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Waves of hype, tsunamis of profit:
Digital media and profitable companies —
make an easy 134% from the new New Net!
by Christian DeHaemer
Remember the Nineties? Wave after wave of hype-driven sectors: Environmental companies, biotech, and satellites. We had disk-drives, routers, and chips. There was B2C, B2B, and the enablers. Don't forget emerging market telecoms, mobile phones, and EU convergence plays.
It was a decade of trends. And if you rode any one of these waves, you made your share of profits. These high-flying trend stocks are driven by flows of propaganda that are difficult to spot at the outset, and even harder to recognize at the top — when you are seized by the greed of a true believer and, in a cult-like, tongue-speaking state, profess to the man next to you on the train that profits don't matter.
This time it's different.
Profound buzzwords possess your soul — you find yourself muttering things like picks and shovels, stickiness, and branding.
Of course, this is the natural dichotomy of investing. You have to squint your eyes at traditional value ratios to buy a company that will benefit from the next wave of hype. Yet you must remain composed enough to know when the speculators have gone too far, so you can lock in the majority of your hard-won profits.
The obvious method is to use a trailing stop loss, which is just what it claims to be. You sell when the stock falls 20% off its most recent high. This is a simple method and keeps many an investor out of the poorhouse. But you knew that.
Greed
The question floating around the nether reaches of my mind for a few months now has been — what happens next? Everyone knows about the Internet, B2B, and broadband. The fast profits have already been made.
But what happens when the promise arrives and high-speed Internet access is ubiquitous? What will you get exactly?
Digital Media
The next wave of market speculation to rumble through will be in the digital media industry. Advances in CDs, DVDs, HDTV, and digital networks have been driving demand for software tools and services that help create digital content.
Most media professionals are aware of the companies and web sites that are taking advantage of digital technology. As an investor, you've probably had the opportunity to listen to conference calls and watch video interviews on websites like ON24 that use streaming audio and/or video.
The technology has advanced beyond the bandwidth access that is available to carry it. However, as broadband evolution continues and more people have access to high-speed Internet at home and in the office, webmasters will increasingly demand these tools to stay ahead of the curve.
Old-style media companies like Time Warner and Disney, as well as audio and video engineers, musicians, and multimedia developers, want new integrated tools and services to republish old content or create new media in a form compatible with digital delivery.
The Three Amigos
There are three top companies now battling for expanded market share in this industry — Sonic Foundry (SOFO:NASDAQ), Loudeye (LOUD:NASDAQ), and Media 100 (MDEA:NASDAQ). All three are growing like mad.
Sonic Foundry grew revenues 85 percent year-over-year as of February 2000. Media 100 grew revenues a more sedate 19 percent, but, due to recent acquisitions that I will tell you about later, should grow much faster going forward.
Loudeye's revenues jumped more than 800 percent, from US$286 thousand to more than US$2.6 million for FY 1999. However, net loss applicable to common stock totaled US$25 million, up from US$1.7 million.
Get more, pay less
This growth, coupled with in-demand online technology, sent the share prices of these companies into dot-com Valhalla over the past few months. Sonic Foundry got as high as US$130 a share until it slipped in the NASDAQ bloodbath and skittered to its current price of US$24, where it currently enjoys a market cap of US$357 million.
 Media 100 shot as high as US$52 before pulling back to US$26 where it percolates today, wearing a market cap of only US$229 million.
Loudeye is a recent IPO, with a market cap of US$570 million and a share price at US$16, down from its initial price of US$54 just a few short months ago.
Loudeye trades at 29 times sales, Sonic Foundry at 7, and Media 100 at 4.3 — the hands-down winner in this category. Clearly, this market is poised for a convergence in valuation multiples.
The situation warrants investigating the most undervalued players, keeping an eye on the market leader (Sonic Foundry), and ignoring the recent IPO, which suffers from lack of track record as well as a high multiple.
Underdog eats magic pills
Media 100 has been selling advanced media systems, disk drives and ancillary video equipment since 1993, and has shipped over 170,000 software applications and 25,000 systems since then though its worldwide channel of value-added resellers.
In June of last year, they purchased Terran Interactive, a maker of Internet and DVD video. This has transformed Media 100 into a hawker of streaming media for use on broadband networks, DVD and CDs.
In December 1999, Media 100 purchased Wired, Inc., a supplier of Moving Pictures Experts Group (MPEG) streaming media production tools for use on the Internet and in DVD authoring.
Also in December of 1999, the company announced that it was going to acquire Digital Origin, Inc., a maker of digital video editing and effects software applications designed for the new low-cost, high-quality digital video (DV) camcorders used specifically for creating Internet video. This acquisition should be completed by the end of July 2000.
