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.
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.
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 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?
Over 67% of US households own pets with most homes owing a dogs and cats.
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)
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:
Pet grooming and boarding – including a luxury hotel for pets – Jet Pet Resort
Organic, allergy-free and fresh food for pets, instead dry or canned.
Pet care and sitting – paying professional dog walkers and pet sitters.
Pet insurance – the fastest growing segment within Pet care $TRUP
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 (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 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.
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.
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
What is their moat?
There are 3 moats that they are building, and need to continue to build.
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”.
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.
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.
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 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.
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.
CEO David is interim – full time investor at Sero Capital. The previous CEO left after 8 months on board in Aug 2020.
CFO Sach joined 18 months ago from D&B.
President & CTO Dominic has been on board for 7 months from a consulting position before.
CPO Joel is part-time AE and is 1 year into the job
CMO Bryan has been there for 3 months and was at Tile before
CRO Russell was at Shipstation and BigCommerce before and has been at AE for 2 months
CBO Rob was at Pinterest and FB as a mid level manager and has been at AE for 1 month
What are the risks?
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.
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
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
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
They don’t report traditional SaaS company metrics such as CAC, DBNER, etc. which gives no visibility into their revenue quality
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.
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.
CEO connections to “Pharma bro Martin S”: Not materialbut agree: Being “connected” to Martin and making them guilty by association is bad form from Mariner.
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.
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.
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.
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.)
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.
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:
Price appreciation of the home
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%.
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.
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.
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.
Open door intends to operate in 50 markets by 2025.
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”.
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.
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.
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.
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?
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.
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.
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.
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.
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:
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.
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.
Optimize operations to reduce the costs – the big cost is realtor fees at 3%.
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:
Help you select a home from their inventory – eliminating broker fees
Provide inspections and get pre approval – lower inspection fees
Obtain mortgage – make money on mortgage referrals
Provide escrow and closing – lower escrow fees
Help with upgrades, repair and maintenance – increase revenue potential
The reason this is important is because each of the markets in the process is large.
Real estate commissions $150B market
US residential real estate mortgages: $4.5 Trillion
100 Baggers is a book on finding and keeping stocks that increase 100X their value after purchase. The book was published in 2015 and has 220+ pages. the book details 365 companies that have returned 100X their value.
Book notes and summary
“Every human problem is an investment opportunity if you can anticipate the solution”. Except for thieves, who would buy locks?
Phelps figured out a few things about investing. He conducted a fascinating study on stocks that returned $100 for every $1 invested. Yes, 100 to 1. Phelps found hundreds of such stocks, bunches available in any single year, that you could have bought and enjoyed a 100-to-1 return on—if you had just held on. His basic conclusion can be summed up in the phrase “buy right and hold on.” Investors need to distinguish between activity and results.
What investors should do is focus on the business, not on market prices.
“Bear market smoke gets in one’s eyes,” and it blinds us to buying opportunities if we are too intent on market timing. The greatest fortunes come from gritting your teeth and holding on.
“There is a Wall Street saying that a situation is better than a statistic,” Phelps said. Relying only on published growth trends, profit margins and price-earnings ratios is not as important as understanding how a company could create value in the years ahead.
Don’t sell just because the price moved up or down, or because you need to realize a capital gain to offset a loss. You should sell rarely, and only when it is clear you made an error. One can argue every sale is a confession of error, and the shorter the time you’ve held the stock, the greater the error in buying it.
There are lots of ways to make money in markets, just as there are many ways to make a good pizza. Nonetheless, there is something to be said for a good pizza that almost anyone can make with the right ingredients.
We’re looking for insights and wisdom, not hard laws, and proofs. Investors have been conditioned to measure stock price performance based on quarterly or annual earnings but not on business performance.
The Biggest Hurdle to Making 100 Times Your Money
The biggest hurdle to making 100 times your money in a stock—or even just tripling it—may be the ability to stomach the ups and downs and hold on.
Analysis of 100 Baggers:
• The most powerful stock moves tended to be during extended periods of growing earnings accompanied by an expansion of the P/E ratio.
• These periods of P/E expansion often seem to coincide with periods of accelerating earnings growth.
• Some of the most attractive opportunities occur in beaten down, forgotten stocks, which perhaps after years of losses are returning to profitability.
• During such periods of rapid share price appreciation, stock prices can reach lofty P/E ratios. This shouldn’t necessarily deter one from continuing to hold the stock.
The key to 100-baggers
Many 100-baggers enjoyed high ROEs, 15 percent or better in most years. It’s important to have a company that can reinvest its profits at a high rate (20 percent or better). ROE is a good starting point and decent proxy. I wouldn’t be a slave to it or any number, but the concept is important.
