On April 11, 2024, I shared with the Seeking Alpha audience my Best Current Micro-Cap Idea: BuzzFeed, Inc. (NASDAQ:BZFD). Subsequent to publishing that piece, on May 22, 2024, to be exact, BZFD shares ripped higher, on the unexpected news that former Republican Presidential hopeful Vivek Ramaswamy acquired a then 7.7% activist stake. Given this news, BZFD shares ripped higher and made an intraday high watermark, which was struck in the low $4.50s. However, that big move didn’t hold, and we learned later, that Comcast Corporation (CMCSA) sold over 3 million of its then 5 million share stake (Comcast’s NBCUniversal were original IPO investors) and that was the biggest reason for BZFD stock to quickly reversed course and give back a lot of the early morning major pop, on May 22, 2024, when its stock traded into the low to mid $4s.
Seeking Alpha
Although it’s always fun to awaken to a big splash and to see your favorite (micro-cap idea) surge in value, sooner than you had expected, believe it or not, my thesis, then and now, is actually based on using my imagination and envisioning a tangible and durable turnaround scenario. As micro caps can be super inefficient, it can be hard for many participants to work out the signal from the noise as so many people get anchored by recency bias.
Speaking of Recency Bias, Let Me Quickly Get Readers Up To Speed, With A Brief BuzzFeed Business History
To quickly get readers up to date who may be unfamiliar with recent business events at BuzzFeed, during the past 18 months or so, I will provide a brief history. Like so many media/publishing companies, the company was heavily reliant on major platform companies to generate a lot of its traffic. Far and away, Meta Platforms, Inc. (META) was the biggest source of BuzzFeed’s traffic. This meant BuzzFeed would create its content, and it would get widely distributed and shared on the rails of the platform companies. No question, though, platform companies charged a hefty fee for this access, but if done at scale, and if the content (often) resonated, there was a path to profitability, in a stable state. Unfortunately, there wasn’t a stable operating environment and many major cross-currents disrupted the business model, completely turning the operating model and BuzzFeed’s go-to-market strategy upside down.
With the sudden and major success of TikTok and its short-form video formatting, Meta and other players were forced to completely change their algorithm; otherwise, they would’ve lost major market share. The net effect was that, almost overnight, BuzzFeed and many publishers lost a lot of traffic very quickly. In fact, during the past 12 to 18 months, suddenly, BZFD’s revenue trajectory was in a major decline, as in a nosedive decline. This abrupt and severe shock meant that BuzzFeed had to cut a lot of costs, retreat, and live to fight another day. Unsurprisingly, its stock price similarly nose dove.
Secondly, and relatedly, as this event dinged its balance sheet, BuzzFeed’s Complex merger just never worked. Although the merger made a lot of sense on paper, and at the time of the deal, as the Internet was a much different place back then, as time, innovation, and events move at warp speed on the Internet, again the Complex merger just never worked. Essentially, the business model of Complex with its highly creative / artist / high touch Madison Avenue style campaigns/creative was very different than BuzzFeed’s other businesses. Therefore, the would-be scale on the marketing/advertising fronts never materialized and there was friction and fiefdoms. A major negative and a by-product of the $300 million Complex deal was that BZFD had to issue $150 million of 8.5% convertible debt, to fund the deal, which is set to expire on Dec. 3, 2026. However, there’s a dangerous provision within the debt structure, at least if you’re an equity holder, that enables the convertible holders with the right, but not the obligation, to put back the debt, to BuzzFeed, two years earlier than the maturity, so on Dec. 3, 2024.
To make a long story short, a cursory glance by a prospective investor quickly leads to them seeing the Eastman Kodak-like declines on the top line despite near breakeven full-year adjusted EBITDA, as well as the risk/fear of the early put option. These two powerful forces have acted like kryptonite, keeping serious buy-side money on the sidelines. And let’s face it, the optics make it much too difficult and require too much imagination to get this idea past most gatekeepers (either the buy side PM or small investment committee).
Hence, why BuzzFeed’s valuation seems so low in the context of how some of its social media peers, such as Reddit, Inc. (RDDT), Snap Inc. (SNAP), or even Pinterest, Inc. (PINS) are valued. Think along the lines of MAUs (Monthly Average Users) and DAUs (Daily Average Users).
Lo and behold, in February 2024, BuzzFeed’s management cracked the code/defused the balance sheet ticking time bond, at least partially, when they successfully sold part of the Complex for roughly $115 million. As part of the deal, BuzzFeed retains its ownership in First We Feast, which owns the highly popular show Hot Ones as well as Tasty. Just google the Conan O’Brien Hot Ones appearance, which took place in late Q2 FY 2024, as that episode went viral.
After that deal closed, BuzzFeed took the proceeds and paid off its highly restrictive Senior Debt and paid down 20% of its $150 million convertible debt. Interestingly, and I would argue this bodes fairly well, BuzzFeed’s convertible debt holders agreed to accept a lesser amount of Complex deal proceeds, so the company could use the extra liquidity to revive its operating businesses. In exchange for this lender concession, 95% of all future sale/deal proceeds (if they sell First We Feast and its related properties) will be earmarked to retire the convertible debt, at par.
Currently, there are various media reports that First We Feast, the entire franchise (Tasty, Hot Ones, etc.) is being marketed and shopped by the investment bank UBS. The rumored but unconfirmed asking price is thought to be in the neighborhood of $65 million to $70 million. According to that recent Bloomberg piece, there are many interested parties, but there appears to be a bit of an impasse on the deal price.
