Linkfire: Unique Play On Music Streaming Through Market Lead
Linkfire: A Unique Play On Music Streaming Through Market Leader Growing At 50%+ CAGR
Summary
- There are many streaming companies. But there is just one dominating service company that serves most of them with 70% market share. Its name is Linkfire.
- Linkfire connects consumers on social platforms who wanted to download a song to music streaming companies that provide the content. Linkfire collects revenues from both.
- Linkfire revenues have grown at 40%-60% CAGR with a stable 76% gross margin. The growth is accelerating further in 2021.
- Linkfire was a victim of a difficult IPO timing. If it was placed in January or February, its share price would've doubled on debut.
- Very strong catalysts in the next six months should cause the share price to double.
Investment Summary
Linkfire (LINKFI:STO) is an intelligent play on global music streaming. Music streaming revenues are estimated to triple from USD 25 billion in 2020 to USD 75 billion by 2030.
Linkfire is the global leader in smart links for the music streaming industry, with an estimated 70% market share. The smart links connect consumers on social platforms who wanted to download a song to music streaming companies that provide the content.
The company has been achieving extraordinary growth rates. Revenues have been organically growing at 40-60%, and the gross margins have been stable at 76%.
Linkfire should have doubled on the IPO launch but did not due to challenging market conditions. There have been too many deals in Scandinavia that exhausted capital available for investment. That created this opportunity.
Linkfire is attractive for both a short term and long-term play:
In the next two quarters, the company should double due to broker research coverage initiation, the release of strong Q2 results and the acquisition of the major competitor.
In the longer-term horizon, the share price should multiply further, driven by penetration into other untouched areas of streaming.
Introduction to Linkfire
Linkfire is a Denmark-based global market-leading marketing platform that connects music listeners to the music streaming industry. Linkfire had 85 000 artists (that includes major and independent record labels) that share their songs on social networks to consumers. In 2020 more than 1.5 billion songs were downloaded using Linkfire´s smart links.
Linkfire was listed in Stockholm at the end of June 2020. The company is still in a blackout period. The brokers involved in the IPO are not allowed to publish a report, which represents an opportunity to buy early before the market understands the value proposition.
Introduction to Linkfire's product
What does Linkfire do? To show it I enclose the below slide.
You see on a social network link to a music song - for example, an Instagram post. If you click on the post, you get on a Linkfire page, which gives you options from where you can download or play the song from.
Linkfire is paid twice - by the artist who uses Linkfire to create the links to their songs and from the streaming services for linking the flow to them.
Another illustration is Youtube.
Source: Linkfire, Pareto Securities
The business model
Linkfire has two revenue streams:
Platform service subscriptions - artists/record labels pay subscription fees to Linkfire to use the platform. At the end of 2020, Linkfire had 85 thousand artists. The client numbers have been growing at a CAGR of 92% (2017-2020). For illustration, Spotify has 5 million artists on its platform. So to get to a similar client number represents 6 000% growth potential for Linkfire.
Traffic commissions - Linkfire receives a commission when a new consumer signs up for their service, plus Linkfire gets a percentage of transactions on certain products like tickets and live events. In 2020 more than 1.5 billion songs were downloaded using Linkfire´s smart links. The number of transactions has been growing at a CAGR of 55% (2017-2020). Traffic commission revenue represents the major revenue-driving force. The traffic monetization is improving too. Between 2017 and 2020, the revenue per thousand visitors increased by 330%. Traffic commission revenues have been growing at a CAGR of 127% (2017-2020).
Source: Linkfire
Strong Partner Relationships is the Barrier Against Competition
Linkfire connects artists (often represented by record labels) with music streaming providers. Both groups represent revenues source. Linkfire has strong connections with both.
Strong relationships are the main barrier of entry for Linkfire competition. No one in the industry has a similar relationship strength. The partners include Apple Music (NASDAQ:AAPL), Amazon Music (NASDAQ:AMZN), Snapchat (NYSE:SNAP), Pandora (OTCPK:PNDZF), Youtube (NASDAQ:GOOG), Warner Music (NYSE:T), Sony Music (NYSE:SONY), Live Nation (NYSE:LYV) and many others. This is delivered mainly by the technological superiority of Linkfire to competition.
