Echelon Wealth Partners analyst Rob Goff is staying bullish on children’s animation company WOW Unlimited Media (WOW Unlimited Media Stock Quote, Chart, News TSXV:WOW) after its recently quarterly earnings.
In an update to clients on Thursday, Goff said WOW has a production backlog and viewership that are both solid. The analyst reiterated his “Speculative Buy” rating and $0.75 per share target, which at press time represented a projected 12-month return of 108.3 per cent.
Vancouver-based WOW Unlimited has two studios, Frederator in Los Angeles and Mainframe Studios in Vancouver, both with two decades of operation behind them, while WOW’s media assets include its Channel Frederator Network —the largest animation-only multi-channel network on YouTube— and its programming on the Canadian streaming platform Crave.
WOW reported first quarter 2020 results featuring revenue at $13.7 million, down from $19.5 million a year ago, and EBITDA of $0.1 million, up from a loss of $1.8 million a year ago. Both top and bottom were markedly lower than the previous quarter, however, which generated revenue and EBITDA of $34.4 million and $3.0 million, respectively.
Goff said the yearly drop in revenue was due to the cancellation of its distribution agreement with channel affiliate ADME, while the sequential drop came from seasonal strength in Q4 2019 with a number of significant deliveries including season 3 of Castlevania (due for release on Netflix on March 2, 2020).
The analyst chalked the majority of the EBITDA increase to revenue coming from the IP deliveries, where titles like Castlevania tend towards higher margins as subsequent seasons are created and library values grow.
Goff has made what he calls modest fine-tuning to his forecasts, now calling for 2020 revenue and EBITDA of $55.2 million and $2.6 million, respectively. The analyst said there’s strength in the Frederator platform coming from increased viewership due to COVID-19 and he sees potential upside to his forecasts with the completion of further IP sales in Q4 2020 ahead of Q1 2021.
“With the current backlog of $72.4 million, WOW!’s mainframe studios in Vancouver and Los Angeles are anticipated to be operating at full capacity in 2020 with the company turning to additional external capacity available from vendors in Asia where WOW has established relations,” Goff wrote.
“We are encouraged by the Company’s ability to win and deliver on contracts; the strength of the Company’s MCN platform on YouTube (and increasingly other social platforms); and the building value of its IP library where each season of Castlevania adds significant value to prior seasons,” he said.
“We believe that further growth will be supported by the demand for content from the OTT platforms where the competition for animation content has increased after the launch of Disney+. We expect kids and family content to attract a greater share of the total original content budget not just from Netflix but also from Apple (APPL- Nasdaq, NR) as the Company is expected to aggressively build its library after being criticized by the reviewers for the depth of the content on its Apple TV+ app,” Goff wrote.
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Speaking of libraries, that’s the biggest problem with Wow. Up until now, Frederator and Mainframe have been producing shows for other entities. They don’t have their own library of first party IPs to fall back on, aside from ReBoot. The bulk of content provided to Crave was dollar bin garbage, at least when it comes to “WOW! World Kids”. Right now, Frederator’s Castlevania is the only valuable title the company has to offer.
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