Cantor Fitzgerald's special purpose acquisition company (SPAC) CF Finance Acquisition Corp VI just took video-platform Rumble (RUM 2.35%) public in a $2.6 billion deal that's generating plenty of buzz from investors. Investors hope this company can be Alphabet's YouTube and Amazon Web Services (AWS) rolled into one.
Wall Street is wading into the hype pool as well. For example, DA Davidson analyst Tom Forte just recommended buying Rumble stock and gave it a $15 price target, suggesting this company could be worth nearly $4 billion despite just going public at $2.6 billion.
Rumble will be a formidable company if it achieves management's goals. However, there's good reason to tap the brakes on some of the market's enthusiasm right now.
Why Rumble is buzzworthy
On Sept. 27, Russell Brand -- a comedian and actor with nearly 6 million subscribers to his YouTube channel -- posted a video slamming YouTube for censorship. Brand's main contention seems to be a perceived double standard when it comes to misinformation. Later on Twitter, Tesla CEO Elon Musk joined the ruckus by saying that Brand made a "good point."
NASDAQ: RUM
Key Data Points
Maybe you personally agree with Brand and Musk. Maybe you don't. But many people are searching for alternative platforms to circumvent the perceived oversteps of big tech.
Enter Rumble. In criticizing YouTube, Brand also announced that he was moving to an exclusive daily livestream on Rumble's platform where he doesn't fear his videos being taken down.
In its investor presentation, Rumble says it's "a 'neutral' video platform and cloud." And on its website, the company says, "We are on a mission to protect a free and open internet." Again, there are plenty of people who would question the premise of these statements. But there are plenty of other people who believe this is needed.
For evidence, I would point to Rumble's user metrics. In the second quarter of 2020, Rumble had just 1 million average monthly active users. As of the second quarter of 2022, it had 44 million average monthly active users -- a growth rate the company claims is comparable to privately held TikTok when it was a similar size.
This does create a small flywheel effect for Rumble. With more active users, content creators have greater incentive to publish videos to the platform. Two years ago, just 42 hours of video were being uploaded daily. Now more than 8,900 hours of content is being uploaded each day. Of course, this still pales in comparison to a platform of YouTube's caliber. But these impressive growth curves are causing investors to salivate over potential stock gains.
Two big reasons for investors to avoid Rumble's hype for now
First, investors should remember that Rumble went public via a SPAC merger and returns for these investments have a bad track record. Specifically, Cantor Fitzgerald brought Grosvernor Capital Management, View, AEye, and Satellogic public through SPAC mergers as well and all are losing to the market since.
This poor performance isn't necessarily an indictment on any of these four companies; some of them may wind up being market-beaters in time. But the underperformance is typical of SPAC stocks because of how they're structured. When Rumble was private, it had investors, and they now own 82% of the company. Investors who brought it public own another 6.3%. This is typical of SPACs. But many of these insiders desire quick exits when lockup periods expire six months later.
To summarize the first point: Selling pressure from SPAC insiders often leads to underperformance. And the track record of Cantor Fitzgerald SPACs -- of which Rumble is one -- is poor so far.
Moving to the second point: Rumble is an expensive stock with questionable prospects to create long-term shareholder value.
For starters, consider that in Rumble's 30-slide investor presentation, investors aren't privy to any of the financials of the business. This is because it only just started trying to monetize its video platform. In short, the potential is there, but it's barely generating any revenue yet despite already having a market cap over $3.5 billion as of this writing. That's pricey.
Regarding cloud, Rumble says it wants to be an infrastructure-as-a-service (IaaS) company. But an asterisk points to a footnote that says, "offerings are currently in development." Perhaps Rumble can create major shareholder value by being a top-notch IaaS company. However, first, it needs to build it. And you can ask Amazon how many billions of dollars that costs.
Returning to Forte's $15 price target, the analyst sees international-expansion opportunity for Rumble. But like building out cloud infrastructure, this too will cost an exorbitant amount of money up front, an additional drag on shareholder returns for the foreseeable future.
In closing, although Rumble could be disruptive, investors should wait for the business to mature more before buying in.