Owner Operators: Skin in the Game
Keep the list of names relatively short. And focus on the best ideas. When you hit that 100-bagger, you want it to matter.
100-baggers distilled: essential principles
You Have to Look for Them: “When looking for the biggest game, be not tempted to shoot at anything small.” You only have so much time and so many resources to devote to stock research. Focus your efforts on the big game: The elephants. The 100-baggers.
Growth, Growth and More Growth: You want to focus on growth in sales and earnings per share.
Lower Multiples Preferred: Great stocks have a ready fan club, and many will spend most of their time near their 52-week highs, as you’d expect. It is rare to get a great business at dirt-cheap prices. If you spend your time trolling stocks with price–earnings ratios of five or trading at deep discounts to book value or the like, you’re hunting in the wrong fields— at least as far as 100-baggers go. You may get lucky there, of course, but the targets are richer in less austere settings.
Economic Moats Are a Necessity: A 100-bagger requires a high return on capital for a long time. A moat, by definition, is what allows a company to get that return.
Smaller Companies Preferred: Start with acorns, wind up with oak trees. The median sales figure of the 365 names in the study was about $170 million.
Owner-Operators Preferred: Having a great owner-operator also adds to your conviction. I find it easier to hold onto a stock through the rough patches knowing I have a talented owner-operator with skin in the game at the helm.
You Need Time: Use the Coffee-Can Approach as a Crutch: Once you do all this work to find a stock that could become a 100-bagger, you need to give it time. Even the fastest 100-baggers in our study needed about five years to get there. A more likely journey will take 20–25 years.
You Need a Really Good Filter: Don’t fret so much with guesses as to where the stock market might go. Keep looking for great ideas. If history is any guide, they are always out there.
Luck Helps: Just as in life, so in the pursuit of 100-baggers. Good luck helps.
You Should Be a Reluctant Seller: If the job has been correctly done when a common stock is purchased, the time to sell it is—almost never. Sell if: You’ve made a mistake—that is, “the factual background of the particular company is less favorable than originally believed.” The stock no longer meets your investment criteria. You want to switch into something better—although an investor should be careful here and only switch if “very sure of his ground.”
An investing edge is a technique, observation or approach that creates a cash advantage over other market players.
Said another way – what do you know better than others?
E.g. You are a developer and know companies that provide software / frameworks for developer before others do. E.g. OKTA, Splunk. Amazon AWS, etc.
What are the characteristics of an edge?
The edge has to be repeatable.
You need to be able to use the same process (your knowledge of developer stack for e.g.) to find new investments consistently. Using your process you may only get 1 investment a year or 1 a month or 1 a day (wow), but it has to be a process that keeps repeating using a set of rules you adopt consistently.
The edge has to result in better than 50-50 odds
Let me give you an example to prove this point. Lets say you and I chose a stock ABC. You know nothing about ABC and I don’t either. The odds of the stock going up or down are – 50% – a coin toss. That’s gambling. When you gamble, the house always wins in the end (regardless of the market).
Now lets say ABC is a developer focused technology company. You know more about whether it will do well or not than I do. You now have an edge.
For me it is still a coin toss. For you, however, the odds are in your favor since you know more.
It has to be validated before and be proven (Back testing)
Back testing is a fancy insider term for “prove to me that your hypothesis will work with data from previous time periods.
Back to our example, if you have an edge, as a software developer, what questions (metrics) will you ask to find the companies you would have invested in the last 10 years?
Doordash, the food delivery company, founded in 2013, by Andy Fang, Evan Moore, Stanley Tang, Tony Xu, filed for an initial public offering.
The company is expected list on the NYSE and is being underwritten by Goldman Sachs and J P Morgan.
The company is expected to seek a valuation of about $25 Billion and it is still not clear how much it plans to raise (the placeholder value is $100M, but the final amount depends on the interest from large investors). Ed: I expect it to raise about $800M – $1B.
The company’s most recent price of shares were $45.9 (Series H, June 2020), when it was valued at $16B, raising $400M. This means the price at IPO will likely be $80 – $100.
The company has grown quickly and has recorded $1.9B (+237% growth) in revenue in 2020 (9 months, ending Sep), losing $149M in the process. During this period the Gross Order Value (Amount of food purchased & sold through the system was $8.1B – giving it a rough take rate (commissions) of 11%.
That compares to $587M in revenue for all of 2019 with a loss of $533M.
