Macroeconomic challenges like inflation and rising interest rates are putting pressure on stocks, with the Nasdaq Composite index down 27.3% year to date. Down more than 70% in the same time frame, the stock for Curiosity Stream (CURI -1.86%) is faring even worse.
Is the massive decline a buying opportunity or a strong signal for investors to jump ship? Let's dig deeper to find out.
What is Curiosity Stream?
Curiosity Stream operates a direct-to-consumer streaming service that differentiates itself through a focus on factual documentaries and educational content. It went public in 2020 through a reverse merger with a special purpose acquisition company (SPAC), an alternative investment vehicle designed to get around a traditional initial public offering (IPO). Since the merger, its stock has struggled significantly.
Image source: Getty Images.
SPAC stocks have generally underperformed. According to Fortune Magazine, out of the 199 companies that went public through this method in 2021, only 11% currently trade above their offering price, and overall these SPAC stocks are down an average of 43% as of late April. They face a barrage of challenges, including changing investor appetite for risk and rising U.S. interest rates, which can make it harder for new, nonprofitable companies to raise the capital they need to grow their businesses.
But while Curiosity Stream faces the same macroeconomic challenges as the rest of the market, its company-specific situation has been improving at a rapid clip, making its stock look oversold.
A bad market, not a bad business
First-quarter results were impressive. Sales jumped 77% year over year to $17.6 million as Curiosity Stream's paying customer count increased 50% to 24 million. The company powered growth by expanding the distribution of its content with Curiosity Now (a free ad-supported channel available on smart TV packages) and creating original content about topics ranging from finance to nature.
The company also boasts a strong balance sheet with $85 million in cash and investments, and no long-term debt. But so far, achieving profitability has remained elusive.
Despite the healthy growth, Curiosity Stream's first-quarter operating loss expanded from $15.2 million to $19.5 million. And this problem may have something to do with the platform's relatively cheap subscription rates of just $2.99 per month for its standard plan. For comparison, the lowest-priced streaming plan at rival Netflix goes for $9.99 per month. This means Curiosity Stream's management has a lot of room to boost revenue and margins through price hikes, which it plans to implement this year.
These changes could help Curiosity Stream achieve its target of positive cash flow from operations in the first quarter of 2023 and ease some market skepticism about the company's sustainability.
The stock is too cheap to ignore
With a price-to-sales (P/S) ratio of just 1.09, Curiosity Stream is valued significantly cheaper than the S&P 500's average P/S ratio of 2.6. It is also cheaper than streaming rivals like Netflix and Walt Disney, which trade for 2.8 and 2.4 times sales, respectively.
While it is unclear how long macroeconomic headwinds and market sentiment will hold Curiosity Stream back, it's hard to imagine the stock staying this cheap forever considering its healthy growth rate and management's guidance for positive cash flow next year.
