Libsyn. And everyone expects it will grow in the long-run.
This is a very, very hard one for me.
Of the stocks I’m seriously interested in, Libsyn is by far the business facing the most intense competition. I like to find stocks where competition is low and getting lower. And I love to finds stocks where competitors are rational, profit maximizing, etc. Competition in podcast hosting is high and getting higher. And competitors are irrational and growth maximizing instead of profit maximizing. A lot of competitors aren’t even interested in turning a profit anytime soon. They just want to grow like crazy.
I’m undecided on this one. The growth runway is long and the compound upside over a decade or more is tremendous. But, the competitive landscape worries me and the company’s positioning in terms of its actual product, tech, customer service, etc. worries me too.
Still, industries with high retention rates tend to be very profitable for incumbents even when competition appears very fierce. It’s usually the new entrants who burn through cash and leave the incumbents in place.
Finally, I have to mention that Libsyn was the podcast host for the Joe Rogan Experience. That show is moving to a Spotify exclusive. This was huge news in the business press and probably the biggest thing the average investor has heard about podcasting. In the long-run, I think it’s not a big deal for Libsyn. I’d expect a year of normal growth at Libsyn would make up for any loss of Rogan’s show. Ten years from now, looking back on LSYN’s financials, I don’t think you’ll be able to detect the year they lost Joe Rogan’s show. It’s just short-term noise. And it’s not bad news of the magnitude that could possibly justify the current very low stock price.
The stock is undeniably cheap.
This is a value stock. And it’s a growth stock.
LSYN is one to keep an eye on. But, it’s not one I’m buying as of today.
Geoff’s Initial Interest: 70%
Geoff’s Re-visit Price: $2.20/share