Major and independent labels are Enterprise customers on Linkfire's marketing platform
Linkfire is the Market Leader That Will Lead the Industry Consolidation
Linkfire estimates it has around 70% market share in the smart links. The other two major peers are:
SmartURL used to be the market leader until unpaced by Linkfire. It has a long-tail of old links that still create significant traffic.
Feature.fm - niche player founded in 2013, approximately ten times smaller than Linkfire. The niche segment; focuses mainly on indie artists and labels.
Other niche players focused mainly on niche segments.
Linkfire on the IPO calls mentioned that they see the competitors as an opportunity for industry consolidation. The management noted that there had been some negotiations. My interpretation is that there is a good chance of a transaction in the second part of the year.
I believe that SmartURL could be an ideal target. It is owned by an Israeli company that has underinvested in the technology for years. This makes the disposal more likely and increases a chance of a very favourable price tag.
Well-Allocated IPO
The IPO was placed on the Stockholm Stock Exchange on 28 June 2021. A well-placed IPO - 15.4 million shares were issued at 11.20 SEK for a total deal size of SEK 172.5 million. The implied market capitalization post the transaction was 675 million SEK. Top 10 investors received approx. 80% of the transaction / Top 20 investors received approx. 85% of the transaction.
The Greenshoe was 2 million shares, which is about 13% of the issued capital. So if you assume that the top 20 are long-term investors, almost all remaining 15% is covered by Greenshoe.
Strong Financial Performance Projected to Accelerate
The financial performance has been just extraordinary.
1.5 billion consumer connections in 2020 - 78% y/y growth
DKK 24.3M Revenue (CCB) in 2020 - 43% y/y growth
DKK 7.6M Revenue (CCB) in Q1-21 - 57% y/y growth
The commission per thousand consumers DKK 3.76 in 2020 - 81% y/y growth
The commission per thousand consumers DKK 6.87 in Q1-21 - 190% y/y growth
Source: Linkfire
Financial targets are equally encouraging:
50-70% organic sales growth
approximately 80% margin
Valuation
High growth companies are valued based on Enterprise Value to Sales value to Sales multiple.
I enclose below a valuation table for selected US peers.
Source: Pareto Securities Research
The table shows that companies that grow their revenues on average at 25%-30% trade at 11-12 times 2023 expected sales. Linkfire has been growing at much higher rates, and its superior growth rates are expected to continue. It therefore deserves at least equal multiple.
Pareto estimates 2023 revenues at around 113 million DKK in their base case scenario and 140 million DKK in their bullish scenario.
Source: Pareto Securities Research
The current market capitalization is around 600 million SEK.
Applying the above 11 times 2023 Pareto base case revenues of 113 million DKK would produce a market capitalization of approximately 1,250 million DKK, which is about 1,700 million SEK, around 2.8 times its current market capitalization, which would represent around 28 SEK per share.
Applying the same multiple to the bullish scenario would produce a market capitalization of 1,540 million DKK (2,100 million SEK) or 3.5 times above the current capitalization, which would represent around 35 SEK per share.
As mentioned above, the company is a victim of market timing. If the IPO would occur in January or February of this year, the share price would easily double on its debut. By June, the market got exhausted by too many IPO deals. This created an opportunity. The share price did not perform as expected, as many investors were already invested in previous deals.
In this situation, the company will have to persuade investors that the above multiples are justifiable. Therefore the Q2 results will be significant. If the company confirms or beat the current forecasts, the share price should re-rate significantly.
The company has a good line of material catalysts. My six months share price target is 14-15 DKK, and my one year target is around 20 DKK assuming at least three out of the below catalysts would materialize.
