All posts by Mukund Mohan

My discipline will beat your intellect

The future of Freelance work and Fiverr ($FVRR) Stock recommendation

Fiverr (FVRR) is an online marketplace for freelance work. Founded in 2010, based in Israel, the company is currently priced at $240 (Jan 21 2020), with a Market Cap of $8.44B. The company is at an inflection point in terms of growth and revenue, recording $163M (+80% YoY) in Trailing Twelve Months (TTM) revenue. It is expected to grow at excess of 70% over 2021.

Risks include a rich valuation at 51X Next Twelve Months (NTM) revenue, the tail winds from work from home (due to Covid) trailing off – unlikely in my opinion, and a distraction in management bandwidth as the focus shifts to expansion in categories, new geographies and products.

I am going to accumulate shares in $FVRR over the next few months, expecting it to be a core (top 15) holding for 3-5 years.

Fiverr stock has been an excellent performer in 2020 with 900% growth

What is freelance work?

Essentially, a freelance job is one where a person works for themselves, rather than for a company. While freelancers do take on contract work for companies and organizations, they are ultimately self-employed.

Freelancers are responsible for all sorts of things that traditional employees are not, such as setting their work hours, keeping track of time spent on different projects, billing clients, and paying their own employment and business taxes. Freelancers are not considered “employees” by the companies they work for, but rather “contractors.”

How many people freelance?

More than 30% of Americans freelance either full-time or part-time

More than one-third of the American workforce freelance amid the Covid-19 pandemic, contributing $1.2 trillion to the U.S. economy.

This was a 22% increase since 2019 and it was fueled in part by an influx of younger, highly skilled professionals seeking flexible alternatives to traditional employment. 59 million Americans performed freelance work in 2020.

Freelancer worker growth continued to go higher even as unemployment was lower

Why are the number of freelancers growing?

Freelancers like the flexibility of time and hours, the ability to earn an income on the side, and the capability to monetize their skill.

Amid a tough job market for recent college graduates, half of the Gen Z workforce (age 18-22) have freelanced in the past year, and of those, more than a third (36%) started since the onset of Covid-19.

The share of independent professionals who earn a living freelancing full-time has increased 8 percentage points to 36% since 2019. 59% of freelancers have participated in skills training in the last six months vs. 36% of non-freelancers.

30+ Freelance Stats – Why the Gig Economy is Growing in 2021
Benefits of freelancing

There is a burst in demand for people to support customer services as well as ecommerce development, web and mobile design.

75% say they earn the same or more in pay than when they had a traditional employer.

Society’s perception about freelance is also changing. Seventy-one percent of freelancers say perceptions of freelancing as a career are becoming more positive, the survey revealed.

Meanwhile, 67% of full-time freelancers say that freelancing has prepared them to cope with the uncertainty of the coronavirus pandemic better than those in traditional jobs.

What categories of work are being freelanced?

Freelance jobs most in demand today are in computers (Graphic design, Web development) /mathematics (data analysis), and in finance (accounting) /business operations (social media marketing, administration).

Design, Media (video production) are most likely candidates for online freelancing

Even before Covid-19, 26% of freelancers worked entirely remote and 46% worked remotely more than half the time. Freelancers doing skilled services earn a median rate of $28 an hour.

The computer related skills that are the most freelanced jobs

How big is the market? Who does freelancing?

Freelancing income exceeds $1 trillion, almost 5% of the United States’ GDP.

One-in-Three Americans Work on a Freelance Basis, Study Finds | Time
Most freelancers are indepdent contractors

Freelancers offer skilled services

Every generation had more than 1 in 4 workers who freelanced in the past year. The ascent of freelancing is clear in generational results:

29% of Baby Boomer workers (ages 55+) freelanced,

31% of Gen X workers freelanced (ages 39-54),

40% of Millennial workers (ages 23-38) freelanced and

53% of Gen Z workers (ages 18-22) freelance

Younger generation folks are more likely to freelance

What are the market dynamics?

Of the 57 Million freelancers, over 5 million are already finding work purely online via platforms such as Fiverr, Upwork, Freelancer and over 20 other websites. Specialized marketplace such as TopTal (Top talent) for developers and Behance for designers also exist.

Most freelancers find that small & micro business tend to use freelancers more than large business. In this kind of marketplace there are a lot more sellers (supply) and harder for them to find buyers (aggregate demand).

For long services feel into 2 major formats – a) Time and Materials (quoted) or b) Fixed Bid.

In a Time and Materials project the risk is on the buyer to define scope, and the seller gets paid a fixed fee per hour.

In Fixed Bid projects the risk is on the seller to narrow the scope and the seller gets paid a fixed fee for the project.

Since both these formats introduce risk, there is a need to “productize” services. A fixed deliverable at a fixed price.

That was Fiverr’s insight that led them to start the company.

Who is Fiverr?

Fiverr was founded by Micha Kaufman and Shai Wininger in Israel and was launched in February 2010. The founders came up with the concept of a marketplace that would provide a two-sided platform for people to buy and sell a variety of digital services typically offered by freelance contractors.

Fiverr : A Two-way Platform for Selling and Buying Digital Services - Your  Tech Story
Fiverr Founders

Services offered on the site include writing, translation, graphic design, video editing and programming. Fiverr’s services start at US$5 and can go up to thousands of dollars with gig extras. Each service offered is called a “gig”.

Freelancers – merchants, entrepreneurs, contractors in more than 200 countries use Fiverr to sell their skills, and talent. They can offer “Gigs”, ranging from web design, logo creation and market research, to personal greetings and video animation. Customers can then buy these jobs for services they need rendered. Fiverr helps sellers collect payments, promote their services, manage orders, exchange files and communicate with buyers.

In an interview with NFX, Shai said the $5 price point was a gimmick.

“It also created a single price point so that we didn’t have to deal with multiple price points based on quality. We knew that over time we were going to extend that, but it was all about simplicity and removing that friction and inefficiency using software. That was it.

Founder of Fiverr

Over the next few years they raised over $150M from blue chip Silicon Valley investors such as Accel and Bessemer Ventures. Fiverr went public in 2019.

Who are the competitors?

The freelance market is very fragmented, diverse and competitive. Over 50 marketplaces exist such as Upwork,,,,,, and

There are no official market share numbers, but since the market is very large ($1.3 Trillion global), one can safely assume that Fiverr has low market share ($160 Million in 2020 revenue) and the penetration is negligible. That means the opportunity to grow is tremendous.

Fiverr has over 7 million users.

Upwork has over 17 million users.

Freelancer has over 31 million users.

What products does Fiverr offer?

The main Fiverr platform has multiple capabilities.

  1. A catalog infrastructure to support over 250 categories of services from voice over to logo design.
  2. A proprietary liquidity management system, putting 9 years of transaction and behavioral data to use, allowing us to match buyers and sellers at the gig level in a personalized fashion.
  3. A comprehensive set of rating and reputation, scoring, and leveling systems to improve the quality of gigs and sellers on the platform.
  4. Features and tools to provide value to our buyers and sellers in areas such as payments, communication, collaboration, and automation
Fiverr products and services

Fiverr Studios: Allows freelancers to collaborate and offer combined services for a project

Fiverr Discover: a beautiful destination site showcasing designs sellers made for our buyers through the platform. Customers use this site to look for inspiration for their projects on hand.

Learn: allows freelancers to keep upgrading their skills

ClearVoice: A specialized capability for hiring voice over artists An acquisition of a company providing tools and automation capabilities (back office) for freelancers.

Fiverr Logo Maker, bringing the power of artificial intelligence to Fiverr’s best creative talent. Allows graphic designers on the platform to monetize their existing designs, deliver their work faster, and serve more customers.

Fiverr’s Choice: A chosen set of freelancers for each type of gig. This is very useful for high value buyers to narrow their selection.

Promoted listings. They have been testing the product internally for a while, and we are planning to launch the beta version in April 2021. This will be the first time they give sellers a tool to proactively promote themselves on our platform.

How is Fiverr different than competitors? What is their moat?

The most important thing to remember is the insight “Productized Services”.

In this market, buyers find it takes too long (this is from personal experience) to vet suppliers, look at bids, then start the work.

If the work can be broken up into products that can each be purchased as a SKU that makes the purchasing process frictionless.

As opposed to competitors who list “freelancers”, Fiverr changes the game and lists “products” which you can purchase – with a defined outcome. These translate to Gigs for freelancers.

This makes it easy to compare 2 products instead of 2 freelancers who you might not know anything about.

That creates the Fiverr flywheel.

Productized services at the start of the flywheel

That flywheel results in consistent growth in buyer and seller cohorts.

Revenue by annual cohort of buyers

The revenue stickiness among sellers creates a strong moat.

While sellers sell on multiple platforms, they can scale “faster” on Fiverr over UpWork, where they have to bid for each project.

Here is an example from a seller:

The major difference between popular freelance marketplaces like Upwork and Fiverr is the process of working with clients.

Working with clients on Upwork means constantly pitching for new jobs. So new work doesn’t happen in the background without your input — you have to be proactively on the hunt for new work when you want it.

Fiverr is a completely different story.

With Fiverr, you essentially productize your service via Gigs.

Each Gig describes a specific deliverable you will provide in exchange for a set price, starting with the words, “I will…”

But the best part about Fiverr is that because of the way Gigs are set up, clients are empowered to make purchases without even talking to you.

How does Fiverr make money?

Sellers pay a 20% transaction fee and buyers a 5% fee

Both sellers (20%) and buyers (5%) pay Fiverr a commission for transacting on the platform.

Core marketplace revenues made up over 90% of revenue

How do the financials look?

Fiverr has produced phenomenal results post going public

In one word – tremendous. That’s the main reason the stock price is up 900% in 2020. Growth is accelerating, and I dont believe this is going to slow anytime soon.

Revenue Growth has been stellar

There are over 3 million active buyers and growing.

Buyers drive growth, which has been the cornerstone of the marketplace growth

The take rate (commissions) have been growing as well.

Take rate growth

What about their competitor UpWork? Are they are “better value”?

UpWork financials show slower growth

UpWork is the biggest large competitor to Fiverr, but they are not growing as fast (18% vs 80%).

I attribute this to seller efficiency with Fiverr and that comes from productized services. The more Fiverr helps sellers productize their services into SKU the easier it becomes for buyers to buy quickly. It does create lack of differentiation for sellers, however, who now have to rely on more reviews, ratings – which is a good incentive.

How big can this become?

There are 3 future directions that Fiverr can take, which I believe will take them to over $1B – $10 Billion in revenues.

They become the platform for “all” knowledge work – “LinkedIn with transactions“. You want a designer, you can hire one at Fiverr and see their prior work.

They become the complete automation platform for freelancers, helping them grow into small businesses – “Square ($SQ) for freelancers.

They become the “Amazon for services” providing buyers and sellers the ability to catalog, purchase, deliver and buy services.

Really low estimates from major analysts is a setup for Fiverr I believe.

What about valuation? Is this not too rich?

At 51X LTM revenue, this is among the richest < $10 Billion market cap company. There are others such as Shopify and Zoom that are richer, but they have Billions in revenue.

I am paying for growth and betting that they can productize more services.

Among marketplace companies, Fiverr (if they execute to their 2021 plan, which they have consistently done in the last 2 years) is the fastest growing.

#TickerRev GrowthEV/RevEV/EBITDA

What does the institutional buying look like?

Institutional buying has been strong and over 200 funds own Fiverr. While that is not “tremendous” it is growing.

Institutional buying for Fiverr

What is the one year price target? What about beyond that?

Assuming the 70%+ growth rate this year $FVRR should be at over $275 Million in revenue, which gives it a $14 Billion valuation at current NTM valuation at 50.

I think valuations will contract.

