Rumble: Stock Momentum Is Not Indicative Of Financial Performance (NASDAQ:RUM)

In a short space of time, with a much smaller budget, Rumble Inc. (NASDAQ:RUM) claims to have built a mini Google’ in its most recent Q4 2023 Earnings call. It has expanded its portfolio focused on censorship-free content to include video, live-streaming, an advertising centre and since Q1 2024 it is offering its independent cloud services to the public on a subscription-based business model. The stock, considered a high-growth stock, has seen some serious momentum lately, increasing by 42.25% since my previous article in January 2024. Most of its popular content creators are focused on politics. Therefore, political events highly influence user activity, of which there will be plenty this US election year. Consequently, this makes the stock highly volatile and unpredictable as market sentiment is less about its financial performance. In FY2023, total revenue has more than doubled, but it is still only at $81 million, and there has been a significant slowdown in the second half of FY2023. Additionally, the company lacks adequate advertising revenue sources, we have yet to see the monetisation outcome of its cloud offering, its losses are deepening, and the company is increasing its cash burn. A brief comparison of the stock relative to peers in the industry makes it difficult to justify the current valuation versus the relatively disappointing performance and lack of growth guidance. Therefore, I do not recommend it for long-term investors and maintain a hold rating.

Rumble – Recent updates

Recently, I provided an overview of the company. I think it essential to keep in mind that Rumble is attracting an audience through its anti-censorship, politically nuanced stance, paying several large, polarising content creators to publish on the site. It quickly built up a recurring monthly active user base of over 40 million, catapulting its growth off the back of an increasingly polarised political environment in the US since 2020.

It is trying to diversify its content and increase advertising opportunities through partnerships, such as Barstool Sports. Most recently, it has expanded its portfolio by publicising its independent cloud offering. The latest cloud offering is on a subscription-based model and will diversify the company’s revenue, which is primarily advertising-based.

Rumble stock – Challenges and future growth

However, amidst all these efforts, there are underlying challenges to attracting advertisers and increasing content engagement in a space dominated by Tech Giants with much larger budgets, much more advanced infrastructure, much greater global reach and more willingness to adapt their policies to meet advertising requirements. Rumble’s loyal (nonpaid) users are there for the free speech message, willing to accept functionality deficits and less flashy, slower user interface experiences. The company’s monetary efforts have been focused on promotion. A quick glance at Rumble’s trending videos over the last month reveals that the most popular videos are largely by individuals paid to post on Rumble and previously banned from YouTube (GOOGL).

For more users to stick around, I believe heavy investments in the infrastructure will be required to gain long-term active user traction. The importance of functionality was shown when YouTube blocked its auto-sync with Rumble. This has had an immediate impact on the number of hours of content uploaded to the site.

If we look at Google Trends, we can see that the company received most of its attention during the previous US elections in 2020. However, outside of politically heated and polarising events, the company has not particularly shown an upward trend in search interest within the US or globally.

For FY2024, it will be essential to see whether the company can monetise its growing number of services. Monetisation from advertising will be critical, allowing the company to reduce spending on content creators and grow its top line. Furthermore, we will likely see spikes in active monthly user trends due to the US elections. These are to be considered outliers to regular growth. Rumble has not yet released guidance; however, it indicated upward results from Q2 2024 and expects to break even by 2025.

Rumble Q4 2023 earnings overview

In the last two quarters, we have seen a significant slowdown in the company’s top-line revenue, missing revenue expectations for two consecutive quarters. This is concerning for a business in the growth phase and reflects the major challenge of attracting and keeping advertisers on a platform focused on non-censorship. The company has established an advertising centre to improve this and additional service revenue and has diversified its revenue into a cloud offering, but we have yet to see the impact of these initiatives. In Q4 2023, Rumble beat EPS expectations by $0.08 to achieve a GAAP EPS of negative $0.14. However, we can see deepening losses as the top line fails to cover the costs of the operations.

We can see that costs and expenses have increased, but at the same time, this is also due to expanding the business, resulting in additional content creation costs, hosting fees and other services.

We can see that there is significant cash burn, with levered free cash flow at negative $84.4 million. A big chunk of this cash flow is going towards its content creators. Rumble aims to reduce this significantly by the end of 2024; however, this will remain an issue for Rumble as long as these content creators are not bringing in serious money from advertising.

If we look at the balance sheet, we can see that the total cash in FY2023 was $218.3 million. Management believes that it has enough cash to meet its capital requirements. Furthermore, it will benefit from cost savings through automated business processes to improve costs as it scales.

RUM stock valuation

Rumble’s stock momentum has been fuelled more by hype and speculation than financial progress, making the stock inherently risky. It has a market cap of $2.26 billion, while annual revenue has yet to reach $100 million, and annual EPS in FY2023 has dropped to $0.58. Furthermore, while the company has increased its services, there is growing uncertainty about how well they can be monetised under its non-censorship stance. If we compare the stock against three peers that take advantage of users’ time spent online and generate revenue through advertising, namely Pinterest (PINS), Snap (SNAP), and recently public Reddit (RDDT), we can see that its price-to-sales ratio of 20.10 is very high compared to its peers. At this stage, the risks of investing outweigh the rewards, amplified by its peer comparison.

Risks

Rumble has caught the public’s attention by focusing on non-censorship. However, it is struggling to find monetisation strategies to match this message. Furthermore, the management team has limited experience running a public company, and the company has expanded its business very quickly. This increase in complexity regarding stakeholders and company operations may require a skill set currently not present within the executive team, which could negatively impact the business. The company has also grown through heavy promotion and investment in sensational content creators, but less investment has been made in the infrastructure. When I briefly clicked through some videos on the site, I was often met with laggy content. This could put off potential users and impact the overall business performance in the long run.

Final thoughts

Rumble’s stock price has seen significant upward momentum over the last three quarters. However, there has been a dramatic drop in top-line momentum in the previous two quarters, and the company’s losses have deepened YoY, alongside growing cash burn. Although management believes it has enough cash to invest in the business, and there are some exciting new services on offer, the pressing question remains whether this business, built on non-censorship, can successfully monetise its efforts in a highly competitive online space. Furthermore, the stock is highly volatile and impacted by news rather than financials. Therefore, I do not believe there is enough reward versus the risk for long-term investors to take a position and maintain a hold position.