From Briefing.Com:
Investing in Porn on the Net
One of the great unspoken truths about the internet is the success of pornography.
While Amazon.com (AMZN) is widely heralded as the great internet ecommerce company, at a run rate of over $1 billion annually, there are estimates that the pornography industry is already exceeding $1.5 billion on the internet.
One of the problems, however, for investors, is verifying this conception, and then finding a company to invest then. Most of the pornography companies are private. Many have the reputation of "dubious" backers.
Of course, there is also the moral question of whether one should invest in pornography companies at all, which we will simply avoid in this Brief.
However, for some time we have received requests from readers about how they can invest in what one reader called, the "biggest, but quietest ecommerce" on the internet.
We have finally found a stock for consideration by those investors interested in participating in the rise of pornography on the internet.
This stock actually showed up in our search for stocks with strong relative strength, the ability of a stock to rise when the market is declining. When it showed up three days in a row in the best relative strength ratings, and setting new 52 week highs, we wondered who Private Media Group was. Lo and behold, it turns out to be a porn vendor. And it is moving to the net.
Comparative Industry Size
There is no question that pornography is a huge industry in the United States. A December 1997 US News and World Report study gave the following comparative estimates for the size of various components of the pornography business, in 1996.
All Magazines: $11 billion (unclear whether this includes ad revenue)
Pornography, magazines, videos, cable: $8 billion
Recorded music: $8 billion
Films (Hollywood): $6 billion
Theater, opera, plays, and ballet: $1.7 billion
With so much of the pornography business in private companies, we aren't sure how these numbers are derived. But it certainly jives with common wisdom that pornography is big business.
Private Media Group is a very small company, comparatively, in this business, but to the best of our knowledge, it is the only publically traded pornography company on a major exchange.
Private Media Group (PRVT)
Private Media Group is a Swedish company (why is that not surprising...), that has been selling magazines and adult videos for over 34 years. The company just moved its headquarters to Barcelona, Spain, however. The principal line of magazines is called Private. The company also produces 60 adult videos each year, with some in high production value classification, and others in low-budget category.
Here is a brief summary of the "schedule" of production of traditional materials.
Movies: 60 X-rated and 10 R-rated per year
Four monthly magazine lines
One annual "Best-Of" book each year
The stock was a bulletin board stock until February of this year. It currently trades on the NASDAQ Exchange.
Financials
This company has a net profit margin about equal to Microsoft's (MSFT), which means it is one of the most profitable companies in America, on a percentage basis.
Here is a table of revenues for 1998. The company reports its earnings is Swedish Kronor (SEK), although the most recent annual report also includes dollar conversions for the year 1998. We didn't make any conversions for 1997, but the revenue growth in the past year, as reported in SEK, was approximately 15% with earnings growth at approximately 10%. All numbers in the table below are in thousands of US dollars.
Revenue 20,484
Cost of Goods 8,843
Selling General, Administrative 6,497
Operating Profit 5,145
Net Income 4,964
The company does not publish a separate line for "Research and Development," so we aren't sure how any internet development costs will affect the model yet.
On a fully diluted basis, (15.3 million shares), the earnings per share is $0.32. The number of shares currently outstanding (as of December 31, 1998) is 8.1 million.
This gives the company a Price/Sales ratio of 12 on a fully diluted basis, and a Price/Earnings ratio of 50. We confess to not having many comparisons in the pornography industry, but in the publishing industry, this is an extremely expensive stock. In the internet industry, this would be a cheap stock. Use your own judgement.
The balance sheet is on the other hand, doesn't look as great. The company reported only $514,000 in cash, with $6.9 million in receivables. This gives an extremely high Days Outstanding (DSO) figure which indicates an extremely inefficient sales cycle. Perhaps it indicates that the type of merchants and distributors Private Media sells magazines to just aren't that great at paying bills.
The balance sheet also lists over $9 million as an asset of the prior year's magazines contents. This is one of those numbers that is just impossible to calculate accurately.
The Internet Initiative
Private Media Group is moving to the internet. At www.private.com, the contents of all of the magazines over the years is available. If you want to, you can look at issues of Private magazine from the 1960's. At least creating content for this web service won't cost the company much. The internet site is a subscription based model, using a credit card.
We didn't sign up for the service, so we really can't tell you what is available there. While we usually include "product research" as part of our normal stock research process, with this one, we have left that, as our old physics professor used to say, "as an exercise for the student."
The Cable and Internet Shopping Initiative
The company has also just started a TV Home Shopping Program in Sweden, which will sell adult novelties and clothing on cable TV, in the same way that QVC and Home Shopping Network sell more mundane items in the US. We have no idea how this business fits into existing Swedish TV, never having seen Swedish TV. Your guess is as good as ours as to the possibility here.
The company is also launching a web site called the Internet Adult Home Shopping Broadcast Channel, which will be the same kind of thing, but as a video broadcast on the internet. Again, we don't have any real information on the business possibilities for this.
Briefing.com Summary
NOTE: Briefing.com is neutral on this stock. We aren't making a moral judgement on the company's line of business. We are neutral primarily because we know next to nothing about the business of pornography, and how Private Media Group fits into the "industry." We intend to follow Private Media Group as a way of learning more about it. Certainly the company is very profitable, even at its current low revenue levels.
We are profiling it here mainly because we have received many requests for a way to invest in some way in what many feel is the biggest business on the internet: pornography. There are other public companies involved in adult entertainment, such as OnCommand (ONCO ), the holding company for SpectraVision, which sells movies in hotel rooms, but these are not, to our knowledge, involved in the internet yet.
This is the only company we know of that is a publically traded company on a major exchange whose sole business is pornography, and which has an internet focus. If any reader is aware of any additional companies, feel free to send them to Robert V. Green at rvgreen@briefing.com.
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