It is hard to predict how much they will contract by, but it can support 30X EV/NTM at which case it will be a $10 Billion Market Cap company or 20% above its current price of $240 or $288 per share by Dec 2021.

Over the next 5 years (2020 – 2025) I can easily see FVRR being at over $1.5 Billion in revenue and growing to over $40 B in Market Cap.

What are the risks?

There are 3 major risks:

  1. Valuation contraction from currently very rich position. If 50X EV/LTM is high (which it is), I can see this being only 10-20X in a down (bear) market. A reasonable valuation is 25X based on other multiples of fast growing companies, but that means a 50% haircut from current stock price.
  2. Fiverr saw tremendous growth during Covid. I am not sure that was supply led since more people worked from home, but demand had to be there for transaction liquidity. I worry that post Covid the buyers will go back to using previous (local) providers instead of online. 90% of the current freelance market is offline.
  3. As Fiverr tries to expand into new categories and markets there is a chance of dilution of the management team bandwidth. This is the #1 cause of issues for most growing companies in my opinion. They tend to bite off more than they can chew.
  4. In 2015 Fiverr settled a lawsuit where Amazon complained it helped sellers on Amazon marketplace get fake reviews from various “sellers” on Fiverr. They have since discontinued that service, but that creates an opportunity for freelancers from various places to productize poor quality and inherently bad services.



Just how big is the freelancing market? You may be surprised

State of Freelancing in USA

What are rare earth minerals and stock recommendation MP Materials ($MP)

This deep dive is on Rare Earth Elements (REE) with a focus on MP Materials ($MP) a company that recently went public via SPAC. This is fascinating topic to me and I have barely scratched the surface in this subject with this post. I recommend you read many of the references below.

I hold $MP (I currently have some shares I bought at $34). I will add to my position if it drops below $24.3 (if market or the stock corrects) or goes above $40 OR

If the next quarter of earnings from MP shows faster growth than they projected (greater than 75% YoY growth in Q4 2020). Earnings date is Feb 23rd 2021.

Volume on the stock has been building in the new year with supports at $28, $24, $19 and $16 price ranges.

MP Materials stock performance with horizontal lines on indicated support prices <Trading View>

For FY 2021 MP expects $171M in revenue and $82M in adjusted EBITDA. The company was valued at at $1.4B when they went public via SPAC in July 2020 and are valued at over 3X that amount (Jan 2021).

What are rare earth elements (REE)?

The rare-earth elements (REEs) are 15 elements that range in atomic number from 57 (lanthanum) to 71 (lutetium); they are commonly referred to as the “lanthanides.”

Rare Earth Elements (bottom of chart)

Although REEs are not rare in terms of average crustal abundance, concentrated deposits of REEs are limited in number.

Rare earths are used in the renewable energy technologies such as wind turbines, batteries, catalysts, and electric cars.

Why are REE suddenly in the news?

Rare earth availability is undergoing a temporary decline due mainly to quotas being imposed by the Chinese government on export and action taken against illegal mining operations.

The reduction in availability coupled with increasing demand has led to increased prices for rare earths. Although the prices have come down recently, this situation is likely to be volatile until material becomes available from new sources or formerly closed mines are reopened.

Keep this in mind as you read this piece. Like many commodities such as oil, there is tight, restricted supply and increasing demand.

Although the number of identified deposits in the world is close to a thousand, there are only a handful of actual operating mines.

Prominent currently operating mines are a) Bayan Obo in China, b) Mountain Pass in the US and recently opened c) Mount Weld in Australia.

US , Australia and China – Rare earths are in these countries.
REE are used in multiple applications and technologies

Are all REE the same?

Rare earths are further divided into

a) light rare earth elements (LREE) and

b) heavy rare earth elements (HREE) with the divide falling between the unpaired and paired electrons in the 4f shell.

LREE includes from lanthanum to europium and includes scandium. The HREEs include from gadolinium to lutetium and includes yttrium.

Present technologies for electric vehicles and wind turbines rely heavily on dysprosium (Dy) and neodymium (Nd) for rare-earth magnets.

It is anticipated that recycling and recovery will assist to satisfy the demand for rare earth element, but its contribution is currently low (i.e., less than 1%) and will pose significant challenge in terms of collection, processing and their recovery due low concentration of REE in products.

According to the Unites States Geological Survey (USGS), world resources are enough to meet foreseeable demand but world production falls short of meeting current demand.

Which rare earths matter? How are they obtained?

Rare earth containing minerals (or ores) are usually dominated by either HREEs or LREEs.

Minerals containing predominantly yttrium and the HREEs include gadolinite, xenotime, samarskite, euxenite, fergusonite, yttrotantalite, yttrotungstite, yttrialite.

Minerals containing predominantly LREEs include bastnasite, monazite, allanite, loparite, ancylite, parasite, lanthanite, chevinite, cerite, stillwellite, britholite, fluocerite and cerianite.

However, commercially operating mines around the world mainly extract bastnasite, monazite and xenotime ores.

So, you need to mine the ore and then “obtain” rare earth elements by extracting them via multiple processes.

For a typical open pit, mine, the approach is similar to other mining operations which involve

a) removal of overburden,

b) mining,

c) milling,

d) crushing and grinding,

e) separation or concentration

Mining Process and SAP Solution | SAP Blogs
The mining process is pretty complicated to get from ore to REE

Why is this a big issue?

Between 2010 and 2012 the Chinese government put strict export quotas on their rare earth minerals and semi processed rare earth products. That caused a huge spike in prices as you can see below.

Prices shot up when China imposed restrictions on exports

The quotas reduced the output by nearly 60% compared to the 2008. These quotas created a gap between demand and supply and large increases in the prices of the rare earths.

At this point, the Chinese have around 55% of all known rare earth deposits and control 95% of world supply through integrated mining, refining and supply chains.

Australia, China and US have enough distribution (and Malaysia) of REE deposits

So why now in 2021? And what is the connection to Electric Vehicles?

The REE are used in multiple applications but most acutely in batteries for EVs

Rare earth magnets (Nd, Pr, Sm and Dy) are particularly needed for alternative energies.

These will find widespread application in wind turbines, the auto industry (electric and hybrid cars) and defense industry (i.e., missile guidance systems).

Rare earth containing (Er) glasses are important for fiber optical amplifiers required in high-speed optical communication networks as well.

Since there has been a boom in Electric vehicles, the need for REE in EV (batteries) is significant.

EV batteries need a lot of HREE

The rare earth’s sector in the US got a significant boost as Senator Ted Cruz lodged a bill with the US Senate to support the US rare earths industry. MP Materials has spent significant money building a lobbying arm to support their cause.

At this time, about 80%+ of rare earths come from China.

China’s major rare earth mine is Baiyun Obo, located in Inner Mongolia. It is the world’s largest known REE deposit. Reserves are estimated at more than 40 million tons of REE minerals grading at 3-5.4% REE (70% of world’s known REE reserves).

High prices also caused manufacturers to do three things:

1) seek ways to reduce the amount of rare earth elements needed to produce each of their products;

2) seek alternative materials to use in place of rare earth elements;

3) develop alternative products that do not require rare earth elements

Those may still happen for EV batteries, but right now REE are the best option.

This seems like a mining problem. Where is the opportunity for growth?

The global rare earth elements market size was valued at US $2.80 billion in 2018 and is estimated to witness a CAGR of 10.4% from 2019 to 2025. It will be a $5.2 Billion market by 2025.

North America rare earth elements market
This market is growing and is being driven by EV batteries

Cerium, neodymium, lanthanum, praseodymium, yttrium, and dysprosium are the most commonly used rare earth elements. The market is driven by the increasing demand for these products in the manufacturing of magnets & catalysts for the automotive industry.

Cerium is widely used as a catalyst in catalytic converters of motor vehicles while neodymium & praseodymium are used in the production of batteries for electric vehicles.

As per the International Energy Agency, the global stock of electric cars was over 5 million in 2018 with more than a 63% increase from 2017. According to JP Morgan there will be 8-10 Million EVs by 2025.

Rising demand for electric vehicles to reduce CO2 emissions is expected to propel the use of permanent magnets in the production of batteries. Neodymium and praseodymium based rare earth permanent magnets are majorly used in the manufacturing of batteries.

Who is MP Materials?

MP Materials was founded in 2017 and they went public via SPAC (announced July 2020) at a valuation of $1.5 Billion (currently valued at nearly $5 Billion).

A wheel loader operator fills a truck with ore at the MP Materials rare earth mine in Mountain Pass, California, U.S. January 30, 2020. Picture taken January 30, 2020.
MP Materials Mining Operations

Mountain Pass in CA had a mining operation that was forced to shut in 2002 in part because it was squeezed out by China’s low prices. In 2015, its owner went bankrupt. MP Materials acquired the mine, and slowly restarted operations.

MP Materials currently has to send much of its rare earth concentrates (ores) to China for processing because it doesn’t have the capacity to do so itself.  The company hopes to process and refine its own rare earths by 2022, so as to keep the entire supply chain on US soil.

Why MP Materials?

MP Materials owns and operates Mountain Pass, the only rare earth mining and processing site in North America.

MP Materials extracts 50,000 tons of rare earth concentrate each year but still relies on China to process the materials. However, MP Materials plans to have its own Heavy Rare Earth separation facility and has been awarded partial US Defense funding for such a facility at their Mountain Pass Mine in California. This is a big moat. They dont give these out to every company.

MP Materials say they will kick-start their own processing operation by the end of 2020 and produce about 5,000 tonnes of two popular types of rare earths annually: Neodymium (Nd) and Praseodymium (Pr).

What is the moat for MP materials?

MP is the only existing domestic (US) extractor of REEs. Their Mountain Pass mine is indeed the sole American rare earths source currently in operation.

MP has been operating it since 2017, and produces a rare earth concentrate product that amounts to in excess of 36,000 tons of rare earth oxide equivalent per year (approximately 15% of world rare earth market demand). 

The company currently has some 200 employees working at the Mountain Pass mine.

They are the 2nd largest producer outside China and profitable.

MP has good moats and the cash inflow will make their moat stronger

Who is the competition?

In China there are several competitors, but outside China, Texas Mineral Resources and Lynas (Australia) are the only other competitors.

$TMRC (Texas Mineral Resources Corp).

TMRC’s flagship Round Top Project is in Hudspeth County, Texas. The project is dominated by rhyolite ore enriched in rare earth elements (REEs), especially heavy rare earths (HREEs), as well as several other critical elements including lithium. It is reported that the Project “offers a 130-year supply of the critical minerals.”

TMRC has a development agreement with USA Rare Earth LLC (“USA Rare Earth”) whereby the partner will earn up to 70% interest in the Round Top project once its $10 million investment leads to a Bankable Feasibility Study. Thereafter, USA Rare Earth can earn an additional 10% interest with a $3 million cash payment to TMRC.

$LYSCF (Lynas) Australia

Lynas is NOT a US rare earths miner; however, it recently won partial funding from the US defense for a heavy rare earths processing plant in Texas USA. Further funding along with their project partner (Blue Line Corp.) looks very likely. Lynas plans to ship rare earths from its mine in Western Australia for final processing at the Texas facility.

China based competitors for MP

What are the risks?

The biggest risk is China controls 80%+ of all production which dictates prices. They can (like they did before) reduce prices to such a low level that MP becomes unprofitable and can go bankrupt – similar to their predecessor.

The second risk is that this is a capital intensive business. Although MP is profitable now, and have enough cash (They got $545M from the proceeds of the SPAC) to get them to processing the ore, they depend on China for a few more years to manage the processing. They may even depend on them for longer after that.

The third risk is MP has a Chinese investor who owns over 10% of the company. Shenghe Resources Holdings owns about 10%, which makes them vulnerable to certain defense contracts.

How do the financials look?

