Investors Should Prepare for BuzzFeed IPO in 2017

IPOIs BuzzFeed Going Public?

BuzzFeed CEO Jonah Peretti must laugh when he hears talk of “fake news” and “failing media institutions.” Last year, the 43-year-old mogul raised another $200.0 million from NBCUniversal Media, LLC, leading to a BuzzFeed valuation of $1.5 billion. There are even rumors of a BuzzFeed initial public offering (IPO) in 2017, so perhaps the word “failing” doesn’t quite apply to this company.

For those who may not be familiar with BuzzFeed, it is the biggest news and entertainment company to emerge in the Internet era.

It gets six billion views per month. This windfall of traffic is usually drawn from an odd mix of viral videos, list posts (e.g. “The 10 Best Moments from the Oscars”), and snappy cultural analysis.

The company also hires journalists for serious investigative work, but the majority of its content is like fast food. In other words, BuzzFeed is the McDonald’s Corporation (NYSE:MCD) of online media. But, rather than burgers filled with questionable beef, BuzzFeed dishes out “hot takes,” trivia, and quizzes.

Advertisement

Readers get an endorphin rush, much like they would from the first bite of a “Big Mac.”

Going public would help BuzzFeed scale even faster, devote more money to online video, and possibly acquire other content studios. There are also signs that NBCUniversal wants a BuzzFeed IPO in 2017 because it would get extra shares of BuzzFeed stock. More on that later.

First let’s look at the most obvious sign of an upcoming IPO: BuzzFeed’s funding history.

Source: Crunchbase

(Source: Crunchbase, last accessed February 21, 2017.)

The above chart convinced me that BuzzFeed might go public very soon. It suggests that private investors are growing impatient and they might force Jonah Peretti to act sooner than he originally intended. However, most retail investors will never hear about this.

Institutional investors have no interest in sharing this information. Why would they?

It’s so much easier to profit off you, the retail investor, the average Joe, when you have so much less information than them. This gap between retail and institutional investors is what the Nobel prize winner Joseph Stiglitz calls “asymmetric information.”

But my job is to level the information playing field.

How to Interpret the “Flat” BuzzFeed Valuation

If there’s one thing you should know about startups, it’s that they like to raise more money in each funding round. The whole point is to push BuzzFeed stock higher and higher, or put another way, to make BuzzFeed’s valuation bigger and bigger.

Think about it like this: a fast growing company—let’s call it “Startup X”—raises $10.0 million in January. It wants more than that in April, and investors are happy to oblige. Startup X raises $20.0 billion in April, double what it got three months before. Expansion continues.

By the time July rolls around, Startup X needs even more money. The venture capital (VC) investors offer another $25.0 million. This is more cash than ever before, but it is also a smaller increase than the first time. Why? Because VC investors are starting to yearn for an IPO.

At some point, they will only give the startup less money than the last time (a “down round”), or the same amount of money as last time (a “flat round”). You should interpret this as a warning shot from VC investors to the startup. “You have to go public sometime,” is the message they’re sending.

Make no mistake, there are financial consequences to down rounds and flat rounds. For instance, the BuzzFeed valuation doesn’t grow in a flat round. NBCUniversal may have given BuzzFeed another $200.0 million, but it doesn’t increase the price of BuzzFeed stock.

History shows that startups choose to go public once this happens. Take a look at the funding history of Square Inc (NYSE:SQ), a hot startup that went public in 2015. (I would use an example from last year, but the IPO market was dry in 2016.)

SQ
(Source: Crunchbase, last accessed February 21, 2017.)

Square Inc experienced a down round in October 2014. A little more than a year later, it was trading on the New York Stock Exchange (NYSE). BuzzFeed appears to be in a similar position right now, meaning that we could easily see a BuzzFeed IPO in 2017.

Should I Buy BuzzFeed Stock?

Don’t be misled by analysts who say BuzzFeed is just a web site. No, it isn’t. Whether you like its content or not, BuzzFeed is an emerging superpower on the world stage of media. It has incredibly deep pockets, and is already making hundreds of millions of dollars in revenue.

This isn’t just my opinion; all the smart money is betting on BuzzFeed stock. Hotshot investors like Marc Andreessen believe it can conquer old media and massive corporations like NBCUniversal think it is a force to be reckoned with. Only retail investors are left behind.

Retail investors are typically barred from private funding rounds, which is why they tend to misjudge IPO opportunities. Just look at how wrong the market was on Facebook Inc (NASDAQ:FB) and Twitter Inc (NYSE:TWTR).

FB_TWTR

Chart courtesy of StockCharts.com

As you can see, Facebook stock lost more than half of its value during the summer of 2012. It had just gone public, but investors were instantly bearish. However, the market was bullish on Twitter stock; it jumped 66% within the first two months of trading.

Clearly, retail investors weren’t paying attention to the fact that Twitter had shuffled its upper management, putting them in a precarious position right before going public. By contrast, Facebook was then and still is, for that matter, under the stable leadership of Mark Zuckerberg.

Fast forward to today: investors in FB stock have made 250% returns while TWTR stock investors lost 60% of their investment.

All this is my way of saying that IPO reactions can be wrong. In fact, they almost usually are, because retail investors are operating on much less information than institutional investors.

The playing field is not level. My hope is that this report balances out some of those disparities, thus giving you the chance to make a successful IPO trade. I believe that BuzzFeed going public in 2017 presents a triple-digit opportunity for investors, but I just want you to be smart about it.

Conclusion: BuzzFeed Stock Is Appealing

Although I’m generally bullish on a BuzzFeed IPO, I don’t want you to walk away thinking this is a risk-free opportunity. Based on leaked BuzzFeed financials, the company missed revenue targets in 2015 and halved its sales outlook in 2016.

Continued underperformance could weigh on the stock in both public and private markets. That being said, I don’t think a few inaccurate forecasts can stall the upcoming IPO. My concern is the hidden provision between BuzzFeed and its VC investors. This little-known contract smells like trouble.

To put it simply, the contract says that NBCUniversal will be owed additional shares if BuzzFeed stock sells at a lower price than expected. There is a two-year window on the contract, meaning that NBCUniversal is likely to push for an immediate IPO. However, it could dilute BuzzFeed stock if the initial share price is too low. That is a genuine risk, at least from my perspective.

However, all of these risks are relatively small.

The bottom line is this: BuzzFeed dominates the rest of the news media. Six billion views per month. One-and-a-half billion video streams. Two hundred million unique visitors. As someone who works in media, I can tell you that these numbers are astronomical!

My parting advice is to watch BuzzFeed for further signs of an IPO. If I’m right, it should be filing papers with the U.S. Securities and Exchange Commission (SEC) sometime this year.