Strong Catalysts Ahead
Stocks move on catalysts. The stronger the catalysts, the stronger the move. Linkfire should be a perfect example of this. There is a number of solid catalysts ahead:
Initiation of Research Coverage - the IPO was placed on 28 June. There is a 30 days blackout period during which no research can be published. The analyst has done a lot of work on Linkfire. I spoke to him on the analyst call. I would expect research publication shortly after the blackout. The research publication is usually a strong catalyst, as it defines the valuation framework for the investors.
2Q2021 results - the Q1 results were very strong with YoY organic revenue growth of 57%. The second-quarter revenue should reconfirm the strong growth trajectory. Beating the Q1 results should be a strong catalyst.
Acquisition of a significant competitor - SmartURL, would increase the market position of Linkfire. The price tag should be quite favourable due to SmartURL underinvestment in technology. The market reaction to the acquisition should be quite favourable.
Video-on-demand links - this is a new area, which I am believe Linkfire is considering to enter. There is no dominant market player in the area. Try to find where to download a movie from the internet. Very painful experience. The company sees this segment as the most promising new area to enter. It is a very material opportunity for the company that already has a relationship with the content providers.
Other products - there are other streaming products where the company see the potential. These include mainly podcasts, audiobooks and gaming. IN the IPO materials, the company stated:
Linkfire is continuously evaluating new markets to enter and have initiated discussion with potential customers for Film, Podcast and Audiobook
The above indicates that the discussions are already happening. The new initiatives are material. The music streaming industry has annual revenues of around USD25 billion. In one of the presentations, the company stated that the total addressable market for all the Linkfire segments represents USD400 billion. The current product portfolio is therefore focused only on 6% of Linkfire's total addressable market. This just indicates the upside potential of the opportunity
Conclusion
Music streaming is currently a USD25 billion industry growing at a CAGR of 12% per year. Linkfire is the market leader growing at a five times higher rate than the music streaming market. The post-IPO share price trading has been slow due to too many IPO transactions in Scandinavia. If the company delivers as expected, the share price should re-rate significantly within three to six months period. Many catalysts represent an opportunity to multiply the share price several times over next 2 - 3 years.
Summary
- There are many streaming companies. But there is just one dominating service company that serves most of them with 70% market share. Its name is Linkfire.
- Linkfire connects consumers on social platforms who wanted to download a song to music streaming companies that provide the content. Linkfire collects revenues from both.
- Linkfire revenues have grown at 40%-60% CAGR with a stable 76% gross margin. The growth is accelerating further in 2021.
- Linkfire was a victim of a difficult IPO timing. If it was placed in January or February, its share price would've doubled on debut.
- Very strong catalysts in the next six months should cause the share price to double.
Investment Summary
Linkfire (LINKFI:STO) is an intelligent play on global music streaming. Music streaming revenues are estimated to triple from USD 25 billion in 2020 to USD 75 billion by 2030.
Linkfire is the global leader in smart links for the music streaming industry, with an estimated 70% market share. The smart links connect consumers on social platforms who wanted to download a song to music streaming companies that provide the content.
The company has been achieving extraordinary growth rates. Revenues have been organically growing at 40-60%, and the gross margins have been stable at 76%.
Linkfire should have doubled on the IPO launch but did not due to challenging market conditions. There have been too many deals in Scandinavia that exhausted capital available for investment. That created this opportunity.
Linkfire is attractive for both a short term and long-term play:
In the next two quarters, the company should double due to broker research coverage initiation, the release of strong Q2 results and the acquisition of the major competitor.
In the longer-term horizon, the share price should multiply further, driven by penetration into other untouched areas of streaming.
Introduction to Linkfire
Linkfire is a Denmark-based global market-leading marketing platform that connects music listeners to the music streaming industry. Linkfire had 85 000 artists (that includes major and independent record labels) that share their songs on social networks to consumers. In 2020 more than 1.5 billion songs were downloaded using Linkfire´s smart links.
Linkfire was listed in Stockholm at the end of June 2020. The company is still in a blackout period. The brokers involved in the IPO are not allowed to publish a report, which represents an opportunity to buy early before the market understands the value proposition.