The projections are strong, and growth forecasts are excellent – if they execute and if prices for REE remain stable. China has incentive to keep prices stable, I believe, but we are in uncharted territory.

If you think OPEC the oil cartel is bad, this is worse since one country controls prices.

They estimate to have $415M in revenue by 2023, and if that is the case, they will have a significant part of a large market and are expected to grow at 50%+ CAGR.

The growth quickens in 2022 (70%+) and slows again in 2023 (18%).

What is the 1 year price target?

The valuation is rich now (it was reasonable in July 2020) at 48X LTM (2020, Last Twelve Months) revenue and 29X NTM (2021, Next Twelve Months) revenue.

This is a narrative driven investment, not by the financial metrics.

You have to believe the US & the rest of the world (sans China) has deep interest in seeing MP succeed for a part of their supply chain.

You have to believe that MP will eventually get to processing ore in the US as opposed to sending it to China for processing.

You have to believe that the environmental lobby won’t find a shut down this mining operation.

If you believe all those things, you can see this being not a multiple of revenue but a core part of many EV and innovation portfolios. It could get there as a “picks and shovels” play on EV ETFs.

I am not sure what a good price target is, but this stock has been building momentum and has good institutional buying (see below).

I can see the stock going up 100% in 2021 thanks to current traction, but I can also see a deep pullback before it gains momentum.

Should this be a core part of the portfolio for more than just patriotic reasons?

Yes, the growth is tremendous and the moats are significant.


PDF file for USPS Rare earths



How much of this rare earth minerals are in the world? Enough

What is Medicare Advantage? Stock recommendation (Clover Health – $CLOV, $IPOC)

This post is a deep dive on Medicare Advantage plans and a look at one of the companies that recently went public Clover Health ($CLOV) valued at $1.9B (Jan 17 2020). I will try to review the entire Medicare and Medicare Advantage market in particular to see what advantages Clover Health brings to the market relative to competitors. I end with a recommendation on the stock.

What is Medicare?

In the United States, after you turn 65 years of age, you get certain health care benefits from the government. Medicare covers medical and hospital costs. There is no “cap” on what you might pay out of pocket and it tends to be fairly restrictive. Most people don’t pay a monthly premium for Part A (free part of Medicare).

What is Medicare Advantage?

Medicare Advantage Plans are health insurance, sometimes called “Part C” or “MA Plans,” are an “all in one” alternative to Original Medicare.

They are offered by private companies approved by Medicare.  If you join a Medicare Advantage Plan, you still have Medicare.  These “bundled” plans include Medicare Part A (Hospital Insurance) and Medicare Part B (Medical Insurance), and usually Medicare drug coverage (Part D).

Most Medicare Advantage Plans offer coverage for things Original Medicare does not cover, like some vision, hearing, dental, and fitness programs (like gym memberships or discounts). Plans can also choose to cover even more benefits. For example, some plans may offer coverage for services like transportation to doctor visits, over-the-counter drugs, and services that promote your health and wellness.

Medicare pays a fixed amount for your care each month to the companies offering Medicare Advantage Plans. Typically the insured individual pays a premium monthly for the “extras”.

What are the benefits of Medicare Advantage?

Medicare Advantage plans include an annual out of pocket (OOP) spending limit, critical financial protection against the costs of catastrophic illness or accident.

That is, under Part C plans, there is a limit on how much a beneficiary will have to spend annually. That amount is unlimited in Medicare Parts A and B.

How large is Medicare and Medicare Advantage?

Nearly 40% of Medicare enrollees are in some Medicare Advantage plan

In 2020, nearly four in ten (39%) of all Medicare beneficiaries – 24.1 million people out of 62.0 million Medicare beneficiaries overall – are enrolled in Medicare Advantage plans.

The Congressional Budget Office (CBO) projects that the share of all Medicare beneficiaries enrolled in Medicare Advantage plans will rise to about 51 percent by 2030. This is a growing market.

This market is worth $270 Billion today and is expected to grow to over $500B by 2030.

Medicare Advantage is more prevalent in state with higher costs of living

Who are the key players / market operators in this market?

Key insurance companies offering Medicare Advantage plans and their market share

Medicare Advantage is offered by 100s of insurance companies. They get “paid” by the government if an enrollee joins their plan. The enrollee might pay more premiums out of pocket to cover the extras.

The top 2 insurance providers – United Healthcare and Humana own over 40% of the market, while the top 3 (including Blue Cross Blue Shield) own over 50%. CVS acquired Aetna.

Is Medicare Advantage a profitable segment of market for these insurers?

Gross margins for Medicare Advantage plans averaged $1,608 per covered person per year between 2016 and 2018 – about double the average annual gross margins for plans in the individual and group markets. That is reasonably profitable.

In 2019 alone, Health insurance companies made $35B in profit, and the biggest part of that growth came from MA (Medicare Advantage) plan growth.

In the United States, almost 60% of people are covered by Group plans, and only 15% by individual plans, so Medicare is very profitable for insurers.

Medicare Advantage plans are very profitable

If you take into account however the costs, and since older people are more prone to higher healthcare costs, the Group market is as net profitable as Medicare Advantage.

What differentiates one Medicare Plan from another?

For the insured (patient):

  1. No ($0) premium plans with extra coverage than offered by Medicare
  2. More services & flexible provider choices offered by the Insurance company – meaning I can go to any doctor or physician instead of a limited choice
  3. Quick (paper-free or less paperwork) settlement of claims

For the provider (doctor / hospital / clinic)

  1. Less paperwork in submitting claims
  2. Getting claims paid quicker and faster
  3. Getting proactive with patients to reduce visits and increase healthcare provider productivity

What are the big trends that are shaping this market?

The biggest trends that are to be watched closely in the Medicare Advantage market are:

Rapid growth of Medicare advantage as more people move from simple Medicare to Advantage plans – Insurers are trying to differentiate themselves by providing more in-network services

Pay for value (outcomes) instead of fee for services. This aligns interests of provider (doctor) with patient, so instead of the provider making them spend more money on tests and procedures they focus on keeping the patient proactively heathy.

Telemedicine, in-home patient care, remote care, managing costs of prescription drug coverage are all the larger healthcare trend that are relevant for Medicare Advantage as well.

Who is Clover Health? What is their background?

Clover Health was founded in 2012 by Kris Gale (“Gale”) and Vivek Garipalli (“Garipalli”).

Clover Health completed its Series A round of funding in 2015, raising $100 million from investors such as Athyrium Capital Management and First Round.

The Company completed its Series B round of funding later that same year, with its Series C round completed in May 2016.

Clover Health has raised around $295 million in funding, from investors including Nexus Venture Partners, Greenoaks Capital, Arena Ventures, and Sequoia Capital.

Clover Health currently serves a range of customers across counties in New Jersey and Texas, with plans to expand its operations further. 

What does Clover Health offer?

Clover Health is a medical insurance and medical services provider. The Company provides a range of health coverage plans to members, which are specifically targeted at consumers aged over 65 years of age who have chronic illnesses or certain disabilities, under the government-funded Medicare Advantage program.

The Company collaborates with a range of healthcare providers – including physicians, clinics, specialist care providers, and eye care providers.

How is Clover Health different?

In order to offer better outcomes for patients, the founders realized they need to use data and machine learning for patients, doctors and everyone else in the system. This can help reduce patient visits, make it easier to identify patient problems quicker and reduce cost of healthcare.

Clover has a data platform to help doctors proactively identify problems

Clover set to build an expert system powered by data and AI to help doctors and providers get answers proactively using Clover Assistant (Used by Doctors).

How fast is Clover Health growing?

Fast. Extremely fast. Clover is available in few markets, but it is growing into other markets rapidly.

Dramatic growth

Doesn’t every one say Machine Learning and AI these days?

Yes, every company says that in their IPO and presentation documents. The key is to see if

a) they have enough data,

b) they have expertise to use that data to build ML models,

c) they have problems (questions) to answer that can be scaled,

d) those answers can drive business outcomes, i.e. increase revenues, reduce customer churn, reduce cost of customer acquisition or reduce cost of services.

I believe Clover Health has all the elements to help them leverage data and technology to increase patient outcomes.

So what will that mean going forward?

This should result in Clover doing 3 things:

  1. Increase patients under coverage (thereby increasing revenue)
  2. Taking share from other providers in the market
  3. Reducing cost of providing care and hence improving margins

This will mean revenues grow 37% (CAGR) from $664M in 2020 to $1.7B by 2023.

This means EBIDTA margins of 0.9% by 2023 from -6.4% in 2020.

Is this a good stock to own?

Clover is currently priced at $13.24 per share with a Market cap of $5.9B. It has a 52 Week High of $17.45 so 24% off its high. It is richly valued, but the growth is compelling.

I believe the combination of data driven patient outcomes with a doctor provided Clover assistant offering is a differentiator in the market, where most other plans only offer an “insurance” offering.

I cant say that Clover stock price will not go down further from here, but this is an attractive stock to own for the long term in the Healthcare market for 3-5 years.


What are is the 1 year price target?


2021 Revenue will be > $900 Million (company provided range is $872 M). 2020 Revenue is $671M.

Revenue growth for 2021 is 33%.

Current EV/ Revenue Multiple is 8.9.

I expect continued margin improvement to 20% (currently 18%).

Over 75K Medicare advantage members (company provided range is 73.4K)

Based on these assumptions, and looking at comparable growth ranges (below) and industry multiples I think this can be given a multiple of 8 – 10 EV/Revenue.

For 8X EV/Revenue the stock price at the end of 2021 will be $16.25, with 21% upside.

For 9X EV/Revenue, the stock price at the end of 2021 will be $18.2, with 36% upside

For 10X EV/Revenue, the stock price at the end of 2021 will be 20.3, with an upside of 51%.

Even at these multiples, given the growth it will be valued in between a high growth SaaS company and a poorly valued Healthcare insurance company.

2021 Growth and Revenue multiples of tech companies
Enough With The 'Scare-And-Dump' Short-Seller Tactics, Health Insurance  Innovations Is Now A Clear Buy (NASDAQ:BFYT) | Seeking Alpha
2020 Medicare revenue multiples
EV to Revenue Multiples for Health Insurance companies

How can Clover Health grow faster?

Clover Health has stated that it can use its technology in a scalable fashion. It will likely acquire many more companies (see targets below) in the space to rapidly increase revenues and number of patients in plan.

What are the risks?

  1. They are a local (regional) provider in 1-2 states and still building out their scale and capabilities
  2. Carepoint a previously owned hospital chain by the founder contributed to most of the initial enrollment (source)
  3. Their growth by acquisition approach is still to be proven. They have not acquired a single company so far.


AirBnb ($ABNB) my investment thesis

Most people know AirBnB as the hospitality platform, where you can book rooms and experiences. It is a two sided market place with guests(demand) and hosts(supply).

I have been investing in the company since the IPO (I will keep buying as well) and am expecting to hold it for 10+ years. This is one of my best stock ideas of 2020-2030. Here is some background and research on why I love $ABNB.

AirBnB was founded in 2008 in San Francisco by Brian Chesky, Joe Gebbia and Nathan Blecharczyk.

Revenue totaled $2.5 billion over the first nine months of 2020, down 32% year-over-year.

How and why did they get started?

When the Industrial Designers Society of America (IDSA) conference came to San Francisco in 2007, overwhelming the city’s hotels, Joe emailed Brian with an idea to “make a few bucks.” He thought it would be a crafty way to subsidize their rent.

The team made three product decisions that shaped their future:

  1. Facilitating payments on-platform. Instead of sending guests to PayPal or another website, Airbnb handled payments themselves.
  2. Introducing ratings. Airbnb introduced a reputational system in which hosts and guests rated each other.
  3. Three-click booking. In just three clicks, anyone could book a place to stay.
Pando: Brian Chesky: I lived on Cap'n McCain's and Obama O's got AirBnB out  of debt
Chesky and Gebbia created and produced limited edition Cap’n McCain’s and Obama O’s cereals that they sold for $40 a pop. That hack netted the company $30K

How much money has the company raised?

