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Canadian small cap NeuLion live-streams for major sports organizations such as the NHL. (Trevor Hagan/THE CANADIAN PRESS)
Canadian small cap NeuLion live-streams for major sports organizations such as the NHL. (Trevor Hagan/THE CANADIAN PRESS)


This small-cap could be the next Netflix – for live sports Add to ...

Chris Umiastowski is the growth investor for Globe Investor’s Strategy Lab. Follow his contributions here and view his model portfolio here.

One of the technology trends that I’ve invested heavily in is the shift toward online streaming video. In my Strategy Lab model growth portfolio, Netflix has been the single best performer to date. As much as I love the service Netflix provides, I also realize the company does nothing to address the needs of raving sports fans.

I don’t really watch sports, but as an investor, I need to consider that many people are willing to pay a lot of money to watch games. Sports is a business filled with complex licensing agreements. Hockey is a perfect example. Rogers recently signed a 12-year deal with the National Hockey League, so starting next season they will hold many of the broadcast rights in Canada for hockey games involving Canadian teams. If you want to watch these games, Rogers will control your ability to do so. It’s currently not possible to pay for an online streaming service and get access to all of these games. The NHL does sell an online-only subscription service called GameCenter Live, but it only allows you to watch games that will not be affected by the Rogers deal.

In other words, most sports fans’ lives are made easier by having a subscription to regular pay TV services. But fans are often choosing to supplement traditional TV with a streaming service, if one exists.

I think it’s obvious that more and more live sports will be viewed as streaming video, and over time I expect more sports organizations will look for ways to sell directly to consumers without using legacy pay-TV providers as the middleman.

One way to invest in this trend is through a small TSX-listed company called NeuLion Inc. Most readers won’t have heard of NeuLion, but it appears to be the dominant player in live streaming of professional sports. It live-streams for major sports organizations such as the NHL, National Basketball Association, National Football League and Major League Soccer. Are you a diehard ultimate fighting fan? NeuLion powers the UFC.TV subscription service. Microsoft also pays NeuLion to stream sports on the Xbox platform.

The stock trades at about 70 cents following record results last week. The company closed out fiscal 2013 with $47-million in revenue, and all its major financial metrics have been moving in the right direction. Pro sports revenue is up 55 per cent year over year. Gross margin has been climbing and reached 72 per cent in the past quarter. The nine-year-old company (originally jumpTV in Canada) has traditionally lost money but was profitable and cash-flow positive in the latest quarter.

NeuLion has a fairly complex capital structure of common and preferred shares along with warrants and stock options. By my math, NeuLion’s fully diluted share count is 231 million, which gives the company about a $160-million market capitalization. That’s 3.4 times last year’s revenue. By way of comparison, Netflix trades at 5.8 times last year’s revenue.

Netflix certainly has a longer track record and much more established brand, potentially justifying the higher revenue multiple on its stock. But it sure looks to me as if NeuLion has an impressive track record building a great platform to stream live events and signing up many of the biggest professional sports organizations on the planet.

I don’t own the stock today, either personally or in my Strategy Lab model portfolio. But I very well may become a shareholder in the near future. The company seems to be doing an admirable job of building a leadership position in a market where giants like Netflix don’t play today. The valuation may not seem cheap, but in the next decade, I expect a market leader in streaming professional sports should be worth a whole lot more than $160-million.

I also like that this is a small-cap name traded in Canada. Lesser known companies often trade at lower valuations and get bid higher as they are discovered by more institutions.

For investors willing to take a long-term perspective and absorb a lot of near-term volatility, I think NeuLion is worth a look.

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