Mega Matrix: Promising Initial Results From Pivot To Video Streaming (NYSE:MPU)

Introduction

I’ve written four articles on SA about Mega Matrix (NYSE:MPU), the latest of which was in November 2022 when I said that Mano was the only NFT game in its alSpace metaverse universe and all signs pointed to a severe lack of interest from players.

The company recently pivoted to the video streaming business through the acquisition of FlexTV and the revenue growth of the latter for first two months of 2024 looks compelling. While I doubt Mega Matrix is likely to get into the black anytime soon, the sales growth could create strong momentum for the stock in the coming months. I’m upgrading my rating on Mega Matrix’ stock to neutral. Let’s review.

Overview of the business

Mega Matrix was previously a small U.S. aircraft lessor named AeroCentury which filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code at the end of March 2021. With the aircraft sold, the company was acquired in September 2021 by a group of Chinese investors who invested $11.05 million for a 65% stake. Following that, Mega Matrix developed an NFT game called Mano which became part of its very own metaverse universe alSpace. Unfortunately, Mano wasn’t hit and revenues from the GameFi business stood at just $0.33 million in 2022. Mano and alSpace were discontinued in November 2022. Mega Matrix then pivoted to Ethereum (ETH-USD) staking, but revenues from this business were even lower and the net loss came in at $4.68 million in 2023.

On January 7, 2024, Mega Matrix bought 60% of video streaming platform FlexTV for $2.18 million in stock and in March it revealed that it shut down its cryptocurrency business to focus on streaming. FlexTV is a short drama streaming platform for vertical screen viewing that is available in over 100 countries worldwide. It buys short dramas from third parties and translates them into multiple languages such as English, Spanish, Portuguese, Japanese, Korean, and Thai. Also, FlexTV is involved in the production of its own content, primarily in English and Thai. FlexTV films its short dramas in the USA, Mexico, Australia, Thailand, and the Philippines among others.

Short dramas are usually made for viewing on smartphones with episode lengths ranging from one to three minutes each. Some of them can have more than 100 episodes. The free FlexTV app is available on the App Store and Google Play, and it has released more than 150 short video dramas since October 2023. It has over a million downloads on Google Play and is ranked 32nd in the entertainment category on the App Store as of the time of writing. FlexTV users can watch between five to ten episodes of each short drama for free. Following that, they have to sign up for top-up and subscription plans whose prices vary by country.

Future of the company

Mega Matrix revealed in its March 2024 business update that FlexTV generated top-up and subscription fees of $6.5 million for the first two months of 2024. This represents a 360% growth compared to the combined sum for November and December 2023. Considering data from AppBrain showed that downloads of the app on Google Play have soared since late January, I’m optimistic that revenues for Q1 2024 could surpass $10 million. The financial results for the quarter should be released in mid-May.

Looking farther ahead, Mega Matrix said that it plans to invest up to $100 million over the next three years to produce short dramas for FlexTV. However, I have doubts this plan is feasible in light of the weak balance sheet of the company. As of December 2023, Mega Matrix had working capital of just $8.6 million, and its total assets stood at just $13.3 million. While the company raised $3.7 million through an equity offering in January 2024, I think the working capital position could be below $12 million at the moment as the staking business likely continued to be in the red before being shut down in March. JMC, the company that operated the aircraft leasing business, finally completed its dissolution in December 2023.

In my view, the two most likely scenarios for the $100 million investment plan include a large equity offering to fund it or a scaling back. Nevertheless, I can see a path to over $50 million of revenues for 2024 if downloads of the FlexTV app continue to be strong over the coming months. That being said, continued growth is likely to require increased investment in advertising and marketing, and I doubt that the streaming platform will get into the black during this year.

Valuation

Turning our attention to the valuation, you could argue that Mega Matrix doesn’t look expensive considering the annualized attributable revenues for its 60% stake in FlexTV based on the January-February period are $23.4 million. This translates into a price to sales ratio of 4.7x compared to 8.2x for Netflix (NASDAQ:NFLX). Yet, the latter is profitable and scale matters in this business. In addition, Mega Matrix has a lot to prove with this new venture after two failed businesses over the past three years. Overall, I think that FlexTV looks like a good buy at $2.18 million considering its monthly sales are already at a higher level than that following a surge in downloads over the past two months. Yet, this is now the main asset of the company, and the market capitalization is over 50x the price paid for the stake less than three months ago. While I continue to think that Mega Matrix looks overvalued based on fundamentals here, it’s possible that a sustained growth in downloads of the FlexTV app translates into higher revenues for the remainder of 2024. This could boost the share price as Mega Matrix starts being perceived by investors as a growth stock. In my view, short selling is starting to look dangerous here and risk-averse investors should avoid Mega Matrix’ stock.

Investor takeaway

Mega Matrix has had an interesting journey over the past three years, pivoting to NFT games, Ethereum staking, and video streaming. The new business has started 2024 strong with rapidly growing downloads of the FlexTV app and $6.5 million revenues for January and February 2024. While the fundamentals remain weak and profitability seems unlikely for 2024, I think the rapidly rising popularity and revenues of FlexTV could provide a boost for the share price of Mega Matrix in the coming months and this could be a bad time for short selling.