With new innovative blockchain technology, LIZI could become a massive audio platform in the coming years. The company reports double digit sales growth and growing gross profit margin. I believe that most investors don’t know the stock, which explains the current valuation. The company trades at 0.7x 2023 Sales. An adequate amount of liquidity and market participants do not exist. As more traders like Citron understand the business story, the stock price will most likely increase.
The Market Fails To Recognize That LIZI Is Growing
Headquartered in Guangzhou, China, LIZI is an online UGC audio entertainment platform founded more than eight years ago. With many other podcast businesses at an early stage of development, LIZI’s audio-based social networks and content portfolios received significant attention from investors and users:
Source: Crunchbase
Source: Similarweb
I believe that LIZI’s current revenue growth is the result of more than eight years of business development. The expertise accumulated appears to be larger than that of competitors. The company has designed a business model that includes commercialization from content subscription, live streaming, podcast advertising, and virtual privileges:
Source: Presentation
The commercialization strategy is working well. Since the company executed its IPO, almost all the company’s financial ratios increased. The number of employees increased at a rate of more than 6% yoy. Quarterly sales growth increased from less than $30 million to more than $63 million in 4Q20, and annual sales growth stands at more than 27% yoy.
Source: Ycharts
With most financial stats showing business growth, there is another clear indicator of business growth. When LIZI needs money, market participants are ready to offer financing. Market participants that get to know the company have firm belief in the business story:
LIZHI INC., a leading online UGC audio community and interactive audio entertainment platform in China, announced today that it has entered into a securities purchase agreement with a certain institutional investor to purchase $30,000,002 worth of its American Depositary Shares (“ADS”) and warrants in a registered direct offering. Source: Seeking Alpha
The stock price appears to be the only financial figure that declined. After the recent equity offering, the share price declined from more than $10-$15 to less than $7. Given the increase in revenue and the size of the offering, the decline in the share price cannot be justified. The share count increased from 40 million to 46 million; more that 15% increase. After the IPO was executed, the share price decreased from $12 to $3.5-$7. We are talking about a decline of more than 40% from the highs seen in 2020, which seems too much:
Source: Ycharts
Lack Of Liquidity Because The Number Of Competitors Is Low
As noted in the thesis, the liquidity in the market is limited because the general public does not seem to know LIZI and the podcast sector. The company noted in its annual report that LIZI operates in an emerging industry. When more companies and investors get to know the business potential of the industry, there will be more money for LIZI. As a result, I believe that the company’s valuation will increase:
Online audio is an emerging industry in China. As one of the leading players in this market, we face competition from providers of similar services. Other online audio platforms in the online audio market and the interactive audio entertainment market, compete directly with us for content and users. The interactive audio entertainment market is a subset of the online audio market which has interactive features. Source: 20-F
I believe that LIZI is a pioneer because the total headcount is larger than that of most competitors. I reviewed companies in the United States that promote podcasts, like LIZI does. Most of them are very small. The total headcount is between 10 and 50. In my view, investors willing to invest in the podcast industry will do good by looking at China. Investment growth will most likely be more significant in Asia than in America. Taking into account the underdevelopment of players in the international markets, LIZI may obtain money from international investors in the near future:
Source: Crunchbase – Buzzsprout
Source: Crunchbase
Source: Castos
Source: Podbean
LIZI’s Upside Potential Is Very Significant
If we assume a share count of 46 million and a share price of $6-$7, LIZI’s market capitalization is $322 million. With cash and cash equivalents of $59 million and debt of $6 million, I obtain an enterprise value of $269 million:
Source: 10-Q
Source: 10-Q
Most market participants expect sales of $252 million for the next fiscal year. If we include sales growth of 27%, I believe that 2023 Revenue will most likely stand at $320 million. Taking into account that the company revised down its sales expectations from $360 million, $320 million does not appear to be a large sum. As shown in the image below, the company expected $360 million not long ago. In fact, I dislike companies that decrease their financial targets. I don’t like what happened to the company’s revenue expectations:
Source: Ycharts
With $360 million and a total valuation of $269 million, LIZI trades at 0.7x 2023 Sales, which is a low valuation. My peer group includes Spotify (SPOT), JOYY (YY), Baidu (BIDU), and NetEase (NTES). These stocks report sales growth of 26%-37%, and trade at 2.1x-5.7x with the median being 3.8x. If we use these figures, LIZI is very cheap at 0.7x 2023 sales with sales growth close to 27%. I believe that there is a minimum upside potential of 70%-100% or more in the stock price:
Source: Ycharts
Financial analyst Citron noted that its price target for LIZI was $30. I agree with the price target, which implies an upside potential of more than 300%. Citron believes that the company’s Tiya app operates in different sectors including dating and gaming among others. Like I stated in my thesis, Citron believes that the company’s growth will most likely result in the increase in the share price:
Source: Twitter
The New Blockchain Technology Could Bring Visibility And Liquidity
In April 2020, the company announced a new agreement with Ant Group (AGGG) to develop blockchain protection of podcasts. Ant Group is an affiliate company of the Chinese Alibaba Group (BABA). I don’t think that the market paid a lot of attention to the news. Read the most relevant text in the lines below:
LIZI announced today that it has entered into a partnership agreement with AntChain to facilitate copyright protection of podcasts with blockchain technology. AntChain is a blockchain-based technology brand under Ant Group with a focus on a trusted digital economy. Leveraging AntChain’s proprietary technologies, LIZHI seeks to support and promote copyright protection of original podcast content on its LIZHI Podcast (LIZHI BOKE in Chinese) platform. Source: SA
The new innovative blockchain technology to be developed by LIZI may increase public awareness. Investors that generally invest in cryptocurrencies could be interested in LIZI’s business model. More investors could mean more liquidity for the company:
Source: Google Trends
Risk From An Eventual Decrease In Users
Right now, I believe that the biggest risk comes from a decrease in the company’s user base. If the total number of paying users decreases, the company’s sales growth may diminish. As a result, the company’s EV/Sales ratio could decrease even more:
The size of our user base and the level of our user engagement are critical to our success. We generate substantially all of our net revenues from virtual gift sales for our audio entertainment. Therefore, our success in monetization primarily depends on our ability to maintain and increase the size of our user base and user engagement level. If our user base decreases or stops growing, our users become less active or interested, or the quality and quantity of our paying user base deteriorate, it is probable that they would spend less on our platform or access our platform less often in general. Source: 20-F
LIZI operates in China, where the PRC government regulates online audio platforms. It is unlikely that LIZI has a lot of problems with the PRC. Notice that BABA and the Ant Group are large organizations. The Government in China appears to have certain ties with large organizations like BABA. With that, notice that Office of the Central Cyberspace Affairs Commission of China closed a new audio social network app started by LIZI:
The provincial press, publication, radio and television administrative authorities shall supervise the local audio-visual program websites to further improve the program content monitoring system and ensure the online program service providers to fully implement the relevant requirements. Source: 20-F
On June 28, 2019, the Office of the Central Cyberspace Affairs Commission of China, or CAC, launched a campaign against illegal activities and inappropriate content on online audio platforms and undertook restrictive measures against 26 online audio platforms, including suspending the operation of a new audio social network app recently launched by us in December 2018, along with a number of other audio social network apps, for an indefinite period of time. Source: 20-F
Conclusion
Currently operating in an emerging industry, LIZI seems to be one of the most innovative companies in China. Most market participants don’t know the sector, which results in an inadequate liquidity in the market. The company trades at 0.7x 2023 Revenue with 27% sales growth. Peers trade at 2.1x-5.7x sales with the median being 3.8x. I believe that most investors will recognize that the upside potential is significant. The new blockchain technology and the agreement with Ant Group could increase market awareness. Let’s expect that more and more investors understand the business model, like Citron did very recently.
Disclosure: We have no shares, and we were not paid to write the article.