Introduction to Linkfire's product
What does Linkfire do? To show it I enclose the below slide.
You see on a social network link to a music song - for example, an Instagram post. If you click on the post, you get on a Linkfire page, which gives you options from where you can download or play the song from.
Linkfire is paid twice - by the artist who uses Linkfire to create the links to their songs and from the streaming services for linking the flow to them.
Another illustration is Youtube.
Source: Linkfire, Pareto Securities
The business model
Linkfire has two revenue streams:
Platform service subscriptions - artists/record labels pay subscription fees to Linkfire to use the platform. At the end of 2020, Linkfire had 85 thousand artists. The client numbers have been growing at a CAGR of 92% (2017-2020). For illustration, Spotify has 5 million artists on its platform. So to get to a similar client number represents 6 000% growth potential for Linkfire.
Traffic commissions - Linkfire receives a commission when a new consumer signs up for their service, plus Linkfire gets a percentage of transactions on certain products like tickets and live events. In 2020 more than 1.5 billion songs were downloaded using Linkfire´s smart links. The number of transactions has been growing at a CAGR of 55% (2017-2020). Traffic commission revenue represents the major revenue-driving force. The traffic monetization is improving too. Between 2017 and 2020, the revenue per thousand visitors increased by 330%. Traffic commission revenues have been growing at a CAGR of 127% (2017-2020).
Source: Linkfire
Strong Partner Relationships is the Barrier Against Competition
Linkfire connects artists (often represented by record labels) with music streaming providers. Both groups represent revenues source. Linkfire has strong connections with both.
Strong relationships are the main barrier of entry for Linkfire competition. No one in the industry has a similar relationship strength. The partners include Apple Music (NASDAQ:AAPL), Amazon Music (NASDAQ:AMZN), Snapchat (NYSE:SNAP), Pandora (OTCPK:PNDZF), Youtube (NASDAQ:GOOG), Warner Music (NYSE:T), Sony Music (NYSE:SONY), Live Nation (NYSE:LYV) and many others. This is delivered mainly by the technological superiority of Linkfire to competition.
Major and independent labels are Enterprise customers on Linkfire's marketing platform
Linkfire is the Market Leader That Will Lead the Industry Consolidation
Linkfire estimates it has around 70% market share in the smart links. The other two major peers are:
SmartURL used to be the market leader until unpaced by Linkfire. It has a long-tail of old links that still create significant traffic.
Feature.fm - niche player founded in 2013, approximately ten times smaller than Linkfire. The niche segment; focuses mainly on indie artists and labels.
Other niche players focused mainly on niche segments.
Linkfire on the IPO calls mentioned that they see the competitors as an opportunity for industry consolidation. The management noted that there had been some negotiations. My interpretation is that there is a good chance of a transaction in the second part of the year.
I believe that SmartURL could be an ideal target. It is owned by an Israeli company that has underinvested in the technology for years. This makes the disposal more likely and increases a chance of a very favourable price tag.
Well-Allocated IPO
The IPO was placed on the Stockholm Stock Exchange on 28 June 2021. A well-placed IPO - 15.4 million shares were issued at 11.20 SEK for a total deal size of SEK 172.5 million. The implied market capitalization post the transaction was 675 million SEK. Top 10 investors received approx. 80% of the transaction / Top 20 investors received approx. 85% of the transaction.
The Greenshoe was 2 million shares, which is about 13% of the issued capital. So if you assume that the top 20 are long-term investors, almost all remaining 15% is covered by Greenshoe.
Strong Financial Performance Projected to Accelerate
The financial performance has been just extraordinary.
1.5 billion consumer connections in 2020 - 78% y/y growth
DKK 24.3M Revenue (CCB) in 2020 - 43% y/y growth
DKK 7.6M Revenue (CCB) in Q1-21 - 57% y/y growth
The commission per thousand consumers DKK 3.76 in 2020 - 81% y/y growth
The commission per thousand consumers DKK 6.87 in Q1-21 - 190% y/y growth
Source: Linkfire
Financial targets are equally encouraging:
50-70% organic sales growth
approximately 80% margin
Valuation
High growth companies are valued based on Enterprise Value to Sales value to Sales multiple.
