10-Minute Investment Autopsy No. 10: eDiets.com
When you get the core business model wrong, the numbers don’t matter
If you haven’t read the guide to the 10-Minute Investment Autopsy series, you can find it here. You will get the most out of each case if you:
Pause after the “Original Thesis” section and think about what you would have done
Engage with the discussion questions and other members in the weekly thread designed to help you further improve your investing process
The Original Thesis
Who: John Lewis
When: March 2005
What: eDiets.com (ticker: DIET)
The Thesis:
Company transforms the underlying principles of the diet programs that it licenses into an online diet service
Users pay $5/week for customized meal plans, grocery lists, access to experts and exercise programs
Revenues have grown from $5M in 1999 to a $55M run-rate in 2005
Most visited website for health, nutrition and fitness with ~ 5M visitors per month and 200K paying customers
Market believes the business model is broken because of enormous advertising spend to acquire new customers
New COO brought in last month who has the potential to turn things around
Company moving away from 100% internet ads and diversified into onsite spending at grocery stores, TV and strategic partnerships
Europe presents a big source of upside with Tesco and Europe’s Wal-Mart owning a 15-year license based on a royalty model
Stock is cheap at 1.1 EV/Sales vs. peer group multiple of 3.5x
If they can show substantial growth while lowering subscriber acquisition costs, the company can get to operating margins in the low teens
eDiets.com has high value to a potential strategic acquirer at a price that is 2x-2.5x where the stock is trading
Worst case scenario is that they can’t get acquisition costs under control, in which case they slash the budget and generate a lot of cash flow with downside to the stock at less than 30%
These are the highlights of eDiets.com then-recent financials up to the point when John was presenting his thesis:
This is the stock chart of DIET up to the point when John was presenting his thesis:
Pause here. Think through the thesis and the facts and decide what you agree with, what you disagree with and whether you would invest based on the information available.
What Happened (Just the Facts)
eDiets.com’s financials following John’s presentation were as follows:
The company never reached sustainable profitability.
eDiets.com shareholders lost ~ 100% of their investment
There is a lot more to the case:
The Autopsy - the reasons for what happened
The Lessons that you can apply to your own investing
Discussion Questions for you to think about and discuss with other thoughtful investors in the weekly case thread