AirBnB has raised over $6.4 Billion so far to fund the company.

Over $6.4 Billion since founding and over $1B during the IPO

What are the key milestones?

By 2011, Airbnb users had booked a million nights (or 2,739 years) through the platform. 

By January 2012, Airbnb hit 5 million cumulative nights booked.

In June 2012, the company hit 10 million.

In November 2016, Airbnb launched Experiences.

How big is the market?

$3.4 trillion. That’s the company’s estimate for their total addressable market (TAM). The reason Airbnb’s opportunity is so enormous is partially because it created a new category

80% consists of Airbnb’s core business, “short-term stays,” defined as those lasting 28 days or less. 

Airbnb expects an expansion in the short-term market from $1.2 trillion to $1.8 trillion. This growth is based on an increasing population and a growing travel market 

What is the business model?

Revenue comes from service fees, charged to customers.

In 2019, Airbnb raked in $5.3 billion in service fees on a Gross Booking Value of $38.0 billion – so its service fees accounted for 17% of GBV. That 17% cost is shared, though not equally, by the guests and the hosts.

The bulk of the fees fall on the guest, with “most guests” paying under 14.2%, and “most hosts” paying 3%.

What does the financial picture look like?

The company measures financial performance across a few key metrics. 

Gross Booking Value (GBV). This is defined as the dollar value of bookings on the platform

Revenue. This represents the amount brought in by Airbnb through service fees.

In terms of GBV, the company generated $38 billion in 2019, supporting a growth rate of 29% from $29 billion in 2018.

These GBV metrics equate to revenue of $4.8 billion and $3.7 billion in 2019 and 2018, respectively.

The first three quarters of 2020 saw both metrics take a hit, with Airbnb generating just $18 billion in GBV (down 39% YoY) and Revenue of $2.5 billion (down 32% YoY).

Quarterly revenue growth (or lack of it in 2020)

What are the moats?

  1. Brand recall: Despite slashing Sales & Marketing spend Airbnb’s acquisition remained strong. 91% of all traffic to the site came through direct or unpaid channels, supporting an organic growth story. When it is time to travel (or find a new experience), a large portion of guests instinctively navigates to Airbnb.
  2. On the other side host loyalty is best understood through retention data. Airbnb’s host revenue retention since 2014 sits at or above 88% by cohort.

Airbnb has demonstrated its model’s potential profitability, albeit in fits and starts. 

Who are the competitors?

Key competitors are:

  1. OTAs – such as, Expedia (Vrbo), and Tujia (China)
  2. Potential competitors from hotel chains such as Marriott, Hilton, etc.

What are the key metrics

  • 4 million hosts
  • 5.6 million active listings
  • 220 countries and regions, 100,000 cities, 55% hosts are women
  • 110 million guests cumulative in 13 years
  • 110 billion host earnings total in 13 years

What are the risks?

Airbnb hasn’t been profitable so far and has incurred net losses every year.

In the S-1, Airbnb reported net losses of $70.0 million, $16.9 million, $674.3 million, and $696.9 million for the years ended December 31, 2017, 2018, and 2019, and nine months ended September 30, 2020, respectively.

Another concern is the liability factor. Some cities have put a ban on single-night rentals to stop the renting of “party houses” for raucous events.

Revenue concentration: While no single city accounted for more than 2.5% of the company’s revenue, in 2019, 11.9% of the company’s revenue came from just 10 cities. 

The bear case for Airbnb’s long run operating profit margin is that travel is a category where you’re competing for a consumer’s business each time they book a trip. 

Why invest?

In the travel space there are few “great brands” – AirBnB could be one of those, besides Disney. Most airlines are hated, most hotels not loved and all OTA’s just ignored.

“Airbnb” has gone from brand name to a common noun in the same vein as using a “Kleenex” or drinking a “Coke”.

The management team – founder led, AirBnB has passionate committed founders with an ability to keep introducing new offerings to keep their hosts and guests happy is my bet.

It unlocks of a vast supply of new lodging inventory, previously unavailable and gives hosts an opportunity to make money off a latent asset. 

Cash float: Airbnb convinced travelers to part with 100% of their booking cost up front and then they pay out the required amount to hosts when the stay actually occurs. Airbnb therefore generates substantially higher free cash flow (FCF) than accounting profit. 

Comparable pre tax operating income:
  • Airbnb -10%
  • Expedia 8%
  • Booking Holdings 35%
  • Hilton 17%
  • Marriott 9%

What are my return expectations?

As a multiple of revenue, AirBnB is rich. Airbnb’s revenue is expected to rise by 30% to $4.33 billion by 2021. Let’s assume that its revenue rises an average of 30% over each of the next five years from that to 2026. That means sales will be 3.72 times $4.33 billion or $16 billion.

Therefore, if Airbnb stock ends up with a similar valuation as Uber, Square or other well valued marketplaces, its market cap will be 8.33 times $16 billion by 2026. That works out to $133.3 billion, or 59% more than the market cap of $83.89 billion.

#TickerRev GrowthEV/RevEV/EBITDA
AirBnB is richly valued to 2021 revenues at 21X with 37% growth


The Ultrasound market stock recommendation: Longview Acquisition corp (Butterfly Network) $LGVW – $BFLY


The Ultrasound market is a ~$7B global medical systems opportunity in 2020, growing to over $10B by 2025. The market has been long dominated by expensive cart systems from GE, Siemens and Phillips at expensive price points (>$50K). However newer disruptors in the segment of handheld systems, such as Butterfly Network are using AI and inexpensive handheld hardware ($2K + $500 annual fee) to “democratize” the use of Ultrasound for many new applications and types of users. This segment of handheld is the fastest growing at 25% CAGR.

This creates an opportunity to expand the market and fundamentally changes the landscape for Ultrasound. This is similar to how Southwest Airlines created low cost point-to-point flying, reducing costs, by doing away with many frills, thereby expanding the market and increasing the number of flyers. Or how Uber “expanded” the rides market by taking on incumbents in the taxi and limo markets by creating a market of supply by making “anyone with a car, a driver”.

Butterfly Network was founded in 2011, by Jonathan Rothberg, an industry veteran and luminary. The company has raised over $350M from multiple investors including the Bill and Melinda Gates foundation. The company has 3 unique differentiators: a) handheld hardware (ultrasound SoC – System on Chip) with patented capability to provide 3D imaging on depth, b) strong use of Artificial intelligence for imaging analysis and c) a network of experts with content – which can now create less expensive “doctor’s aides” into ultrasound technicians.

Butterfly Network has chosen to go public on Nov 25th via a SPAC with Longview Capital ($LGVW) providing it with $584 million in cash, and valuing the company at $2B (post money). It currently trades (12/29/20) at $20.5, valuing the company at $4.17B.

This represents a 94X multiple on 2020 LTM revenue ($44M), 53X NTM revenue ($78M) and, 30X 2020 revenue ($137M). While rich, the reason could be attributed to the expected 70% revenue growth rates for 4 years (2021-2024), strong management team, unique technology, seasoned backers and disruptive market approach which could dramatically increase revenues and growth to over 100% annually for many years.

My recommendation is to initiate a long term position, with an expectation to hold for 4 years, when it will be at $235M in revenue and likely at $10B in market capitalization (42X Revenue), representing a ~139% upside in 4 years (~31% CAGR).

In 2021 I expect it to consolidate and have put a price target of $24.5 by Dec 2021, representing a 29% upside from its current price. It is likely that momentum investors will ignore the stock by Q1 / Q2 when the acquisition is complete and the stock lists as $BFLY, at which point I expect the stock to drop to between $15 – $17 per share. My recommendation is to dollar cost average (DCA) in with 25% sizing initiation by quarter or 10% every 2 weeks.

If the company delivers higher revenues that projected in its first two quarters of being public – expectations are $18 to $20M in Q1 and Q2 2021, then I would expect the stock to further gain in price to be at $30.

The biggest risks for Butterfly Network stock include a) lack of revenue growth due to insufficient trained technicians, b) an incredibly competitive landscape with over 80 other companies in the space (many with larger distribution), c) likelihood of Apple ($APPL) to enter the space with a software solution to partner with any ultrasound hardware (low likelihood), d) the very high valuation getting a significant haircut post the merger due to momentum investors moving to other pastures and e) lack of long public company operating experience making internal controls for finance, reporting and operations a material weakness.

What is Ultrasound?

Diagnostic ultrasound, also called sonography or diagnostic medical sonography, is an imaging method that uses high-frequency sound waves to produce images of structures within your body. The images can provide valuable information for diagnosing and treating a variety of diseases and conditions.

Diagnostic ultrasound is a safe procedure that uses low-power sound waves. Unlike X-Ray which might cause some radiation, Ultrasound is safe.

Ultrasound is used for many reasons, including:

View the uterus and ovaries during pregnancy and monitor the developing baby’s health, Diagnose gallbladder disease, Evaluate blood flow, etc.

How does Ultrasound work?

High-frequency sound waves travel from the probe through the gel into the body. The probe collects the sounds that bounce back. A computer uses those sound waves to create an image. Ultrasound exams do not use radiation (as used in x-rays). Because images are captured in real-time, they can show the structure and movement of the body’s internal organs. They can also show blood flowing through blood vessels.

Conventional ultrasound displays the images in thin, flat sections of the body. Advancements in ultrasound technology include three-dimensional (3-D) ultrasound (Butterfly’s market) that formats the sound wave data into 3-D images.

Ultrasound scanners consist of a computer console, video display screen and an attached transducer. The transducer is a small hand-held device that resembles a microphone. Some exams may use different transducers (with different capabilities) during a single exam. The transducer sends out inaudible, high-frequency sound waves into the body and then listens for the returning echoes.

Ultrasound is safe for many types of imaging

How big is the Ultrasound market?

Ultrasound market is expected to be over $10B by 2025.

The Ultrasound market is expected to grow to over $10B by 2025.

Global ultrasound unit shipments grew 9% from 2016 to 2017 and totaled 218,767 in 2017. Traditional ultrasound unit shipments totaled 149,013 and accounted for 68% of the total ultrasound market in 2017. Segment growth was driven by strong demand for traditional equipment in China.

Point-of-care ultrasound (Butterfly’s market), which consists of anesthesia, critical care, emergency medicine, musculoskeletal, and primary care applications, was the smallest ultrasound segment in unit shipment terms in 2017. However, point-of-care unit shipments grew 14% from 2016 to 2017— the highest year-over-year growth rate of all three ultrasound segments.

Point of care (Butterfly’s market) is small but the fastest growing

What is handheld Ultrasound?

Sales of handheld ultrasound accounted for less than 2% of the $6.9B global markets for ultrasound equipment. The relatively high cost and limited performance of early generation handhelds were limiting factors. Steady product improvements over the years, coupled with fresh innovation from new market entrants (Butterfly), are beginning to unlock the full value of handheld ultrasound, both for experienced and new users alike.

Credentialing, data security and quality assurance (both for image capture and interpretation) can be challenging. While handheld ultrasound devices may be ready for mainstream adoption, many institutions lack the IT infrastructure required to provide seamless patient care between the office and hospital settings.

Primary care remains a largely untapped market for handheld ultrasound, and is potentially the largest opportunity, with more than 250,000 primary care physicians in the US alone.

The handheld ultrasound market is growing rapidly, as the latest generation of ultra-portable devices gains acceptance among a diverse range of customer groups, from emergency medicine physicians and internists and office-based specialists, and looking forward, primary care physicians.  The expanding customer base, coupled with the increased availability of affordable handheld scanners, is forecast to boost global sales of handheld ultrasound by over 50% in 2019. By 2023, the global market for handheld ultrasound is forecast to exceed $400 million.

