Fabrice Taylor, CFA, publishes the President's Club investment letter. His letter and The Globe and Mail have a distribution agreement.
Investors have changed their minds about social media stocks. Not long ago apps were treated like spam. Now they're the rage: Facebook is up 60 per cent in a year. Twitter is 70-per-cent higher in about three months. LinkedIn is up a third in even less time.
It turns out social media is a lucrative business, as these companies are demonstrating by posting growing profits.
If you think you missed out, you haven't. You can catch up by investing in theScore app, a homegrown app with a loyal and fast-growing following. It's run by a proven media entrepreneur who's built and sold two publicly traded companies in the past two decades and who invested millions of his own money into theScore Inc. And best of all, theScore may have an ace up its sleeve that could see it trump all other social media apps for profitability.
Based on the number of active users, theScore is the No. 2 sports app in the world, after ESPN's. But it's growing faster, adding 33 per cent year-over-year to its active user count in the last reported quarter. The company now boasts 5.5 million users. Average revenue per user was up almost as much.
The app is used by sports fans, who are very sticky consumers because they're addicted to their favourite sports, teams and players. They crave timely updates, news and stats, and now that it's available to them on their phones, they check in often.
In the media business – which I call the "eyeball" business because the media's goal is to attract eyeballs and sell them to advertisers – the importance is to have a big number of users with similar interests. Sports fans are very valuable to advertisers because they share so many characteristics: typically they're males, aged 18 to 44 and are relatively affluent. It helps to have their eyeballs glued to your content for as long as possible.
What makes the app so successful in the face of what would seem like intimidating competition from ESPN, CBS and Yahoo, among others, is what many consider a fine user experience. Those who use it, use it heavily and are huge fans.
If you don't use it, ask around. The app is an offshoot of theScore cable channel, now owned by Rogers Communications. Even when I travel to the U.S., where the network isn't a household name, I meet more people who use theScore than any other app (I always ask because I own the stock; while this is merely anecdotal, I've found that such evidence can be useful when investing in early-stage companies). TheScore typically ranks highest in surveys such as the Android Marketplace ranking of sports apps and the iTunes Canada ratings. Wired Magazine calls it the best app for sports junkies.
I recently spent two hours in theScore's office and met the chief executive officer as well as a the crew of programmers, writers and content creators. Their culture and esprit de corps may explain how theScore can be far more entrepreneurial than the much bigger ESPN.
So theScore is in a growing and lucrative space, has a good chance at competing with the bigger players and will probably be bought if it can continue its success.
Can it? John Levy, the CEO, along with his family and friends has invested millions of dollars in the company. His family built and sold a cable company to Cogeco in 1999 and sold Score Media to Rogers two years ago. I am betting he will replicate that success with theScore.
Although the company has revenue, it is still losing money as it invests in growth. But there's $12-million in the bank to finance expansion, and the stock looks cheap at about $8 a user, compared to more than $15 on average for more established apps that aren't growing as fast. It is not profitability that drives its valuation, but expected profitability.
The ace up theScore's sleeve is sports gambling. That's a $500-billion business, according to Beacon Securities analyst Vahan Ajamian, and he thinks it's likely that if the U.S. legalizes online sports betting, theScore could add $50-million of high-margin revenue.
He does not factor that into his 12-month target of 65 cents for the stock, representing a more than 100-per-cent return. Gambling would turbocharge the upside.
Although at the higher end of the risk of the risk spectrum, theScore seems like a good bet.
Globe app users, please click here for a table showing social media stocks.