I enclose below a valuation table for selected US peers.
Source: Pareto Securities Research
The table shows that companies that grow their revenues on average at 25%-30% trade at 11-12 times 2023 expected sales. Linkfire has been growing at much higher rates, and its superior growth rates are expected to continue. It therefore deserves at least equal multiple.
Pareto estimates 2023 revenues at around 113 million DKK in their base case scenario and 140 million DKK in their bullish scenario.
Source: Pareto Securities Research
The current market capitalization is around 600 million SEK.
Applying the above 11 times 2023 Pareto base case revenues of 113 million DKK would produce a market capitalization of approximately 1,250 million DKK, which is about 1,700 million SEK, around 2.8 times its current market capitalization, which would represent around 28 SEK per share.
Applying the same multiple to the bullish scenario would produce a market capitalization of 1,540 million DKK (2,100 million SEK) or 3.5 times above the current capitalization, which would represent around 35 SEK per share.
As mentioned above, the company is a victim of market timing. If the IPO would occur in January or February of this year, the share price would easily double on its debut. By June, the market got exhausted by too many IPO deals. This created an opportunity. The share price did not perform as expected, as many investors were already invested in previous deals.
In this situation, the company will have to persuade investors that the above multiples are justifiable. Therefore the Q2 results will be significant. If the company confirms or beat the current forecasts, the share price should re-rate significantly.
The company has a good line of material catalysts. My six months share price target is 14-15 DKK, and my one year target is around 20 DKK assuming at least three out of the below catalysts would materialize.
Strong Catalysts Ahead
Stocks move on catalysts. The stronger the catalysts, the stronger the move. Linkfire should be a perfect example of this. There is a number of solid catalysts ahead:
Initiation of Research Coverage - the IPO was placed on 28 June. There is a 30 days blackout period during which no research can be published. The analyst has done a lot of work on Linkfire. I spoke to him on the analyst call. I would expect research publication shortly after the blackout. The research publication is usually a strong catalyst, as it defines the valuation framework for the investors.
2Q2021 results - the Q1 results were very strong with YoY organic revenue growth of 57%. The second-quarter revenue should reconfirm the strong growth trajectory. Beating the Q1 results should be a strong catalyst.
Acquisition of a significant competitor - SmartURL, would increase the market position of Linkfire. The price tag should be quite favourable due to SmartURL underinvestment in technology. The market reaction to the acquisition should be quite favourable.
Video-on-demand links - this is a new area, which I am believe Linkfire is considering to enter. There is no dominant market player in the area. Try to find where to download a movie from the internet. Very painful experience. The company sees this segment as the most promising new area to enter. It is a very material opportunity for the company that already has a relationship with the content providers.
Other products - there are other streaming products where the company see the potential. These include mainly podcasts, audiobooks and gaming. IN the IPO materials, the company stated:
Linkfire is continuously evaluating new markets to enter and have initiated discussion with potential customers for Film, Podcast and Audiobook
The above indicates that the discussions are already happening. The new initiatives are material. The music streaming industry has annual revenues of around USD25 billion. In one of the presentations, the company stated that the total addressable market for all the Linkfire segments represents USD400 billion. The current product portfolio is therefore focused only on 6% of Linkfire's total addressable market. This just indicates the upside potential of the opportunity
Conclusion
Music streaming is currently a USD25 billion industry growing at a CAGR of 12% per year. Linkfire is the market leader growing at a five times higher rate than the music streaming market. The post-IPO share price trading has been slow due to too many IPO transactions in Scandinavia. If the company delivers as expected, the share price should re-rate significantly within three to six months period. Many catalysts represent an opportunity to multiply the share price several times over next 2 - 3 years.
