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The theory behind Rumble (NASDAQ:RUM), a video sharing platform which is seen by many as an alternative to Alphabet’s YouTube (GOOG) (GOOGL), is that it is seeing such higher growth rates as users flock to the app and upload thousands of hours of video each and every day, that it will be a multi-bagger down the line.
But there are some realities in the way of that theory, which I believe will limit its ultimate long-term potential, even as its short term remains volatile.
The first is that the current opportunity for creators of any kind to take advantage of the higher pay rate. While YouTube only pays about 15% to 20% of their ad revenues with their users / creators, Rumble is paying around 60% of that revenue with theirs.
The second is that the more the platform is gearing itself to become an echo chamber for certain political ideologies, the less mainstream advertisers are likely to use and pay the platform for running their ads. This means that even if we do see explosive growth in revenues over the next year or two, I believe there’s a limit as the company may have to ultimately reduce revenue sharing and will hit profitability snags.
Let’s dive into these theories.
But First – Current Expectations
So far there is only 1 single analyst which is projecting what the company’s top and bottom line figures are going to be in the coming 5-10 years. This should be taken with a huge grain of salt for any company, let alone one which we have very little information on thus far.
These projections call for a serious surge in revenues, including a seemingly unrealistic surge in Q4 revenues, as the company reported they made $6.5 million in revenues in the first 9 months of fiscal 2021. Here is what the projection currently calls for the next 5 years:
| 2022 | 2023 | 2024 | 2025 | 2026 | |
| Revenue | $22.1 million | $99.9 million | $211 million | $326 million | $448 million |
| Growth | N/A | +352% | +111% | +54.6% | +37.5% |
(Source: Seeking Alpha Earnings Estimates Page – Rumble RUM)
Not only does this projection call for a Q4 sales figure of $15.6 million, which is unrealistic, but it also projects that the company will be generating such high revenue growth that will more than triple in the coming 12 to 24 months.
When it comes to the company’s profitability, even when comparing it to YouTube’s current figures, there doesn’t seem to be a lot of sense in these:
| 2022 | 2023 | 2024 | 2025 | 2026 | |
| EPS | $(0.05) | $(0.15) | $0.02 | $0.16 | $0.21 |
| Growth | N/A | -200% | N/A | +700% | +93.8% |
(Source: Seeking Alpha Earnings Estimates Page – Rumble RUM)
What I meant by comparing the company’s revenue figures to YouTube’s current is that this projection is calling for $211 million in revenues to translate into a profit for the company even as they share as much as 60% of their revenues with users. This same figure later assumes that they will increase their profit margin by such an extent that a 54% jump in revenues for the year will translate into a 700% jump in profits.
Here’s why I don’t think these figures are warranted. I’ll get into the valuation projections based on these figures in a later section of the article.
#1: Temporary User Surge
It’s no secret that partisan video and content creation is a lucrative business, as some creators on YouTube and other platforms are making big money by commentating and spreading information in either sides’ echo chambers.
But I believe it’s actually Rumble’s revenue sharing that’s causing a lot of the flocking to the platform rather than its organic growth due to some attraction for individuals other than a monetary one.
This means, I believe, that not only is the commitment to the platform a monetary one (which as we’ve seen with YouTube over the years, can vary greatly as policies change), but that there will eventually be a need to cut that monetary sharing due to 2 different factors.
The first is a pure numbers reason. Given the past reported revenues of $6.5 million for the first 9 months of the year with an average estimated 39M users, based on the company’s filings, that equals to about $0.17 per user. YouTube generated over $8.50 per user in revenues. This means that it is inevitable that the company will need to eventually change their revenue sharing platform and begin to explore different revenue-generating streams. That leads me to reason number 2.
#2: Limited Ad Revenue Sources
As we’ve seen with other social media platforms, as they become increasingly partisan, as Rumble has become, the ad revenue sources dry up very quickly. YouTube’s success lies in the algorithms which billons of individuals use to keep politics away from their viewing habits.
Sure, there are a ton of partisan videos on YouTube, but a huge amount of their users are young folks who are not involved in politics whatsoever and if they are, they tend to lean the other way. The fact that you can’t scroll through any Rumble video without seeing ads and content filled with partisan sensationalism headlines means there’s a severely limited amount of users they can attract when you compare them to Alphabet’s YouTube.
This, in turn, means that advertisers which are relying on that mainstream young-person for their ad targeting are likely to avoid a company like Rumble since the vast majority of individuals on the platform are either video creators who don’t watch things, or those who are only there for a partisan reason.
This doesn’t mean that partisan companies and outlets won’t advertise on Rumble, I certainly believe that the company will garner a nice number of revenues streams over the years, but to think it’ll approach YouTube’s average revenue per user or any significant portion of their user base is unrealistic, in my opinion.
Valuation Means Volatility, But Long-Term Downside
Can Rumble generate $200 million in revenues over the next 5 years? Yes.
But can it sustain its current revenue sharing environment and grow to generate over $1 billion in revenue to a point where it can become profitable? I don’t believe so. As a result, a look at current valuation alongside the aforementioned projections whose an overvalued company will have extremely volatile long-term investment prospects.
Here are price to earnings multiples based on the aforementioned projections:
| 2022 | 2023 | 2024 | 2025 | 2026 | |
| EPS | $(0.05) | $(0.15) | $0.02 | $0.16 | $0.21 |
| P/E | -241x | -80.3x | 602x | 75.3x | 38.8x |
(Source: Seeking Alpha Earnings Estimates Page – Rumble RUM)
While a valuation of 39x forward earnings with a projected 94% rise in EPS for the year is not all that out there, the aforementioned factors not only make that an extremely unlikely feat, it also makes their current figure multiples all that more important.
Meaning – the company is now trading at a multiple so high to their current revenues and projected EPS for the next 24 months, that it’ll take a massive surge in both to justify these. Not of users, but of revenues and gross margins for the company’s fiscal 2022.
Projecting a 10x to 20x price to sales ratio for the company means that if they do indeed make over $20 million this coming year that their fair value will lie between $220 million and $440 million in market capitalization. Given that their current market capitalization is $460 million, I believe the company is overvalued.
Risks & Conclusion
The main risks associated with avoiding the company is that they do, in theory, have an avenue to get to the aforementioned levels of revenues (maybe not profits) in the coming years, which means that the conservative 5x forward price to sales multiple means that they can, potentially, reach a fair value market capitalization of $1 billion, which is about double their current.
While this is the case, and sentiment and emotions are likely to lead the company’s share price for the time being, I am not by any means advocating for a short on the company, but rather avoiding an investment on the hype that perhaps the company can seriously take on a giant like YouTube.
For now, I will be avoiding the company as any form of investment and will be watching closely for any sharp moves upwards in the company’s share price to then contemplate a short position.
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