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Motley Fool Issues Rare “All In” Buy Alert
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Shares of Rumble (RUM 5.28%) tumbled as much as 26.7% this week, according to data from S&P Global Market Intelligence. The alternative video platform posted strong user growth in the third quarter but a sharp operating loss, leading investors to sell the stock. As of 12:39 p.m. ET on Friday, Nov. 18, the stock is down 24.2% this week.
Rumble is an online video platform similar to YouTube, but with a focus on not censoring any content. The company is seeing strong user growth at the moment. In Q3, average monthly active users (MAUs) grew 97% year over year to 71 million, which is impressive for a platform so young. This is not nearly as large as YouTube, which has over 2.6 billion estimated active users, but it is a good start.
Revenue is also growing quickly, up 430% year over year to $11 million in the quarter. However, that is where all the good news ends. Rumble is highly unprofitable, generating an operating loss of $7.8 million in the quarter due to a huge increase in sales and marketing spending. Through the first nine months of 2022, the company has burned $22.8 million in free cash flow. With over $357 million in cash on the balance sheet, Rumble is in no danger of going out of business anytime soon, but it will have to turn a profit eventually and hasn’t proven it can do so yet.
Another concerning fact when looking at Rumble’s income statement is the low gross margin. Rumble only generated a gross profit of $3.5 million in Q3 for a gross margin of only 32%. This is much lower than other consumer internet businesses. Investors following the stock should look for the gross margin to improve in the coming years for this investment to work out.
The biggest problem with Rumble is not its operating losses, which should be expected for something growing so quickly. It is the stock’s valuation. At a market cap of $3.9 billion, the stock trades at a super high price-to-sales (P/S) ratio, let alone price-to-earnings (P/E) ratio. For example, by annualizing Rumble’s Q3 revenue to $44 million and projecting 100% revenue growth for five years (a tall task), the company would have $1.4 billion in revenue five years from now. Assuming a 10% net margin given the company’s low gross margin, that equates to $140 million in net income five years from now or a P/E ratio of 28 based on the current market cap. This is a premium to the market average of approximately 20.
Rumble’s stock is extremely expensive. Even if you like the business, it is best to stay away from shares today.
Brett Schafer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
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