Handheld Ultrasound will go from niche to mainstream in the next decade

Who are the key players?

While traditional players such as GE Healthcare, Siemens and Phillips matter, over 50 new companies have been funded in the last 12 years.

Butterfly Network began shipping its Butterfly iQ scanner towards the end of 2018 at the headline price of $1,999 (plus annual subscription of $420). In response, GE Healthcare cut the price of the basic version of Vscan Extend to $2,995 (currently US only).

While the price is becoming less of an issue, many primary care physicians lack formal ultrasound training and reimbursement is not widely available.

To address the lack of skills issue, vendors of handheld scanners are striving to simplify ease-of-use, both in terms of the device itself and integrated tele-ultrasound services that connect novice users with experts at separate locations over two-way audio and video calls.

The latest generation of handheld scanners feature numerous presets for common exam types and artificial intelligence (AI) is being applied to enable physicians with no prior scanning experience to capture high-quality images. AI-guided ultrasound will help users to identify body parts and correctly position the transducer to maximize the image quality for a given exam. Moving forward, AI will also play an increasingly important role in image interpretation, providing physicians with automated measurements, anomaly detection, and diagnostic decision support.

This is not a winner take all market by any means

What is the customer problem?

For patients who do not want exposure to radiation (X-ray) and need a quick convenient way to view internal organs for issues, Ultrasound is the best solution.

For example, ultrasound is playing an increasingly important role as a screening tool for women with dense breast tissue.  In acute care, ultrasound is increasing being used for lung imaging to diagnose conditions such as pleural effusion, pulmonary oedema and pneumothorax. In another example, the use of shear wave elastography is expanding beyond hepatology (e.g. liver fibrosis) to other body areas, including breast, prostate, thyroid and spleen. Musculoskeletal is another relatively untapped market for ultrasound, including orthopedics, rheumatology and sport’s medicine.

Who is Butterfly?

Butterfly Network, Inc. (“Butterfly”) is the inventor / pioneer in semiconductor-based point-of-care ultrasound (“POCUS”) devices

Founded in 2011 by visionary innovator Jonathan Rothberg. Dr. Jonathan Rothberg PhD, Founder and Chairman, has dedicated his career to enabling breakthrough technologies to revolutionize healthcare. He was given several awards including from President Obama to further the cause of better healthcare.

Total investment of over $400 million with first product introduced in 2018, 700+ patents and 2020E revenue of $44 million, projected to grow to $138 million in 2022E.

Longview Acquisition Corp. (“Longview”) is a Special Purpose Acquisition Corporation (“SPAC”). Initially capitalized with $414 million in cash in May 2020.

Butterfly develops a sensor and software to enable handheld Ultrasounds.

400-member team.

What is unique about Butterfly? What is their moat?

There are 3 parts to Butterfly:

  1. A 3D patent pending rendering sensor with System on Chip
  2. AI and software to make it easier for diagnosis without significant training.
  3. Strong content and delivery network to train new specialists and “less expensive” technicians.

Who are the competitors?

As mentioned over 100 companies old and new startups exist in the space. Butterfly is the most funded, the earliest and has the most patents among the smaller upstarts.

Why will Butterfly win over others?

  1. Funding: Better funded ($400M to date, plus $453M from the SPAC IPO)
  2. Sensor technology: Proprietary SoC with hundreds of patents on the sensor
  3. Distribution: Strong distribution framework for new applications
  4. Software and AI: AI and machine learning software to make it easier for technicians to diagnose problems
  5. Support: Strong training and support network
  6. Competitive Price: Superior price point (under $2000) plus annual fees (subscription)
  7. Talented management team: with CEO who has experience in managing fast growing companies.

Artificial intelligence (AI) will have a transformative impact on the market as it addresses some of the key limitations associated with ultrasound; namely, the shortage of trained sonographers and the relatively steep learning curve, high operator dependency both during image acquisition and interpretation, poor image quality for certain exam types and the relatively lengthy exam time compared with other modalities.

The first wave of ultrasound AI applications are entering the market and are mainly for image optimization (noise reduction) and automation of time consuming and repetitive tasks, such as anomaly detection, image labelling, feature quantification and classification.

However, the greatest impact of AI will be guided ultrasound (ultrasound navigation), which will provide real-time support during image acquisition (i.e. probe placement and anatomy detection). This is what Butterfly does best.

What are the financial projections?

Butterfly is expected to grow at over 60% in 2020 from 2019 and over 77% for the next 2 years to reach $138M in 2022.

Why is the valuation of Butterfly so rich?

Given the rich background, the lack of multiple companies that are public in the space and execution record, Butterfly is very highly priced. It does have strong projections of growth in revenue to back the valuation.


AEVA (NASDAQ $IPV, $AEVA) Spac merger – LIDAR company recommendation

Please read an overview of LIDAR before you view this stock recommendation.

A quick background on AEVA

Aeva was founded by former Apple Inc. engineers Soroush Dardashti and Mina Rezk. In 2018, the company raised $45 million in a series A funding round co-led by Lux Capital Management and Canaan Partners.

Rezk, who previously designed optical hardware for Nikon and worked alongside Salehian at Apple’s Special Projects Group.

They employ about 100 people in Mountain View, California.

Aeva is planning to merge with a special purpose acquisition company called InterPrivate Acquisition Corp.

AEVA founders

What does AEVA do?

Aeva has created a miniaturized solid-state photonics chip, called Aeries, that reduces the size and power requirements of typical LIDAR systems. It will cost less than $500 at scale, compared to tens of thousands of dollars.

Instead of pulsing a laser beam that bounces off of objects in a vehicle’s path to determine distance and depth, Aeva’s system emits a continuous, low-power laser beam that measures changes in the frequency of waves reflected off of objects.

LIDAR on a chip

What is the unique technology that AEVA has developed?

Aeva’s technology is unique as it has a 4D map. AEVA can measure distance as well as instant velocity without losing range all while preventing interference from the sun or other sensors.

Its technology is also said to use less power which allows it to integrate better with perception software. Its technology is primarily meant for autonomous cars but it is also being leveraged for ADAS systems.

Aeva says its sensor does not rely on powerful lasers or exotic materials, which has helped it to shrink the cost and size of the device.

Aeva’s 4D LIDAR-on-chip uses a continuous laser beam to measure the change in frequency of the waveform as it reflects off of an object. This allows it to detect an object’s range and instant velocity simultaneously beyond 300 meters at high accuracy. Aeva’s 4D LiDAR is free of interference from other sensors or sunlight and it operates at fractions of the optical power typically required to achieve long range performance. 

Small, with constant pulse and low power requirements

A key differentiator is breaking the dependency between maximum range and points density, which has been a barrier for time-of-flight and FMCW LiDARs so far.

AEVA LiDAR integrates multiple beams on a chip, each beam uniquely capable of measuring more than 2 million points per second at distances beyond 300m.

All lasers, detectors, circuitry, are integrated on a chip at the wafer level, and it’s in production for volumes already targeting use in major OEMs. It will be in cars in the 2022 to 2023 timeline.

AEVA’s sensing system is capable of completely shutting out interference from other, similar sensors — including those from other companies — and operating in all weather conditions and in the dark, thanks to a reflectivity sensor.

Sensing depth and velocity

Why is AEVA better than Velodyne or Luminar?

It has high resolution, long range, additionally it gives velocity. It’s scalable because it’s all on a photonics chip–a very small package with low power consumption.

A few other LIDAR startups also rely on a version of frequency modulation. But Aeva’s system uses a continuous beam, rather than a pulsed beam. 

Who is AEVA partnering with?

Aeva and ZF, a top global automotive Tier-1 supplier, are partnering to bring the world’s first Frequency Modulated Continuous Wave (FMCW) LiDAR to the automotive market. 

The company has signed a sensor-system deal with an Audi-owned unit that is working on self-driving technology for Volkswagen Group and is working with German automotive supplier ZF Friedrichshafen to have its sensors in mass production by 2024.

Aeva and ZF partner for production of first automotive grade FMCW LiDAR for automated driving. (Photo: Business Wire)
Partnership with Porsche supplier ZF

Are there other use cases for AEVA?

It has also attracted consumer electronics companies likely phone manufacturers who want to get into smart glasses and augment their smartphone camera systems with LIDARs for better portrait photography, autofocus, low-light performance and augmented reality. 

An increasing number of devices, such as Apple’s new iPad Pro and iPhone 12 Pro models, include lidar sensors that help with applications such as augmented reality, in which digital content is overlaid on the real world.

Who is InterPrivate Group?

InterPrivate is a SPAC led by private equity investor Ahmed Fattouh. It raised $210 million in an initial public offering in February. InterPrivate Acquisition Corp valued AEVA at $2.1 billion. InterPrivate is lead by private equity investor Ahmed Fattouh expects the deal to be closed by early 2021.

When will we see this in cars?

Aeva’s lidar has been on test vehicles for some time, including an experimental version of Audi’s E-Tron. The first commercial application may come in lightly automated, or Level 2, vehicles, but right now, all VW will say is that it plans to put Aeva’s lidar on the ID Buzz AV. That’s a more completely automated, or Level 4, minibus; it’s scheduled to launch in 2022/2023.

VW  ID Buzz AV

What is the valuation for AEVA?

Aeva was last valued at $460M in 08/19, and its public valuation on the merger date 11/20 was $2.1B. Today (12/29/20) it is valued at over 3.2B (8X valuation gain in 1 year).

Investors include Porche, Audi, Canaan Partners, Lux Capital, Volkswagen Group.

The deal will provide up to $343 million of gross proceeds to AEVA.

AEVA will be richly valued at over $4B (Dec 29, 2020)

Who are the competitors?

AEVA competes with 70+ other LIDAR companies including Waymo (Google), Velodyne, Luminar, Ouster, Quanergy systems and Innoviz.

What is the financial model?

Aeva financial projections

Aeva is expecting meaningful revenues only by 2024. As you can see from their projections, it goes from $11M for next year 2021 to $236M in 2024 and $880M by 2025.

If those projections work out, then given their long term expectation of 62% gross margins, this could end up at nearly $350M in adjusted EBITDA by 2025.

Margin and EBITDA projections

Should you buy the stock?

IPV is a NASDAQ listed SPAC and trades today (12/29/20) at $15.12. That implies a valuation for AEVA at over $4B, twice the proposed valuation at time of acquisition announcement.

With no significant revenues until 2022 or later, this is a purely speculative play. I would recommend a small position close to $13 – $14 and patience for 2+ years.


Partner presentation


An overview of LIDAR and its use cases in Autonomous Cars

As 6 LIDAR companies have gone public, either via SPACs or have been public for a while, I thought I would dig deeper into LIDAR and answer a few questions as I formulate my thesis on LIDAR. There have been over 80 companies funded in the LIDAR space and over $3.5 Billion in investments that have been made over the last 7 years.

The public companies are: Velodyne Lidar (VLDR), Luminar (LAZR), Aeva (IPV / AEVA), Innoviz (CGRO / INNV), Ouster (CLA / OUST) and Microvision (MVIS). This write up is going to focus on LIDAR overall, while the next few days I will focus on each of the companies.

Velodyne is an early leader in both the market and revenues, while the others are expecting to ramp up production of products and revenue by 2025.

I have taken a Frequently Asked Questions approach to this write up, focusing on questions I would have as a beginner in this market.

What is LIDAR? (LiDAR)

LIDAR (or LiDAR) stands for Light Detection and Ranging, the use of laser pulses to build a 3D model of environment around objets.

Just like SONAR (which uses sound) and RADAR (which uses radio waves), LIDAR uses pulsed laser to measure distances and map objects.