Why I’m So Excited About BuzzFeed’s Q3/High-Frequency Data
In the rough and tumble hedge fund world, these movers and shakers love to pay for extensive and expensive high-frequency data. Think of datasets that track credit card spending that tracks comparable sales data in the restaurant or CPG industries (at least directionally). Armed with this expensive high-frequency data, hedge funds can get a major/material setup for would-be revenue and EBITDA surprises, both good or bad. Moreover, armed with this expensive data, these hedge fund movers and shakers can use a data-driven approach to that build these (overly) engineered and elaborate financial models. This go-to-market strategy has been pretty successful for some of the better practitioners of this art form.
Lo and behold, I would argue we have a perfect storm for BuzzFeed when it comes to material and highly favorable drivers/high-frequency data. The only trick is there are no fancy datasets readily available for purchase, as 90% of BuzzFeed’s traffic is from its owned properties. In fact, I’m particularly excited about its prospects for both Q3 FY 2024 and the second half of 2024, for BuzzFeed and HuffPost.
Let me explain:
What drives BuzzFeed’s business is content, distribution, and engagement.
It’s that simple.
Now that 90% of BuzzFeed’s traffic is from its owned properties, the namesake, BuzzFeed brand, HuffPost, and First We Feast, means that the distribution piece is the least most important piece to solve for in this equation. The two major drivers of both BuzzFeed’s revenue and EBITDA power are from its namesake site and HuffPost. And, again, content and engagement drive those metrics.
Since June 28, 2024, there couldn’t have been a better series of favorable events that are arguably driving compelling content and stronger engagement.
On June 27, 2024, Donald Trump was ahead in almost all of the major polls. Election engagement was fairly uninspiring, and it was almost a foregone conclusion that Donald Trump would most likely win. Well, the poor debate showing between Joe Biden and Donald Trump set in motion a series of major events that might’ve changed the course of history. Immediately following the debate, astute Democrat pundits, like James Carville, among others, called for Biden not to pursue a second term. Although the first line of defense tried to rally and rush to Biden’s aide, it was too late. Perception became reality, and the perception was that it was time for Biden to pass the baton to a younger generation and usher in some new ideas and fire up the largely dormant democratic base. Over the subsequent days and weeks, the chorus grew louder and a number of celebrities, and democratic high priests whispering turned into a shout. Amidst this intrigue, “will he” or “won’t he” run, Trump was nearly assassinated in Pennsylvania.
All of these events were part of a major news cycle and drove a lot of page views on both BuzzFeed and HuffPost. Next, there was the Republican convention that also was a good source of content/engagement. And then, finally, when it was announced that Biden would not seek a second term, there was a major groundswell of excitement and energy for Kamala Harris’ nomination. In fact, on Sunday, July 28, 2024, it was reported that the Harris campaign has raised $200 million since Biden endorsed her. Moreover, almost all of the Democratic high priests have backed her, including Barack Obama, the Clintons, some major celebrities, and many of the most influential members of the Democratic Senate and House.
In addition to major intrigue leading up to what might have been a boring 2024 Presidential election, measured in engagement, there has been a surge in engagement. Not only should this surge in engagement lead to more clicks, views, and advertising dollars, as the addressable market for ad dollars is massive, you just need to bring the traffic and audience for advertisers to care, but this past Saturday night, I noticed the Harris campaign was advertising directly on BuzzFeed.
And if this wasn’t enough of a major driver, at least directionally, of positive high-frequency data, we have the Paris Olympics, which take place over the span of 16 days, as the opening ceremony kicked off, last Friday, on July 26.
One silly article that generated more than 444,000 views, over 24 hours.
Now, I haven’t even discussed/mentioned any videos about a Childless Cat Lady.
To make a long story short, there’s clear and compelling evidence, at least directionally, that the high-frequency data for BuzzFeed’s traffic and engagement throughout the month of July 2024 has been spectacular. Next, we have the Paris Olympics, which only happens once every four years and this should drive engagement.
We now have a much different and much closer 2024 Presidential Election race, a race that’s looking more and more like a toss-up. With the Democrat’s major war chest, with Biden’s $250 million of funds that can now move to the Harris campaign, combined with new funds, recently raised, to the tune of $200 million, there’s a good chance both BuzzFeed and HuffPost, both directly and indirectly, will get a few advertising dollar crumbs that fall off the giant’s table (think Jack and Beanstalk for imagery). And the crumbs of a $450 million piece of bread (and the bread is still rising) are very, very valuable, notably to a left-for-dead company with its $110 million current market capitalization, such as BuzzFeed.
Risks
The risks are straightforward. BuzzFeed has to resolve the $120 million of 8.5% convertible debt that can be put back to the company, on Dec. 3, 2024. Secondly, the company needs to show clear and compelling evidence that its business is actually turning itself around. Both Q3 and Q4 FY 2024 are pivots, and I mean pivotal, periods for this management team to prove the business turnaround is both real and inflecting.
Putting It All Together
In closing, this was a long-overdue update piece related to my original April 11, 2024, write-up. That said, I try to only write when I have something to say. I would argue we have clear and compelling evidence, at least directionally, that BuzzFeed could post an impressive Q3 FY 2024 quarter, driven by the series of major events discussed above. Because there are no readily available high-frequency datasets for well-armed hedge funds to purchase, and because BuzzFeed’s equity has almost been swept into the dustbin of history, I would argue Mr. Market simply isn’t paying any attention here, at least not yet.
Either way, hopefully, we will learn more, on Aug. 12, 2024, when BuzzFeed reports its Q2 FY 2024 results and offers some initial Q3 FY 2024 guidance ranges.
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