Ready to "Rumble" (RUM) ?
Before you charge ahead in this "de-SPAC" name, take a step back.
In the past two years, almost every company able to de-SPAC has sported wildly optimistic growth forecasts with simply absurd valuations. For those not following the special purpose acquisition company craze, to de-SPAC is essentially when these so-called blank check companies produce a publicly listed company, usually through a process that looks similar to a merger.
In most cases, these issues have hurt investors who bought shares in the public market, even as insiders and deal sponsors were still deep in the money, owning cheap stock. Similarly, the recent de-SPAC of Rumble, the online video network platform, presents several challenges for investors, likely leading to a much lower share price due to its unjustified valuation and massive dilution for insiders' option ownership.
Investors keep repeating the same mistake, buying the stock of a growth company where numerous years of growth are already baked in. Established tech stocks like Snap (SNAP) or Zoom (ZM) demonstrated the risks in paying up for growth after falling from valuations over 20-time to 50-times revenues to more sober 5 or 6-times revenues as growth inevitably slowed. Rumble currently trades for around 100-times revenues of under $50 million, with an enterprise value of about $3.75 billion -- close to 20% of SNAP's or ZM's with only about 1% of their revenues. RUM has 375 million fully diluted shares outstanding, plus additional founder shares that assure majority voting rights.
Rumble's revenues grew strongly last quarter to $10.9 million, up from $2.1 million last year, but it could take a decade to grow into its valuation, even if the company executes perfectly. Losses almost match revenues at $7.78 million and can be expected to continue as far as the eye can see. While generating losses at Rumble is perfectly reasonable in its nascent business stage, Wall Street can tire of paying a massive premium for profitless growth. Thus far, losses have scaled up just as rapidly as revenues due to hefty checks paid to talent for content.
It's true that the recent completion of the SPAC deal gives Rumble $350 million in capital to invest in growing its businesses. Still, because of business uncertainties, management cannot guide the near term-revenue range.
Rumble's business pursuits, in ad-supported video content and cloud hosting, bump into a crowded field of deep-pocketed competition. Investors should expect slim margins from paying content creators to attract eyeballs and from competing with tech titans to provide cloud hosting services.
There's a path for Rumble to carve out a solid niche in politically conservative content. The company has established a fast-growing audience for its video offerings. Monthly active users increased 97% year-over-year to 71 million.
There's a path for Rumble to carve out a solid niche in politically conservative content. The company has established a fast-growing audience for its video offerings. Monthly active users increased 97% year-over-year to 71 million.
Generally, investments are best when there's a discernible opportunity for stock appreciation. It's impossible to make a fundamental case for RUM at a $4 billion valuation, let alone make a case for a higher stock price that would make investing in it now worthwhile.
I believe that Rumble's valuation demonstrates, yet again, that SPACs are designed to enrich insiders at the expense of open market buyers.
Given that Rumble just came public in September, investors may mistakenly believe they are getting in early. While it's true that Rumble is early in cultivating its revenue-producing opportunities, the fully diluted stock valuation at $4 billion is entirely out of whack with the company's nascent business and tiny revenue base. The risk/reward skews so far negative for buyers at the current price around $10. I would avoid owning the stock.
