Stingray Group: Navigating Growth and Value in a Volatile Market

Amidst the turbulence of the global economy, Stingray Group (TSX: RAY.A) has emerged as a compelling case study in strategic adaptation. Its first-quarter 2025 results reveal not just incremental progress but a deliberate shift toward sustainable growth, underpinned by accelerating revenue streams and a marked improvement in its leverage ratio. For investors seeking undervalued opportunities in the media and entertainment sector, Stingray's metrics now present a compelling entry point—provided risks are carefully weighed.

The Catalysts for Revenue Growth

Stingray's Q1 2025 revenue surged to $89.1 million, a 12.8% year-over-year increase, driven by two key pillars: FAST (Free Ad-Supported Streaming) channels and retail media advertising. The FAST initiative, which expanded access to Stingray's music and entertainment content, has become a linchpin of its strategy. This segment's growth reflects a broader industry shift toward ad-supported models, where Stingray's deep catalog of licensed content and partnerships with retailers like Walmart and Best Buy provide a competitive edge.

Meanwhile, retail media advertising—a newer revenue stream—has capitalized on the rise of in-store digital displays and targeted ads. This diversification is critical, as it reduces reliance on traditional subscription-based models and aligns Stingray with the evolving consumer demand for free, ad-supported content.

Financial Resilience: A Turnaround in Leverage

The most striking improvement lies in Stingray's Net debt to Pro Forma Adjusted EBITDA ratio, which fell to 2.77x in Q1 2025 from 3.28x in the prior year. This metric, a cornerstone of corporate health, signals a significant reduction in financial risk. The ratio's improvement stems from two factors:

1. Higher EBITDA: Pro Forma Adjusted EBITDA rose 9.9% to $31.1 million, reflecting operational efficiencies and cost discipline.
2. Strategic Debt Management: While net debt remains elevated at $362.25 million, the Corporation has slowed debt accumulation while boosting cash flows.

This deleveraging is critical. A lower leverage ratio not only reduces default risk but also opens access to cheaper financing—a lifeline for any company navigating economic uncertainty.

Valuation: A Hidden Gem?

On paper, Stingray's valuation appears compelling. Its Enterprise Value (EV) of $949 million sits at just 7.98x EV/EBITDA, far below peers in the media sector. The Forward P/E of 7.44 and Price-to-Free Cash Flow (P/FCF) of 5.66 suggest the market is undervaluing its earnings potential. Analysts, too, are bullish: the average target price of $11.67 implies a 37% upside from its June 2025 price of $8.78.

However, caution is warranted. While cash flow metrics (e.g., $102.1 million FCF over twelve months) are robust, Stingray's Altman Z-Score of 1.35—below the 1.8 bankruptcy threshold—highlights its precarious debt position. With $390 million in debt versus $19 million in cash, any prolonged revenue slump could strain liquidity.

The Risks to Consider

• Debt Overhang: Despite improved leverage, Stingray's Debt-to-EBITDA ratio of 3.22 remains high. Interest coverage (3.86x) is adequate but fragile in a rising rate environment.
• Net Loss Persistence: A trailing twelve-month Net Profit Margin of -4.68% underscores the challenge of translating revenue growth into sustained profitability.
• Regulatory and Competitive Risks: The FAST space is crowded, with giants like Disney+ and Amazon Prime dominating. Regulatory scrutiny over content licensing could also disrupt margins.

Investment Thesis: Buy With Eyes Wide Open

Stingray's combination of strong cash flow, dividend yield (3.52%), and analyst optimism make it an intriguing pick for value investors. The FAST channel expansion and retail media advertising are growth vectors with tangible upside, while the improved leverage ratio reduces immediate default fears.

Yet, the Altman Z-Score and debt burden demand vigilance. Investors should consider a staged entry—allocate a small position and monitor whether Stingray can sustain EBITDA growth while addressing its debt.

Final Verdict

Stingray Group is a classic “turnaround play” with asymmetric risk-reward. The data points to undervaluation and strategic progress, but the balance sheet remains a hurdle. For those willing to bet on management's ability to deleverage further and capitalize on FAST's potential, Stingray could prove a rewarding contrarian bet.

Recommendation: Hold for now, but keep an eye on the June 10 earnings report. If revenue growth accelerates past 79.7% annualized expectations, a gradual buy position may be justified.

This analysis balances Stingray's promising trajectory with its lingering vulnerabilities, offering investors a roadmap to navigate the trade-off between growth and risk.