New Deals
Media 100 and Terran are proving that they can be leaders in this field. The company has picked up new contracts with Streaming Communications Inc., which will integrate Media 100's streaming media production tools on the Windows NT and Apple OS 9 platforms.
Media 100 has also invested in Beatnik, Inc., a developer of applications for interactive Internet music production.
And ON24, Inc., which supplies streaming broadcast investment news, including CEO interviews and conference calls, has decided to use the tools from Media 100 and Terran to standardize its broadcast studios.
Cash cow
This increased revenue is largely attributable to such acquisitions of Internet media tool companies. This side of the business climbed to US$4 million in revenues in Q1, up from zip in Q4 1999.
Media 100's old business did not fare as well. Digital Video sales fell US$1.7 million to US$8.3 million, while its service sector increased a marginal 6% to US$2.3 million. But this core digital editing business, though flat, accounts for some 70% of revenue and carries a 60% margin.
Now, you could argue that as more website producers seek to add video content, this business could pick up significantly. Regardless, it stands as a cash cow and produces positive EPS and funds expansion. Something Media 100's competitors cannot say.
Gross profit increased 18.6 percent to US$8.7 million and held steady at around 60 percent — which is fat — over the past year. The good news is that even after acquiring two software firms the company had a net income of US$108,000, or US$0.10 a share, compared to a net loss of US$689,000 or US$0.8 a share in 1999.
All Terran drive
The Terran Web business is flying out of the chute. Comparing March numbers to December, units and total dollars are up in excess of 75 percent, compared to expectations of 15 percent quarterly revenue growth.
| HISTORIC AND QUARTERLY RESULTS REVENUE (Thousands of U.S. dollars) |
| |
1997 |
1998 |
1999 |
2000 |
| Q1 FEB |
11,524 |
10,521 |
12,139 |
14,482 |
| Q2 MAY |
12,102 |
9,637 |
12,537 |
— |
| Q3 AUG |
11,107 |
10,124 |
13,116 |
— |
| Q4 NOV |
11,927 |
11,506 |
13,687 |
— |
| EARNINGS PER SHARE (U.S. dollars per share) |
| |
1997 |
1998 |
1999 |
2000 |
| Q1 FEB |
0.02 |
-0.09 |
-0.08 |
0.01 |
| Q2 MAY |
0.04 |
-0.41 |
0.02 |
— |
| Q3 AUG |
-0.05 |
-0.29 |
-0.02 |
— |
| Q4 NOV |
0.06 |
-0.18 |
0.14 |
— |
This will be the main driver of share price appreciation, given the 150 percent estimated annual growth rate in websites using advanced digital media.
Targets and prices
There you have it. Medea 100 sells at a 38 percent discount to the market leader SOFO (LOUD's valuations are ridiculous and don't even merit discussion). Granted, SOFO gets 90% of its revenue from high-growth streaming media, while Media 100 receives only 27% from this source (Terran, Wired, and Digital Optical).
But given recent deals, streaming media will account for some 45% of revenue for Media 100 going forward. This is important because the segment carries margins of 65-70 percent.
Media 100 can leverage its core business to expand, without sacrificing positive EPS. A secondary catalyst is the release of Terran's Media Cleaner 5.9 in the current quarter.
Multiple guess
Media won't trade at a comparable multiple to SOFO, but the gap should close somewhat, given that its Terran division is expected to grow more than 75 percent in the coming year. That would give you US$77 million in revenues over the next four quarters even if the core business stays flat. Multiply that by the current price-to-sales and you get US$331 in market cap. Or 38.5 on the share price.
But with the likelihood of a convergence with SOFO, the current market downdraft, its growth rate and the sound possibility of speculation in this market segment, I believe MDEA can carry a multiple closer to 7 times sales. Which would give you a conservative one year target of US$61 on the share price, or 134 percent over current levels.
It has obviously traded at much higher multiples in the recent past. With the right market conditions this could be a US$90 stock.
Media 100 (MDEA:NASDAQ) is a strong buy under US$27 with a one year price target of US$61. Contact Investor Relations: Media 100, 290 Donald Lynch Boulevard, Marlborough, MA 01752 Phone: (508) 460-1600, Fax: (508) 460-8627, Investor Relations Website.
| Company |
P/S |
Revenue Growth Q1-Q1 |
Market Cap. |
EPS Q1-Q1 |
| LOUD |
29 |
US$301k – US$1.6 mil |
US$570 |
(0.21)-(0.84) |
| SOFO |
7 |
US$2.7 mil – US$5.1 mil |
US$357 |
(0.52)-(0.33) |
| MDEA |
4.3 |
US$12.1 mil– US$14.4 mil |
US$229 |
(0.80)- 0.01 pos. EPS |
| MDEA’s Terran division |
|
US$0- US$4 mi |
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In addition to his duties at Taipan, Chris DeHaemer is the editor of The Hammer.
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