SFX More Than Its IPO

Finance blog Seeking Alpha recently said of all the IPOs this year, “almost none have done as badly.” Ouch. Rupert Hargreaves, one of the traders who have submitted articles about SFX to the aggregate site, said the underperformance can be attributed to the company bringing it to market too early and at a “cautiously optimistic” price, and investors who don’t understand what SFX does and how it will go forward.

It should be noted that Seeking Alpha has a reputation for articles that appear to either hype / pump a stock or, more often, downplay it in hopes of a short. Hargreaves tries to explain it all for them, saying the company has bright prospects but is difficult to value.

On the plus side, SFX’s growth “has been nothing short of impressive,” he writes. SFX controls around 10 percent of a market worth some $4.5 billion annually. On the other hand, the festival season is cyclical with most revenue coming in the third and fourth quarters.

The company has acquired other businesses, such as Beatport, iMotion and Life in Color in an attempt to generate revenue not dependent on the festival season. The acquisition of festival producer ID&T has also provided a boost, particularly with its wildly popular Tomorrowland festival that was rebranded as TomorrowWorld and brought to the U.S.

Its Atlanta rollout was so successful, SFX invested $5 million in three new North American festivals. SFX is also expanding TomorrowWorld to Brazil next year.

The success of these EDM festivals has been “mind-blowing,” Hargreaves writes. “In just one year management has stated that TomorrowWorld’s profitability has improved by eight figures.

The $5 million investment in the brand this year will go a long way to increasing sales, income and widening margins and widening margins,” he adds.

SFX has brought aboard some other big guns, making qualified marketing agreements with Corona (AB InBEV), Clear Channel, T-Mobile, viagogo, MasterCard and liquor giant Diageo.

That might make SFX’s loss of $22 million in pro forma adjusted EBIDTA from this year’s second quarter a little easier to swallow. And Hargreaves says that even adjusted to net for costs, which the company says makes for an almost break-even quarter on paper, is “not worth anything and gives a completely false picture of the company.” But Hargreaves insists that despite the festival successes, SFX is still difficult to valuate.

Estimates reportedly call for a full-year profit per share of $0.19 during 2015 and then $0.59 by 2016. “Of course, this is assuming that SFX does meet these targets for growth,” Hargreaves writes. “The key will be the third and fourth quarters of this year. If the company hits analyst targets, turning a profit thanks to a good festival season, there’s no reason to believe that SFX cannot continue to build on its already impressive base and drive growth.”