Why is LIDAR suddenly important?

LIDAR has been around since 1950s and has been used by ecological organizations to track tree growth in forests and other sprawling ecosystems. Airplanes equipped with LIDAR soar overhead, and – even when travelling at cruising speed – can catalogue individual leaves and branches by the billions in a single sweep.

Filmmakers have incorporated this technology to chart rare environments or objects that cannot be used in production – like consecrated ruins and fragile artifacts – to recreate them in CGI

In the automotive industry, radar has long been utilized to automatically control speed, braking, and safety systems in response to sudden changes in traffic conditions.

The move towards autonomous cars (level 5) requires multiple sensors on cars – cameras, radar sensors, etc.

Whereas vision and RADAR-based sensors can provide a high level of automation to vehicles, the conception of a fully automated self-driving vehicle requires LIDAR-based sensors.

Self-driving cars equipped with LIDAR sensors offer complete automation under all driving modes. LIDAR-based ADAS systems along with vision and RADAR-based sensors take complete control over the vehicle, managing the speed and steering control, thereby providing a remarkably safe driving experience.

What is Level 5 autonomous driving?

The 6 levels of autonomous vehicles

Level 5 vehicles do not require human attention―the “dynamic driving task” is eliminated. Level 5 cars won’t even have steering wheels or acceleration/braking pedals. They will be free from geofencing, able to go anywhere and do anything that an experienced human driver can do. Fully autonomous cars are undergoing testing in several pockets of the world, but none are yet available to the general public. 

What types of sensors are needed for autonomous cars?

Automobiles need radars, cameras and ultra sound sensors for different purposes. Some for assisted parking, staying in lane, “sensing other cars ahead”, and viewing potential obstacles.

How does LIDAR work?

  1. Lidar systems emit a constant stream of laser pulses in every direction.

2. Laser pulses travel outward until contacting an object.

3. Upon contact the pulses reflect to the LIDAR system.

4. Lidar system received and registers the echo pulse.

5. The system calculates the distances of the object, based on the laser pulse’s travel time to and from it.

Lidar systems emit and receive hundreds of thousands of laser pulses every second.

A LIDAR system consists of four key components: a transmitter to emit laser pulses, a receiver to intercept pulse echoes, an optical analyzing system to process input data, and a powerful computer to visualize a live, three-dimensional image of the system’s surroundings.

How did LIDAR become important for autonomous cars?

LIDAR allows you to generate huge 3D maps, which you can then navigate the car or robot predictably within. By using a LIDAR to map and navigate an environment, you can know ahead of time the bounds of a lane, or that there is a stop sign or traffic light 500m ahead. This kind of predictability is exactly what a technology like self-driving cars requires and has been a big reason for the progress over the last 5 years.

How big is the market?

The LIDAR industry is projected to be worth $1.8 billion in three years and over $8B by 2025. The market for LIDAR sensors in light-duty vehicles could reach $46 billion in sales by 2030, with much of that going to enable partial autonomy.

LiDAR industry: high expectations for autonomous driving - System Plus  Consulting

Is LIDAR really needed? Can you do the same with cameras and software?

Critics of LIDAR including Tesla CEO Elon Musk believe the high cost of LIDAR (early units were > $75K), makes then untenable for autonomous cars. Musk has said that AI + cameras would suffice for autonomous cars.

LIDAR has the potential to make autonomous systems safer, If there’s bright sunlight or if it’s really dark at night, camera-based features are not reliable and not available all the time.

Advanced driver assistance systems (ADAS) are becoming more commonplace in mass-market vehicles. These systems rely on cameras and radar to power features like automatic emergency braking, blind spot detection, and lane-keep assistance.

For inclusive vehicle safety solutions, ADAS systems cannot be dependent on just vision and RADAR based systems; they require more efficient systems capable of providing highly accurate data for improved driver assistance.

Whereas vision and RADAR-based sensors can provide a high level of automation to vehicles, the conception of a fully automated self-driving vehicle is impossible without LIDAR-based sensors.

Self-driving cars equipped with LIDAR sensors offer complete automation under all driving modes. LIDAR-based ADAS systems along with vision and RADAR-based sensors take complete control over the vehicle, managing the speed and steering control, thereby providing a remarkably safe driving experience.

What are the types of LIDARs?

1. Electro-Mechanical LIDAR

Electromechanical LIDARs are traditional LIDAR systems, which can be considered as first generation LIDAR sensors for automotive applications. These mechanical spinning LIDAR system sensors are assembled from multiple moving parts, which are arranged to produce and emit an array of laser beams towards the targeted area. Electromechanical LIDARs are quite bulky, very expensive and prone to wear and tear in tough terrain. They are installed on the top of the vehicle and continuously rotate to scan the surroundings of the vehicle and typically cover a long range.

How does Google's Waymo self-driving car work: GRAPHIC - Business Insider
The Waymo Google Lidar is a bulky electro mechanical system

2. Solid State LIDAR

Unlike traditional electro-mechanical LIDARs, solid state LIDARs are built entirely on a single chip (e.g. AEVA or Luminar). All the components of the LIDAR systems like emitter, receiver and processors are integrated on the single chip of the solid-state LIDAR. Being on microchips, solid state LIDARs are compact in size. Also, they are not visible upon installation, light in weight and cost efficient. Since there are no moving parts in these LIDAR systems, they are fixed in rear, front and sides of the vehicle.

Solid state LIDARs have optical emitters, which send a burst of laser photons without having to adjust the direction of the transmitters. The light, emitted in specific patterns, collides with the objects in the way and bounces back to the system’s receiver. The processor in the LIDAR system fetches this data constantly and produces a real time 3D map of the vehicle’s surroundings.

Solid state LIDAR is the future of LIDAR based ADAS systems as it is exceptionally durable, reliable, affordable and commercially viable.

LeddarTech Releases 3D Solid State LiDAR System-on-Chips to Automotive  Partners - News
Cross Sectional view of LeddarTech solid state LIDAR

What are the alternatives?

Tesla is pushing the idea of pseudo-LIDAR based on innovations in cameras, AI and computing, and the fact that they have access to rich driving data from ~1M cars in varied traffic and weather conditions. 

Daimler has research activity, aimed at exploiting gated imaging and machine learning to replace LiDAR. GM Cruise stated in a recent interview that they had replaced one of the sensors in the sensor pod of their newly launched purpose-built ride hailing AV, the Origin, most likely implying that LiDAR will be replaced by thermal cameras.

Other methods to extract 3D information using stereo vision cameras have also been proposed.

What is the future of LIDAR?

The industry is marching ahead with a real focus on cost decrease and resolution and range increase.

Solid-state LIDAR opens the potential of sub-$1k powerful LIDAR units, which today can cost as much as $80k a unit. The huge jump in the number of applications for LIDAR has brought with it a flood of talented founders and teams starting companies in the space. Higher resolution output and increased tracking range (200m in some cases) will provide better object recognition and tracking and are one of the key differentiators in sensors from startups like Luminar.


US Pet industry Overview and list of stocks to watch and track

What is the market size?

The US Pet care industry is about $77B – $90B, growing at 2.5% annually. It is expected to grow rapidly, reaching over $100B – $120B by 2025.

There are 17 companies in this industry that are public (or about to go public). There may be a few more, but these companies make more than 70% of their revenues from selling to pet parents or pet owners.

How has the industry performed as a segment in 2020?

The industry ETF (Invesco PAWS) is in the 97th percentile of performing funds, returning over 60% for the year.

PAWS has returned over 60% on the back of Trupanion, Chewy, Freshpet, Zoetis and PetIQ
PANW is #70 out of 1967 funds, putting it in the 97the percentile.

What are the segments within this industry?

The 17 stocks (and more in the < $500M stock Market Cap), are in 5 segments:

1. Food (consumables, treats, cat litter, etc.). This segment covers a wide range of products such as dry and wet food for dogs and cats, bird feed, crickets and worms for reptiles and other treats and supplements.

2. Supplies (OTC medicine, toys, etc.). Products in this segment include over-the-counter medicines, food bowls, collars and leashes, pet clothing, brushes and combs, shovels and scoopers, cat litter, cages birds and reptiles, travel carriers and other various accessories for pets.

3. Health (prescriptions, vet care).

4. Live animals (birds, mice) and

5. Other services (Rover for dog walking, Grooming, pet insurance, etc.). Pet services were the fastest-growing product segment for the industry over the past five years, reaching an estimated 7.7% of total industry revenue in 2020. Pet services include full-service grooming, haircuts, baths, toenail trimming and tooth brushing. This segment excludes veterinary services.

There are 17 stocks I track in the Pet care industry in the various segments

The sub segments that are growing the fastest are Other services (7%) and Supplies 6%.

How have individual stocks performed within this industry?

The top 10 stocks in the list I track have all beaten the S&P 500 (+13.5%) and NASDAQ (+40%) this year.

The top 10 stocks in this industry have outperformed both NASDAQ and S&P 500

The average dog owner for example spends over $2000 annually on their pets with the most being spent on Surgical visits, Vet services, Food, Kennel services & grooming.

Will the industry keep growing?

Pet owners spend over $2000 annually on their pets

Over 67% of US households own pets with most homes owing a dogs and cats.

Data: APPA

What does the industry value chain look like?

While retail (Petco, Petsmart, Chewy, Barkbox) margins are in the 20-40%, manufacturer (Freshpet, Zoetis) are closer to 40-50% and services (Trupanion) are in the 50%+.

US Pet retail is $20B, with 1.7% CAGR 2015-2020 but growing at 2.3% 2020-2025

The pet technology market map from CB insights further tracks the technology companies innovating in the space from Chewy and Barkbox to Rover and Wagz (werables)

ALL IN 💪🏼🚀🌎 on Twitter: ".@CBinsights' pet tech market map features  pioneering startups in the pet industry including portfolio co @petsymx  #ALLIN since 2013…"
CB Insights tracks over 100 startups in the pet tech market

What are the key industry trends for 2021?

In 2020 with Covid the number of pet owners has increased over 2019. Millennials and younger adults have been the primary driver of growth. The long term secular trends include:

  1. Pet grooming and boarding – including a luxury hotel for pets – Jet Pet Resort
  2. Organic, allergy-free and fresh food for pets, instead dry or canned.
  3. Pet care and sitting – paying professional dog walkers and pet sitters.
  4. Pet insurance – the fastest growing segment within Pet care $TRUP
  5. Move to online (ecommerce) ordering, subscription purchases, thanks to Covid and store closures – $CHWY, $BARK

Which are the best bets in Pet care market?

I will write a long piece on each of these stocks, but the 3 companies for me to invest in are

Growth stocks for 2020

a) Trupanion (TRUP)

b) Chewy (CHWY)

Speculative stock for 2020

a) Barkbox (SPAC acquisition by Northern Star Acquisitions Corp (STIC.U) , will list in Q1 or Q2 2020)

If there was only one company I could invest in, I would invest in Chewy. I already have a position and have consistently been buying it from $64. It is currently over $100.



Audioeye (NASDAQ:AEYE): Stock Analysis and Recommendation

AudioEye Eradicates Barriers to Digital Accessibility with Launch of  Machine Learning-Powered AudioEye Digital Marketplace and Team AudioEye

Audioeye (AE) is a Software-as-a-Service (SaaS) company founded in 2005 by Sean Bradley and his brother in in Phoenix. The company helps businesses (SMB, Enterprises and Government organizations) make their websites, PDF files (new in 2020) and mobile websites accessible to individuals with disabilities. There are about 40M people with disabilities of some form in the US alone.

Audioeye claims to provide 3 capabilities to solve the problem of poor accessibility:

a) testing of your website to look for accessibility problems,

b) remediation (how to automatically fix the problems it found) and

c) monitoring (ensure that those problems were fixed) for your website.

