Two companies at the cutting edge of modern media have got hundreds of millions of people devouring their stories. They’ve become kings of content which goes viral, with users reposting articles and video clips across social media.

Big viewer numbers are music to the ears of advertisers who are eager to push products in front of all these people digesting the viral content.

On this basis, you might expect the owners of media outlets BuzzFeed and LADbible to be interesting investments. The market says otherwise, with shares in both companies having been a disaster.

BuzzFeed (BZFD:NASDAQ) went public on 6 December 2021. The shares opened 14% higher on day one at $10.95 but have since fallen by 86% to $1.54. Last month they fell by 41% in a single day after restrictions were lifted on staff and major shareholders being able to sell stock.

LADBible publisher LBG Media (LBG:AIM) joined the UK stock market a week after BuzzFeed, listing at 175p on 15 December 2021. Today those shares trade 39% lower at 106.12p.

WHY HAS BUZZFEED FLOPPED?

BuzzFeed’s popularity is dissipating. The time users spent engaging with its content declined by 4% during the first three months of this year compared to 2021.

The group also suffers from having gone public via a special purpose acquisition vehicle, also known as a SPAC.

BuzzFeed’s life on the markets was doomed from the start as 94% of the $287.5 million raised by the SPAC was subsequently withdrawn by investors before the media group went public.

Compounding these concerns, the current outlook for BuzzFeed’s second quarter anticipates revenue growth in the low 20s in percentage terms. Analysts had previously been forecasting 35% year-on-year revenue growth.

DIVERGRENT TRENDS

BuzzFeed’s 2022 first quarter results revealed several areas of weakness. Revenues of $92 million (26% year-on-year growth) were below the analyst consensus forecast of $94.5 million.

Equally disconcerting, the group’s net loss quadrupled to $44.6 million, a loss of $0.33 a share. This was significantly worse than the consensus analyst forecast of $0.21 loss per share.

In sharp contrast to its American counterpart, LBG Media reported more upbeat full-year results on 21 April.

Group revenue increased by 80.6% year-on-year and group adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) more than tripled to £16.8 million.

Growth has been broad-based across all divisions and regions, as the group’s content continues to resonate with its engaged and valuable youth audience. Put simply, people watched more of its content for longer.

Despite the similarities in the LBG and BuzzFeed business models the former has outlined a more encouraging outlook compared to that articulated by its American counterpart.

In April LBG confirmed current year trading was in line with market expectations. In contrast, BuzzFeed’s guidance for the second quarter was considerably below analysts’ expectations.

HOW DO BUZZFEED AND LBG MAKE MONEY?

BuzzFeed generates income through various means including display advertisements. If a viewer clicks on an advert and subsequently purchases the product being promoted, BuzzFeed receives a commission payment.

It is active on a variety of video-enabled platforms including YouTube, Instagram, Facebook and SnapChat, all of which carry advertisements against its content.

It has accumulated a considerable following with over 20 million subscribers on YouTube and 12 million followers on Facebook.

LBG’S APPROACH TO MONETISING CONTENT

LBG chief financial officer Tim Croston tells Shares: ‘If you were comparing us to BuzzFeed there are two points I would highlight.

‘First, we have a well-balanced and diversified business model. We have a 50/50 split between content marketing, where we have a direct relationship with the client, and indirect marketing.

‘With respect to content marketing we are making bespoke content and retain the intellectual property.’

The group’s in-house agency provides campaign creation and production, with campaigns subsequently distributed across the group’s social media and website platforms. LBG uses these to generate and collect real-time feedback for brands.

Croston adds: ‘The second area is indirect, which is more comparable with BuzzFeed which is income coming from web or social video via platforms like Facebook.’

Indirect revenues are created through a revenue-share model with social media platforms for advertisements sold alongside LBG media content, typically on a 50:50 revenue-share basis.

POPULARITY CONTEST

LBG’s global audience grew by 13% to more than 264 million during 2021, while content views increased 97% to 62.9 billion. The company’s content was viewed for a combined 53 billion minutes, a 14% year-on-year increase.

This contrasts with BuzzFeed where the time users spent engaging with its content declined during the first three months of 2022.

According to the latest estimates from Berenberg, LBG is forecast to grow net profit from £5 million in 2021 to £11 million this year and £13 million in 2023. The investment bank believes LBG will chase opportunities in North America as a key driver of future earnings growth.

BuzzFeed is expected to remain loss-making for at least the next three years, according to market estimates published by Refinitiv.

In the current environment, investors have lost interest in loss-making companies which would suggest that LBG has more going for it than BuzzFeed. Berenberg has a ‘buy’ rating on LBG, calling it the ‘industry-leading youth publisher’.

LBG trades on 6.4 times 2023 enterprise value to EBITDA which is not excessive, neither is a price to earnings multiple of 14.5.

The key risk to earnings estimates is a decline in advertising activity which we’re already seeing across platforms like YouTube. Therefore, investors interested in LBG should appreciate there are clear risks to profits and that negative sentiment could weigh on the share price for longer.

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