Weekly News

M17 Entertainment: There's Some Concern Under The Hood

June 09,2018 02:39

After aiming for a June 7th IPO release, M17 Entertainment (YQ) has delayed going public. While this is not out of the ordinary, it does leave investors wondering why this occurred. The odd thing is that management was at the NYSE Thursday morning to ...

After aiming for a June 7th IPO release, M17 Entertainment (YQ) has delayed going public. While this is not out of the ordinary, it does leave investors wondering why this occurred. The odd thing is that management was at the NYSE Thursday morning to ring the opening bell in celebration of the IPO, yet there was no IPO.
Source: CNBC
Since my last article from my IPO series, "IPOs This Week", I have seen that investors are excited about the company. I set out to see if it is smart to invest in this company from a fundamental perspective, or are people looking to 'ride the wave' per se.
As a result, I discovered that there are concerns lying underneath the hood of this company. At first glance, it appears like the company is an easy multi-bagger: recent merger for diversification, out of the park growth rates, and a leader within its 'developed Asia' markets. Despite this, the company may soon be in trouble and some of the trouble is from the industry itself.
IPO... So Far
M17 Entertainment formed from the merger of Paktor (the dating app) and Machipopo (the live-streaming platform) in 2015. The company aimed to raise ~$90 million offering 7.5 million ADSs in the $10 - $12 per ADS. However, the company fell short, raising only $60 million priced at $8 per ADS.
*Note: Each ADS represents 8 shares before option exercise
Besides being left in the dark on the reasoning for the delay, there are other concerns that exist that are overshadowed by good news. One example is found within the revenue.
Revenue Concern
The good news is that YQ has seen phenomenal revenue growth over the last couple years. Shown below, Q1 revenue exploded by 221% y/y, going from $11.8 million in Q1'17 to $37.9 million in Q1'18. Yes, cost of revenue and selling expenses have both increased, but proportionally to revenue, they have actually improved. Cost of revenue has gone from 90% of revenues to 72%. Selling expenses have gone from 56% of revenues to 52%. Not profitable yet, but improving.
Digging deeper, we find that revenue is very concentrated among users. An article by Techcrunch, one of the few in relation to the delay, details this concentration. According to the article, 'almost a majority' of revenue is composed of 500 users, with 11.8% coming from the top 10 'whales' as they call them. This is referred to as the demand side, since it is the users. The supply side, the artists, also experience a concentration with the top 100 artists representing 33% of the revenue. This tells us, if we assume 'almost majority' means only 40%, that 73% of revenues come from 600 people.
User Concern
While revenues have taken off, we have seen user growth appear lackluster. MAUs for the entire company has increased from 1.5 mil to 1.7 mil y/y, with 1 mil MAUs coming from the 17 Media live-streaming platform. This is low when compared to the total user base. M17 Entertainment has ~47 million registered users, with 17 Media representing ~33 million of the total. This equates to 3% MAUs (1 mil) to total users (33 mil). For the entire company, it is 3.6% MAUs (1.7 mil) to total users (47 mil).
In terms of user monetization, 3.1% of the user base makes purchases on the platform. This is a plus for the company as revenue per user is $355. This is slightly skewed due to the 'whales' we were talking about earlier.
Industry Concern
Another major concern is the state of the video streaming industry. The industry is currently doing really well and is booming. This is a double-edged sword. Because of the boom, companies are looking to expand their markets. This means larger, more established companies are going to be encroaching on YQ territory, thus boosting competition.
YQ has ~20% market share within its 'developed Asia' (Taiwan, Singapore, Hong Kong, Japan, and S. Korea) market. This leaves a large portion available to competitors. Furthermore, the company is overwhelming dependent upon Taiwan, which represents 71.6% of revenues and 44.6% of users.
Cash Concern
Lastly, the company is burning through cash, and fast. The company currently has $31.4 million in cash (and equivalents). In the first quarter of 2018, there was a net loss of $24.8 million. Unless a major turnaround towards profitability happens in the next quarter or two, there will not be enough cash to keep the company afloat without the IPO. However, with the raised funds only amounting to $60 million, short of their target, it is most likely that cash will remain a problem and this may evolve into a debt issue in the future in order to keep the company alive.
I expect losses will continue to increase, especially in the short term, and until we see where the breakeven point is, this will be a major headwind for the company.
While this article does focus on the concerns with the company, that does not eliminate the possibility of potential. It is up to the individual to decide whether or not this fits their risk appetite and then decide to inveaccordingly.
I mentioned some problems that may turn into opportunities. For example, the expansion of larger competitors into YQ's market may lead to the opportunity for an acquisition proposal. Also, the cash crunch may force innovation which could help profitability.
Ultimately, for me, I think there is more risk than it is worth for this company, which is disappointing because it sounds like a good idea. I would not recommend a large position to anyone but a small position (that you are willing to lose) may payoff nicely as I'm sure there will be a run soon after IPO.
I say this because we have seen a near 100% run from other Asian streamers Huya (HUYA) and iQiyi (IQ). I am not completely sure if it is from news and positive forecasting (the future of both appears promising) or if it is due to hype on Asian tech stocks. If it is the latter then there will be easy profit from YQ, but now that you are aware of the risks, do not ignore them.
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in YQ over the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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