The company listed in the NASDAQ stock market on August 26, 2020. Before that they were on the OTC. It is priced at $24.96 (12/18/2020) and the market cap is $231M.

In Q3 2020, the company reported $5.3M in revenue (+92%) with MRR (Monthly Recurring Revenue) of $1.7M (+67%). It has a Gross Margin of 71% and a net loss of $1.1M ($0.12 per share). They have $10+M in cash and have 25K customers, with a 90% renewal rate (Q3 2020 conference call transcript).

They pre released earnings for Q4 on Dec 16th 2002, and guided up Q4 revenue to $5.4 – $5.6M, full year 2020 revenue at $20.3M – $20.5M and expect to have 32K customers .

For 2021, the company guided revenue in the range of $30 million to $32 million (+56%)and reiterates its expectation to grow MRR and become cash flow positive.

The company was ranked 122 on Deliotte 500’s fastest growing companies in 2019, growing at over 983% YoY.

What is the customer problem?

There are over 1.4 websites with over 1000 visitors / day worldwide. Companies building websites have to conform to Web Content Accessibility Guidelines (WCAG) to make their content easy to consume by individuals with disabilities (e.g. blind – support for read aloud, deaf – video content needs to have captions, color blind – dark contrast, primary colors, etc.).

Most companies dont do this. When mid-sized, large companies and government organizations do not make their website accessible to the disabled they get sued.

In February 2006, a student at the University of California-Berkeley sued Target because its website was inaccessible to the blind. Target settled for $6 million with Bruce Sexton Jr., the student at UC Berkeley, and the National Federation of the Blind, which filed the lawsuit jointly with Sexton.

In 2019, there were 11K lawsuits and average cost of litigation was $50K – $100K. Below are some common accessibility errors. Images may not have ALT-text, color contrast may not be sufficient.

There are several regulations (ADA compliance) that you need to adhere to as a large company (e.g. Target) so this is a big driver for customers. A customer sales presentation from AE shows all accessibility problems they solve.

How big is the market?

The market for accessibility software currently is about $350M – $450M growing at 4% and AE revenue is $20M annual. This is not a very large market, but AE can see a path to $50 – $100M in revenue (2021E is $30-$32M) and take advantage of adjacent markets (TAM over $1B) for mobile apps accessibility, etc.

They could also make the market larger <if> governments decide this is important for their disabled citizens.

Most companies a) use consultants to find and fix accessibility issues manually, b) outsource the accessibility issues to external contractors or c) ignore the problem.

The biggest direct competition for AE is a company called AccessiBe, but the real competitors are many small companies that provide accessibility testing solution (over 20) or manual outsourced consultants.

What technology does AE have and what are their differentiators?

Audioeye has 8 patents they have applied for and some have been granted, in the area of assessment and remediation. I have reviewed the patents, and they are valid submissions but only partially relevant to the remediation problem. You can view the patents and understand their technology moat. The patents are in the areas of Modular systems and methods for selectively enabling cloud-based assistive technologies, with patent numbers 10867120, 10866691, 10860173, 10845946 and few others. I read one of the patent documents – it is interesting but not earth shattering, which tells me the patents are there purely to claim they have patents. 4 have been granted and 4 have been filed in Aug 2020.

What is the customer experience?

When a customer signs up for AE they need to add a few lines of JavaScript code to their website. That enables AE to track visitors to the website and provide them a dashboard to view website errors and a dashboard with recommendations / remediation’s to fix and monitor. See dashboard example below.

When a user comes to the customers website, a small AE icon shows up on the bottom right corner of the website allowing visitors to view accessibility options. See below for examples.

AE claims Machine learning based remediation, but I dont see that in any website

Does it really automate and solve the problem of accessibility remediation?

Having been a CTO before I dont think you can remediate in an automated fashion. 20-25% of the accessibility issues can be identified and < 5% can be automatically remediated.

The best option is for developers and Product managers to build accessibility into their plans upfront, but that is the last thing on their mind and it delays website launch if they choose to do that.

When companies get sued, they look for a quick fix and while none really exists, the low hanging fruit from simple fixes (putting a Javascript from AE) is what they end up doing.

There are some customers I visited (example Mohawk below – visit their website to experience for yourself and notice a small icon on the bottom right) which provide a simple way for accessibility to be solved for < 10% of the disabled audience.

See the right navigation for controls in screenshot 2

See bottom navigation for audio in screenshot 3

AE tools
See right navigation for controls
See bottom for audio controls

What is their moat?

There are 3 moats that they are building, and need to continue to build.

  1. Proprietary algorithms for remediation – <if> this works, it can be a game changer. Customer growth is strong for just the simple testing product. Remediation is the “cure cancer” offering, as opposed to testing which is “diagnose that this is cancer”.
  2. Partnership channels are going to drive growth – they target WordPress (content websites), Shopify (eCommerce websites) and media sites using partners. No partner likes to sign up with multiple providers.
  3. Customer retention with monitoring: While AE is easy to replace <1 line of Javascript code is not hard to remove and replace from a website), when developers get use to the reports and monitoring they dont want to learn a new tool.

What is the go to market model for Audioeye?

AE has a sales team for enterprise customers (20+ sales and partner reps) and a partnership model with channel partners who sell AE as a bundled solution. Companies get to know about AE through Google SEO, search ads or partner promotions.

AE offers a freemium SaaS model – meaning customers can sign up for free to find problems in their website and they offer some paid plans.

A $39/mo plan allows them basic remediation, $99/mo plan allows for advanced and if you are an enterprise that wants a “managed” i.e. outsourced solution they offer that as well.

AE does not disclose # of customers by plan.

Quarter# customersQoQ Growth
Q1 202011K48%
Q2 202016K45%
Q3 202022K38%
Q4 202032K45%
Customer growth has been strong

Are their customers real? What about Mariner research’s claim that the product does not have any AI/ML?

The report by Mariner on Seeking Alpha made me dig deeper into their customers and I visited 20+ customer websites to confirm that they actually have them on.

BuiltWith (see below) confirms that there are over 28K websites with the AE Javascript. That does not tell you how many are paying customers. They should more data on cohort analysis or metrics on DBNER.

I also confirmed by checking the Javascript code on a few websites. At the very least – even if AE does not provide “remediation” – which is the holy grail, it does provide accessibility options, which solves a part of the problem.

You can also see a sample of a website accessibility testing report from AE with a snapshot below.

BuiltWith confirms 28K installs of AE javascript
An actual website accessibility report from AE
Maricopa County website with AE
AE Javascript on as an example
With 28K customers, and no reviews on G2 something is amiss

Builtwith also confirms that the usage of their script is growing. They had a big drop in 2018, but after that they have been getting installed at a rapid clip. It does show that over 95% of their customers are in the United States.

AudioEye script install growth shows websites using them increased

How is employee morale given all these management changes?

AE has 100+ employees in Atlanta, Phoenix and Portland. Reviews of CEO (100%) 7 reviews and Company (75% positive) are good, but the sample size is too small. It is hard to say.

The numbers seem to indicate the sales and marketing teams are getting the job done. The product will likely go through several “build for scale” changes, but I dont see too many concerns.

When you have a mission such as AE’s I think it attracts a certain kind of individual (who wants to make the world better).

How good is the management team?

This is one of the biggest issues I have with AE. There has been constant management change. The current website lists some strong names, and I am reaching out to them on LinkedIn to confirm.

  1. CEO David is interim – full time investor at Sero Capital. The previous CEO left after 8 months on board in Aug 2020.
  2. CFO Sach joined 18 months ago from D&B.
  3. President & CTO Dominic has been on board for 7 months from a consulting position before.
  4. CPO Joel is part-time AE and is 1 year into the job
  5. CMO Bryan has been there for 3 months and was at Tile before
  6. CRO Russell was at Shipstation and BigCommerce before and has been at AE for 2 months
  7. CBO Rob was at Pinterest and FB as a mid level manager and has been at AE for 1 month

What are the risks?

  1. There have been constant management changes with3 CEO’s in 3 years. They have an interim CEO now (who was their board member) after their CEO hired in March 2020 stepped down. They named a new CMO, CRO in Feb 2020 and replaced them both again in Dec 2020. Risk – management continuity does not exist.
  2. They have moved their technical development team to Portland from Atlanta and hired a new President there who will build a new technical team there – Risk have to rebuild their tech stack / architecture which could distract from customer growth
  3. Lawsuits – they have filed a lawsuit against their #1 competitor – AccessiBe for patent infringement on Sep 2020 and that is still being litigated. AccessiBe has raised $10M+ in funding, so this will be a long battle
  4. They dont have great reviews on many review sites, but customer growth is increasing dramatically and churn is moderate (90% retention – which is poor given most good SaaS companies have negative churn
  5. They don’t report traditional SaaS company metrics such as CAC, DBNER, etc. which gives no visibility into their revenue quality
  6. The company has amended and reclassified historical financials (and at one point restated 97% of its revenue) likely enabled or caused by material weaknesses in internal controls. A long piece by research firm Mariner (link below) says their accounting is suspect, product does not actually work and AI/ML is just marketing.

So what is Mariner missing?

At the core of Mariner’s research is 5 issues:

  1. Lack of investment in R&D: Agree. Their R&D spend has been minimal, but as a technical person with sufficient knowledge of systems, I can tell you that this product does NOT require deep technical depth. The biggest issue is AE has “marketed” a simple web accessibility toolbar as a machine learning / AI tool and made multiple claims to be making 1 Billion+ remediation’s daily. That is overreach and (probably) false, but this does solve a part of the accessibility problem. When AE says they power 1 billion remediation visits daily that is the sum total of all the page views their customers serve daily thanks to the Javascript that shows the AE icon on the bottom right. I say (probably) false because they could argue it is remediation – but that is like calling a cat, tiger. Yes they are feline, but there’s a big difference.
  2. Poor internal financial controls: Agree: AE reporting is so poor and has only 1 analyst covering them (who is from their banker B Riley) that this needs to be viewed more closely because they have reinstated revenue and earnings before. I also learned from others that this is “turnaround play” – they should be even more clear with investors and transparent.
  3. CEO connections to “Pharma bro Martin S”: Not material but agree: Being “connected” to Martin and making them guilty by association is bad form from Mariner.
  4. The founder’s other companies are suspect or have been barred from NASDAQ. Not material but agree: They have since left the company or have been relegated to lower positions for continuity.
  5. No real technology to claim their remediation with ML/AI: Partially Agree: This is a simple JavaScript add-on to the website that allows for certain accessibility capabilities to be turned on. Marketing this as AI/ML based remediation is overreach. But, it does the basic job of accessibility testing and reporting.

Even though I agree all of their points are “valid”, however, the product does some basic things. It is usual in the software world and in Silicon Valley in particular to “pitch the vision” and deliver” the current version”.

If the company is given AI/ML valuations, (which everyone wants) that is a valuation problem and poor communication from AE.

That’s what the company is doing, I believe, but I would like verification of the SaaS metrics reported by other companies to confirm.

Would I recommend this stock?

I was introduced to this stock by my friends on Twitter, and while there is a lot to not like – it is risky, it has many challenges and the marketing seems off – I believe those are the main reasons they have brought on fresh talent.

The quarterly numbers are amazing (given their growth) because they are starting from a small base. I would be willing to give them a quarter or two of runway to clean up the issues mentioned an move forward. During this time I want more reporting on standard SaaS metrics, such as DBNER, churn, CAC, etc. I also think they should ask their new President to outline their product strategy and execution plan.

Since this is a very risky play I would time the entry (I am not a stock chart price-action expert), keep a short stop loss (and keep a stop loss in permanent, instead of just for the day), and put <2% or a small amount of portfolio to see the performance for 1-2 quarters.

