Thinking of investing in Audioboom? Take a look at 7Digital instead…by James Faulkner

Thinking of investing in Audioboom? Take a look at 7Digital instead…

Audioboom, whose ticker symbol (BOOM) raises some rather ambivalent emotions, has certainly got off to a cracking start after it reversed into One Delta Plc in April. One of those proverbial “next big things”, Audioboom shares have already quadrupled in the space of a few months. So what is all the fuss about?

Essentially, Audioboom seems to be attempting to do for audio what YouTube did for video.

The firm provides both broadcasters and content creators with a very simple and effective way of distributing audio clips via social media. Using both a web browser interface and a mobile app on iPhone and Android, users can browse content uploaded by others or create content themselves. Each audio upload can then be easily or even automatically attached to a tweet or sent to Facebook friends.

On the Audioboom app itself, broadcasters and content creators have ‘channels’ on which their uploads are collected. It is now used widely by most of the UK radio sector, adopted by the BBC as an official technology partner and is beginning to move into the broadcast market in the US.

Registered users are up 100% in 12 months from 1.4 million to 2.8 million as at 25th August 2014, with over 12 million active users and 93 million page impressions served in July 2014. Meanwhile, content partners increased from 150 to 1,200 in 12 months, including SkySports, BBC, Global Radio, Bauer Media Group, Aljazeera, talkSPORT and The Guardian.

The really exciting thing about Audioboom is that growth in the user base has been achieved without any marketing spend at all; rather, it has simply gone ‘viral’, to use the industry jargon. However, while growth in user numbers has been impressive, the company reported just £24,000 in revenue for the five months to 31st May 2014.

For a company valued at just under £90 million, there is, to put it mildly, a certain amount of optimism already cooked into the valuation here. But then again, we’re dealing with a ‘social media’ stock, and it should be remembered that industry heavyweights such as Facebook spent a long time concentrating on building a ‘platform’ before they even began thinking about monetisation. So long as the market recognises the potential, valuations in this space can look very outlandish indeed.

Caveat over the valuation aside, there looks to be interesting times ahead for Audioboom.

A recently announced deal with talkSPORT to sell advertising on Audioboom’s UK sport content “illustrates the readiness of the platform for monetisation”, according to management. Meanwhile, the launch of the new app at the end of September “will revolutionise the way audio is consumed, providing a seamless, automated way to search and consume news, sport and entertainment.” A Spanish language version of the platform and app is also on the way, to target the Hispanic markets in North and South America. 

If one is persuaded of the attractions of a punt on Audioboom, it is interesting to note that 7Digital Group (7DIG) (formerly UBC Media) holds an 18.7% stake in Audioboom which, at time of writing, is valued at £16.7 million. In the light of a market cap for 7Digital of just £20 million, this looks like a potentially interesting situation.

Formed by the combination of 7Digital and UBC Media, 7Digital has positioned itself as a B2B (business-to-business) services provider in the growing digital music and streamed radio market (hence the interest in Audioboom). Its global platform for music rights management and services covers 42 different countries with over 26 million tracks available globally for exploitation. In particular, I note the following comments from broker Investec:

“The number of songs is on par/better than other players (e.g. Spotify at ‘over’ 20m). We believe a new entrant would need to spend 3-4 years to replicate its platform and spend tens of million dollars given the number of rights and technology issues. 7digital should be preferable as a backbone provider to, say a JV with Spotify, as customers want control of their own valuable customer relationships.”

Crucially, this is an operationally geared business with a relatively fixed overhead base, so once breakeven is reached, profit growth could be very strong indeed.

Joint house brokers (salt shakers on standby) Investec and finnCap both envisage profitability in FY16 (year to December) and have price targets of 37p and 38p respectively, against a current share price of 16.375p. Although a sensible P/E-based metric isn’t possible until FY17 on their numbers, there is net cash of £6 million, which management believes is sufficient to “fund the combined business to a position of profitability.” Stripping out the current value of the stake in Audioboom, 7Digital is valued at just £3.3 million, which is less than net cash. If house brokers are to be given credence, this company could be making north of £2 million in 3 years’ time. It strikes me that those seeking exposure to Audioboom should consider doing so via 7Digital.