2021 iHeartRadio Music Awards - Arrivals

Emma McIntyre/Getty Images Entertainment

Emma McIntyre/Getty Images Entertainment
As with a lot of stocks in the current market, iHeartMedia (NASDAQ:IHRT) has collapsed despite reporting generally strong results. During a recession, the ad market could definitely freeze up reducing the growth rates of the media company. My investment thesis remains very Bullish on the stock with the dip already pricing in substantial weakness in the ad market that might not even occur.

Finviz Chart

Source: FinViz

Source: FinViz
The market appears to have absolutely forgotten how iHeartMedia has transformed the business since the start of COVID. The media company hasn’t even gotten the legacy Multiplatform revenue base back to prior revenue levels at $629 million, yet the market is now worried again about a hit to the ad market due to another recession.

Segment slide

Source: iHeartMedia Q1’22 presentation

Source: iHeartMedia Q1’22 presentation
The Digital Audio Group remains a game changer for the business. iHeartMedia saw the business grow 36% in Q1’22 to reach $214 million. The business was nearly immaterial back in Q1’20 at only $77 million, yet the stock has collapsed to $12 here.
Total Q1 revenues are now up from the 2020 levels at $843 million versus $781 million. Podcast revenues are 8% of total revenues reaching $69 million in the quarter versus $38 million last year. Podcasts are only scratching the surface on monetization providing additional upside.
The market doesn’t like the forecast for April revenue to have only grown by 8% YoY with guidance for Q2 revenues to reach double digit growth based on a huge snap back in May and June. The current environment makes such progression appear unlikely, but iHeartMedia did exceed Q1’22 revenue guidance of 17% to 19% by reporting 19.4% growth. The company provided comfort that April revenues grew on an adjusted basis at a 12% clip with May already headed to faster growth rates.
iHeartMedia guided to Q2’22 adjusted EBITDA of $225 to $245 million. With the company still on target to reach the leverage targets of 4x adjusted EBITDA, the media empire has to reach EBITDA totals far in excess of $1 billion to hit this target.
Despite the goal to top the 2019 EBITDA levels of $1 billion, the stock has fallen over 50% from the recent highs. iHeartMedia forecasts free cash flows topping the $350 million levels of 2019 suggesting over $450 million in free cash flow for the remainder of year pushing the debt levels down.
With the high debt levels of iHeartMedia, the market can easily just ignore the business prospects and write off the investment opportunity due to debt fears. The company has a more promising model now to just fall for the normal concerns of the past.
iHeartMedia ended March with ~$5.5 billion in net debt. The company has a weighted average cost of debt in the 5.5% range, so naturally any higher interest rates could impact the refinancing of current loans due in future years. Though, a lot of the debt is fixed with terms in 2026 and beyond.

Debt table

Source: iHeartMedia Q1’22 presentation

Source: iHeartMedia Q1’22 presentation
The bigger concerns with the debt levels are any dramatic impacts to the ad market would hurt the EBITDA targets. The company will have the net debt levels down to the $5.0 billion range with achievement of the above free cash flow targets.
The investment equation drastically changes with iHeartMedia becoming a massive cash flow generator. With adjusted EBITDA at $1.1 billion and the net debt dipping to $5.0 billion, the current enterprise value of ~$7.0 billion is less than 7x EBITDA.
The EV will constantly dip going forward with iHeartMedia throwing off a lot of cash flows in the future. The market isn’t pricing the stock based on any ability to expand EBITDA via growth and higher margins in the digital ad space going forward as the ad platform develops with additional 1st party data while ad targeting improves providing greater returns for podcasts.
At an EV of just 15x EBITDA targets of $1.2 billion in 2023 with net debt possibly dipping to $4.5 billion in the process, the stock would need to trade at a market cap of $13.5 billion leading to a stock price of $90. Naturally, the current economic environment will likely cause iHeartMedia to miss some targets, but a lot of valuation can be achieved between the current stock price and the targeted price with only minor hits to growth targets.
The key investor takeaway is that iHeartMedia is far too cheap here. The company has the ability to start throwing off substantial cash changing the investment thesis in highly indebted business. A U.S. recession remains a risk, but the digital transformation of iHeartMedia appears to provide a much more resilient business this time around.
Investors should use weakness to load up on the stock knowing the past bankruptcy history of the business adds additional risk to capital.
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This article was written by

Stone Fox Capital launched the Out Fox The Street MarketPlace service in August 2020.

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, but may initiate a beneficial Long position through a purchase of the stock, or the purchase of call options or similar derivatives in IHRT over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock, you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.


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