Audioeye financial metrics

Links for more reading


Errors and Omissions

Please do not take this as investment advice.

As I notice errors and issues, I will update this document and also highlight the errors in this section. Please check this area frequently

What is iBuying? Which is the stock to buy for the next 10 years?

What is iBuying?

An iBuyer is a company that buys your existing home and then (usually) resells it on the open market.

iBuying (instant Buying) companies such as Opendoor, Offerpad, Zillow Offers, RedfinNow, Knock, eXPI and over 20 others use online technology to estimate a home’s value and make an offer in one to two days. If the offer is accepted and the sales transaction closes, the iBuyer assumes the burden of owning, marketing, and reselling the home.

Opendoor provides a simple app to get estimates

Who is the customer?

The process of buying or selling a home takes 6-8 weeks from finding an agent, listing the property, preparing the home for sale, inspections, “showing” the home, confirming mortgage, getting escrow and finally closing.

The customer for iBuying is a home seller, frustrated with this lengthy process and would like to sell their home in less than a week or less, and get a good price for their home, quickly. This is so they can then buy another home that they may have already selected or just keep the cash.

Similarly the buyer of the home has to go through a lengthy process of selecting a broker, viewing homes, getting mortgage pre-approval, selecting a home, getting inspections done, and finally closing on a home (escrow, title, etc.)

Home Selling Process: 12 Steps You Should Know | HOMEiA
The home selling (and buying) process is long and cumbersome

What is the customer problem?

In an iBuying transaction, there is no need for the homeowner to hold open houses, consider multiple bids, or wait for a buyer to work out financing.

Simply sign up on any one of their websites/mobile app and you can get a cash offer. Sometimes you can expect that offer within 1-24 hours.

iBuyers make cash offers on “livable” houses That are supposedly close to the actual market value of the house.

The owner selects the closing date, which can be as soon as a week after signing the iBuyer contract. It also offers advantages to consumers who want to sell their existing home and purchase a newly built one in a single transaction and wait to move out until their new home is completed.

How big is the market?

In the US there are 5.3 Million (new and existing) homes sold and bought each year. That represents a $1.4 Trillion market. The commissions paid to realtors alone is $150 Billion. The closing and escrow is another $30 Billion market. The US mortgage (refinancing included) is a $4.5 Trillion market.

iBuyers represent a small part of the market in 2019 and 2020

What are the pros and cons of iBuying?

Pros of Selling to an iBuyer

Quick close on a day of your choosing – instead of waiting for many weeks.

No showings (except inspectors) – saves time and hassle.

Buy your next home without a contingency – this means you can buy another home without having to wait to sell your current home.

Better than selling to a flipper – Flippers tend to undervalue the price of a home, “fix” it and “flip” it for a large profit.

Cons of Selling to an iBuyer

Less than full fair market value – iBuying can pay you less than if you use a realtor.

High fees – Realtor commissions and closing costs tend to be 6% whereas iBuying charges 8-10%.

Not so “guaranteed” offer – some offers are withdrawn if the iBuying firm finds the home to be in less than acceptable condition.

Few homes/markets qualify – Of the homes in the US the estimate is < 15% qualify for iBuying

How do iBuying companies make money?

iBuying is a low margin, high volume business. The companies make money in 2 ways:

  1. Service fees
  2. Price appreciation of the home
iBuyers make money with fees and home price appreciation because of the fixes they peform

E.g. If a home is priced at $250,000, the iBuying company charges $25K (10%) as their service fee (for the entire process, cleaning, title, escrow) and then will “upgrade” your home by making cosmetic changes and sell it for $260,000.

In this example they make $25K in fees and $10K in appreciation.

If you look at this unit economics for e.g. (below) and assume an average 11% just in service fees, their margin is about 4%.

If you look at “agent commission” – that is the area to improve for iBuyers. Margin can get to 6-7%

Who are the key companies in this iBuying space?

There are over 20 companies in various markets, but the leader is Opendoor, followed by Zillow Offers and Offerpad.

Opendoor is the leader, but Zillow is catching up fast

Is iBuying available everywhere?

No, Opendoor is in 21 “markets” or cities, Zillow in 25. Redfin in 5, eXPI in 7 and Offerpad in 5. Rest are in under 5 markets.

The market needs to have enough inventory, sufficient transactions and resonsably priced homes
iBuying will likely remain a US phenomenon for decades

Will every home be sold with iBuyers in 20-30 years? Is this a long term trend?

Currently the iBuyers are in the top 25-50 markets as the chart shows below. There are a total of 250+ markets in the US. So the penetration by the iBuyers is relatively small.

The sweet spot for iBuyers seems to be the $250K (+/- 20%) price point for the home, which is the median US home price, representing about 42% of all US homes. This means iBuyers will likely only be (for the next decade) in the top 50-60 markets.

Markets where iBuyers operate
Markets where iBuyers operate

Open door intends to operate in 50 markets by 2025.

The 50 markets where Opendoor intends to operate

Who is iBuying disrupting? Is the real estate agent in trouble?

In 2020 and for the next few years the easy 25K “home flippers”, in the US, i.e. people who buy a home, do minor fixes (paint, clean, etc.) and then flip (sell it) are the ones that are feeling the pressure from iBuyers. The heavy-lifting flippers (who buy run down properties and rebuild) are not going to care about the iBuyers since those run-down homes are not the target for iBuyers.

There are between 1.5 to 2 Million registered real estate brokers in the US. Of those < 200K do more than 2 transactions a year. The others are “casual realtors”.

How Many Real Estate Agents Are There Globally? - FBW
In 2020 there were over 1.4 Million real estate brokers in the US

Over time, with volume, iBuying will disrupt the long tail of realtors, and also reduce the fees for real estate brokers.

What about regulation?

The existing real estate brokerages (there are over 104K in the US) and many real estate brokers are threatened by the iBuying phenomenon. This is because it cuts into their commissions (which have been 6% of the home price forever) and know that iBuying companies might eventually cut them out of the transaction.

Sellers beware - Why America's real-estate brokers are such a rip-off | United  States | The Economist
Real Estate Broker commissions across the world

In terms of regulation, there are no proposed laws against iBuyers in any states yet.

Many brokers, mortgage companies and escrow firms think iBuying will continue to be a small part of the business overall. For e.g. after 25 years of ecommerce, it is still < 10% of all retail in the US. However, ecommerce has disrupted many brick and mortar retail companies.

It is very likely that iBuying will do the same to traditional real estate brokerages.

Do iBuyers offer the best price? If not, why are people still choosing iBuyers?

Not always. If a buyer values time over the best price they will choose iBuying. If not, the traditional process might yield a better price.

An analysis of 1000 iBuying transactions showed that that iBuyers offer between 90% – 95% of the current value of the home.

How big is iBuying now? How big will it get?

iBuying is very small as a segment (< 2% of homes sold in the US are bought / sold by iBuyers), but it is growing fast.

iBuying is expected to have large growth

The market slowed in 2020 (thanks to Covid) but with a) millennials looking to buy homes in the suburbs, b) remote working being acceptable now, and c) low interest rates, iBuying will see dramatic growth from 2020 – 2030.

It is anticipated that iBuying will be 3%-5% (currently < 2%) of all homes bought and sold by 2025 and 5% – 10% by 2030.

At 5% in 2025, the total transactions (homes bought) by iBuyers will be 265,000 homes (60K in 2019) in the US and the transaction volume will be $66B (4.4X 2020 of $15B). The implied revenue to iBuyers is $8B – $10B.

Transaction volumes have increased exponentially over the last few years

In some of the mature markets (e.g. Phoenix), iBuying is already over 15% of transactions.

What is a “Market” according to the iBuying companies?

According to the National Association of Realtors, each MSA (Metropolitan Statistical Area) or County in the US is a market. There are 256 markets in the US.

You might hear realtors refer to “buyers market”, “sellers market” or “balanced market”. The term market in iBuying is a location (city, county, MSA) where there is enough inventory of homes to buy and sell.

Top iBuying markets of 2020

How do iBuying companies finance their home purchases?

All companies have lines of credit, or have raised billions in debt. In 2018 alone Opendoor raised $1.3 Billion and have over $3B in 2020.

This chart is as of 2018

What is the competitive differentiation between these companies?

The differentiation comes from having more data about the market, buying homes at the “right price”, selling them “quickly” and automating the operations to reduce unnecessary costs.

Opendoor is the pioneer in the space and has done the most transactions. So they have a lot of data about the home and use ML/AI to price homes based on multiple photos and images of the home.

Zillow is the leader in real estate technology and has data for pricing on over 100 Million units in the US.

Redfin has the most “in house agents” to get potential customers interested so they are using that to their advantage.

Which stock should I buy?

Ticker2020 Rev (TTM)2020 iBuying Tx*Mcap# MarketsExpected Rev (2025) from iBuying
OPEN~$3B – $4B~20K – $22K$4.8B*15$50B
ZG$4B~6K – 7K$30B22$40B
RDFN$900M~ 1.5K – 2K$7B7$15B
EXPI$1.5B< 500$4.6B5$10B
OPEN will list by Dec 2020 or Jan 2021. This is the expected valuation

The 2020 iBuying Transactions (# of homes) is obtained from their projections, so subject to changes.

The 2025 expected revenue is disclosed in their conference calls with analysts and is a “likely number”.

Who is Opendoor? Why are they going public?

Opendoor was founded by Eric Wu (ex Trulia – sold to Zillow), Keith Rabois and JD Ross in 2014. After multiple rounds of funding from Softbank and General Atlantic, it last raised $300M in 2019 valuing the company at $3.8B.

In Sep 2020, Opendoor announced it would go public by merging with Social Capital Hedosophia Holdings Co (IPOB), a company launched by Chamath P of Facebook.

The deal valued Opendoor at $4.8B.

Opendoor has strong history and metrics in the space to be a leader

What is Opendoor’s moat or unique value proposition?

Given that the business is simple to understand but difficult to execute, any company that has to succeed will have to get these 3 important things right:

  1. Buy at the right price. Not too low that the homeowner would prefer to sell it via a real estate agent and not too high that that cant make an appreciation, given that fees are difficult to raise.
  2. Assess the conditions of the market and neighborhood well to ensure they dont “buy and hold” properties that required a lot of upgrades or markets where inventory moves slowly.
  3. Optimize operations to reduce the costs – the big cost is realtor fees at 3%.
Algorithms and large data sets (with network effects) power Opendoor

Opendoor collects a lot of data about a company by doing “feature inspection and data recording. This in turn generates better estimates and better data to price intelligently. The new data in a market helps make the next purchase better.

Zillow has more data on US homes than any of these companies, so I would be very bullish in their ability to leverage their proprietary data and be the #1 or #2 in this market quickly

Given that Redfin chose to partner with Opendoor, I see this as a 2 horse race – Zillow (which might acquire others in specific markets) vs. Opendoor + Redfin combined.

What is vertical integration in real estate? Why is that important?

If you look at the process of buying and selling homes, there are multiple steps. iBuyers eventually want to own the entire process end-to-end. This is called vertical integration. It gives the iBuying companies bigger markets to grow into.

For example iBuyers can:

  1. Help you select a home from their inventory – eliminating broker fees
  2. Provide inspections and get pre approval – lower inspection fees
  3. Obtain mortgage – make money on mortgage referrals
  4. Provide escrow and closing – lower escrow fees
  5. Help with upgrades, repair and maintenance – increase revenue potential
The Home Buying Process - Atlanta Ben
Home buying process for vertical integration

The reason this is important is because each of the markets in the process is large.

  1. Real estate commissions $150B market
  2. US residential real estate mortgages: $4.5 Trillion
  3. Escrow and closing: $25B
  4. Home setup, showing and preparation $10B
  5. Home insurance, title insurance, etc. $25B

Resources and Links for more reading