Eros STX Global (NYSE:ESGC) is a volatile stock in a turbulent market. The company, which is the product of a recent merger between India-based entertainment producer Eros and U.S.-based film and television company STX, has seen dramatic swings over the past year.
The completion of the merger at the end of July and recent relisting under its new stock ticker don't seem to have done the company's share price any favors. Eros stock has slid more than 30% over the last month, and there's a good chance that the share price will continue to see big swings. On the other hand, the company has some intriguing growth avenues, and its stock could turn into a big winner for risk-tolerant investors.
Putting the volatility and risk into context
Volatility for the broader market and growth-dependent stocks in particular is a likely factor in Eros STX's big sell-off over the past month. The big price decline also stems in part from the creation of new shares used to fund operations and facilitate the merger.
Another potential catalyst is that newly offered shares or those held by insiders were freed up for sale after the merger was completed and the company was listed on the New York Stock Exchange under a new ticker, with selling action spurring a bigger slide for the stock.
Whatever the case, buying Eros STX stock involves taking on high risk even after the recent valuation decline. Content production is expensive, and releasing new shows and films will require the company to pursue financing through debt or additional share offerings. Even so, Eros' current valuation presents an appealing sales multiple for a company operating in a high-growth industry in a high-growth geographic territory.
A valuation that leaves room for explosive growth
Eros STX has a market capitalization of roughly $380 million and anticipates that growth for its subscription streaming service and streaming distribution deals will help it achieve revenue of $1 billion in 2022. The company is now valued at less than 40% of that figure.
Whether Eros STX will manage to hit its 2022 sales target is difficult to predict, but there are some indications it's within reach. Taken as a combined entity, Eros and STX generated revenue of roughly $600 million in 2019.
Protracted pressures stemming from the coronavirus pandemic could hurt the company's box office performance and ability to produce new content, but Eros still seems to be getting distribution interest for its movies and recently announced that it had secured over $100 million in sales from films it showcased at the Toronto International Film Festival. Streaming looks to be the company's core focus.
The paying monthly subscriber count for the company's Eros Now platform grew roughly 60% year over year last quarter to reach 33.8 million. Big subscriber growth was driven in large part by promotions, but the company's expectation for roughly 50 million monthly paying members for its Eros Now subscription video service in 2022 doesn't look unreasonable. The business should also get a boost from content distribution deals with companies including Amazon and Netflix.
Projecting how entertainment production and distribution deals will pan out typically involves a heavy dose of speculation, and conditions created by the coronavirus have created added uncertainty. Still, the company's 2022 sales target appears within reach.
India's streaming market could be huge
The Indian economy is poised for big growth in the decades to come and entertainment is one of the country's fastest-growing industries. At present, there are a variety of challenges inhibiting growth for subscription streaming services, but many of these pressures will likely be alleviated as the economy continues to improve.
Per-capita discretionary spending power remains relatively low in India, but this should start to change as hundreds of millions of the country's citizens are expected to be lifted into the middle class over the next couple of decades.
Availability of high-performance internet has been another major bottleneck to growth. India is a huge market with a population of nearly 1.4 billion people, but most reports suggest that less than half of them connect to the internet. Many also rely on relatively low-speed connections that are a poor fit for streaming video. But the availability of capable internet connections continues to expand, and high-end connectivity is on track for dramatic growth over the next decade.
There are plenty of catalysts on the horizon for the entertainment industry in India and other markets, and Eros STX will have opportunities to take advantage of these trends. Investors should proceed with the understanding that the stock is a speculative investment, but it also could be a life-changing one that generates huge returns.