Recently, much Internet scuttlebutt has surrounded an anonymously published report by investment blog Seeking Alpha regarding SFX as not a smart investment, and moreover questioning the financial sustainability of SFX as a company. In questioning whether or not the company can succeed or even is a solid investment is missing the point. Rather, discussion needs to start on contemplating just how large SFX intends to be, how explosive the growth potential of the company actually is. As well, the idea of how said growth will likely alter the size and scope of finance in not just music, but digital technology, social media, banking, and well, just about any industry that EDM (and by extension SFX) touches should be considered as well. Thus, the stock listed as SFXE on the New York Stock Exchange, may be the smartest investment since people bought Apple stock in the 1980s. Therefore, it's possibly advisable to get in while the getting is cheap.
At present, SFX currently has a debt valued at $305 million, with the rating on that debt listed to investors as CAA1, meaning that the debt makes the company as an investment “to be of poor standing and are subject to very high credit risk." As well, a rebuttal circulated where financial services analyst by Rich Tullo of Albert Fried & Company defended SFX against the Seeking Alpha article, saying "SFXE expanded top line by 3 fold over the last 12 months ending in June to $82 million from $27.4 million which makes SFXE the fastest growing Company in our coverage universe. The fact that SFXE expanded revenue by about 300% and Adjusted Cash Out-Flow (AOCF or EBITDA) expanded at a slower rate to roughly $21 million in 2Q14E from roughly $15 million in 2Q13A suggests to us there is potentially significant operating leverage in the SFXE model."
For those not-so-savvy with investment-speak, what is basically being said is that any financial model being used to measure SFX's business model isn't equipped to handle the style and level of growth that SFX is undertaking. Moreover, whatever debt SFX is accruing, the company's earning potential is such that there's potential for the debt to not be as much of a significant issue in the long-term life of the company.
If someone without significant knowledge of the EDM landscape were to look at SFX's moves, it would look like the company is swallowing any and every company whole in its path to dominating the EDM market. However, if a more aware EDM observer took a look, the company has acquired high-cost/high-profit properties, while also acquiring a slew of talented and (more-importantly) respected personnel to work in top positions with those organizations, while at the same time taking on the financial loss of streamlining acquired companies to fit within a model in which all pieces ideally fit in a seamless manner. In short, there's a method to SFX's madness, and in either not understanding dance culture, technology, and the speed at which change occurs in digital society, the boat is entirely missed on SFX's model for success.
For instance, SFX literally purchased Beatport—and then, yes, set about shaving away departments—but at the same time, the company will also likely plug in with partner Mastercard for handling its digital transactions, as well as redefining Beatport as a portal for EDM with the launch of Beatport Pro. So, while yes, folks lost jobs and/or shifted departments, the earning potential for the site has potentially increased by billions (Mastercard will likely want to globally market its EDM involvement and also push for greater use of the portal, too).
As well, on the personnel front, SFX hired Kerri Mason away from being a respected dance journalist for places like Billboard and Liz Miller away from Big Beat Records, plus scores of other talented individuals with high levels of respect in electronic music culture. Also, in absorbing a number of top festivals, they're also plugging in with the staff that run those festivals, too, which only increases the institutional knowledge of the company, which on one level is the world's most intriguing startup, but on yet another level is quickly becoming the all-star game for behind-the-scenes EDM movers and shakers. SFX is clearly being built with no intention of going out of business anytime soon, but rather being built like a conglomerate with immediate global impact.
Regarding said festivals, EDMTunes' critique of the Seeking Alpha article points out a clear flaw in any financial modeling regarding SFX's current (and potential) dividends in stating, "SFXE’s most productive quarter is going to be the third quarter, when TomorrowLand, Electric Zoo and TomorrowWorld’s profits will be hitting the books. While it may not make up for the large amount of debt the company holds, it will show the power of growth in the company now that they have acquired most aspects of the EDM industry (booking agency, ticket distributor, event organizer, PR firm and music distribution.)"
Proof that all may ultimately be well in SFX land comes from this recent report from Billboard that on the heels of the above conversations—which led to SFXE's shares on the NYSE to fall to $3.52 per share (the steepest decline from their initial offering at $12)—that the company's stock has rebounded by 23.3%. Of course, given the above discussion, SFXE is trading at $4 per share on the New York Stock Exchange.
As SFX begins to roll out their business model on domestic and semi-global fronts, there will clearly be need for adjustments and re-development. However, the one thing that will never change is that the scope of SFX's work will always be more enormous than any other similar company in the entertainment industry, and in having so many moving parts will be unable to be measured by any existing standard. SFX doesn't just sell you the music, it throws you the party where you can hear the music, plus also wants to facilitate the development of the culture surrounding the music to literally be ubiquitous. As ridiculous as a world literally guided by EDM may be, it's a world that for a generation of young adults and children who'd vote Skrillex for President, think Zedd is better than Elvis and that Adventure Club are bigger than the Beatles—is a reality. In both placating and embracing this evolution on a global level, the company has poised itself well to truly be a next-level conglomerate, the likes of which which has never been seen.