Ed: I think this stock will head lower after the IPO if it prices at $80 – $100, unless Uber and Lyft start to trend upwards. This is based primarily on the valuation expected.
The questions around delivery and consumer growth need to be answered only by 2021 and until then I think this business will grow very quickly.
Given that the key story for DASH is that the pandemic has kicked its business into orbit, the key questions will be:
Can the the growth in consumers and consumption be sustained?
Are there good competitive moats vs. Uber, Just Eat (Grub Hub) and Instacart?
Are the take rates sustainable in the future?
What is the autonomous delivery story?
What about the poor economics of delivery businesses outside the major metros?
You should buy this IPO only if you believe the future of restaurants depends at least on 25%-30% of their business coming from delivery (compared to < 12% currently), as opposed to people going back to dining in after 2021 (Post Covid).
The market for “local” business delivery – starting with restaurants (which is where Doordash initially operates) is large. There are over 660K restaurants and over 38K grocery stores in the US alone. Of those 390K are customers of Doordash (Monthly active). Doordash is active in Australia (3 cities), Canada (80 cities) and United States (4000 cities).
Doordash claims to be a “merchant first” business. There are 3 participants in the business.
Merchants: These are local businesses that want to deliver products to consumers, without the overhead of delivery or the cost of owning a fleet of trucks. 390K active merchants use Doordash.
Consumers: Businesses (before Covid) who need catering for their office and homeowners who like food delivered at home from their local restaurant are the main buyers. 18 Million consumers use Doordash.
Delivery personnel (Dashers): These are the on-demand workers who deliver the food (similar to Uber or Lyft and get paid in tips and delivery fees for their work. There are 1 Million Dashers on the platform.
1 People cannot cook due to lack of time.
2. Professionals who can’t go out during lunch because time is the constraint.
3. Students who don’t have a kitchen facility.
4. People who don’t know how to cook.
1 Food joints that have no delivery service.
2 Restaurants with poor seating arrangements.
3 New restaurants that need a huge customer base.
4 Eateries looking for advertising and marketing.
1 People looking for part time or full-time work.
2 People looking for good income via salary and tips.
Product and Value Proposition
There are 3 apps Doordash provides: a) for merchants, b) for consumers and c) for Dashers.
Merchant Value Proposition
Demand aggregation: Provide them orders from customers who want local delivery.
Merchant services: White label logistics service (Doordash drive) allowing merchants to generate demand by themselves & Doordash Work for catering orders
Consumer Value Proposition
Convenience: Stay at home and order food
Wide selection: Food and groceries from 1000s of local food places
Value: flat delivery fee or monthly subscription
Dasher Value Proposition
1. Flexible opportunity to earn
Doordash makes money by
a) charging businesses a percentage of their sales. That commission ranges from 10% to over 30% in some cases. Consumers pay a delivery charge and tips to the dashers. As of Sep 2020, over 5 M consumers pay a monthly subscription fee ($9.99) to Doordash for unlimited local food deliveries.
b) advertisement: Any restaurant that wishes to advertise themselves on the DoorDash app has to pay in order to be ranked in one of the top places. This is done to increase the visibility of the restaurants and earn more customers
c) delivery fee: the delivery fee is another source of income for Doordash. The amount is decided during the payment process depending on the distance from the pickup to the delivery point. Usually, the delivery fee ranges from $5 to $8.
Doordash charges consumers $5 – $8 as a delivery fee. Consumers can subscribe to a $9.99 Doordash pass which gives them unlimited orders per month.
Doordash charges 20% – 30% commissions from merchants.
The advertisements fee is between $50 – $100 per month on average.
Doordash pays Dashers per delivery ($10 – $25).
There are many questions about the viability of the model from multiple players, (see footnotes), but Doordash seems to have executed the Covid plan well. They have grown over 200% YoY and are
GOV (Gross Order Value)
$1.91B (9 mo)
Take rate % of GOV
Doordash quick financials
Growth for Doordash will come from more merchants (expanding beyond restaurants to other local services), followed by more consumers buying more often (increasing transactions and GOV).
More merchant services
More consumer engagement
International expansion (beyond .AU and .CA)
They raised a small round from YCombinator ($120K) in 2013, followed by $2.4 M round from Khosla Ventures. Since that point they have raised over $2 B from over 50 investors. The biggest investors are Softbank (25%+) and Sequoia Capital (20+%), followed by GIC Singapore (9.5%).
Given the range of valuation I expect $DASH to trade lower after IPO
(A) Acquired, (E) Estimate
The local food delivery space has multiple competitors including Uber Eats, Grubhub (acquired by Just Eat for $7.3B), doing $1.2B in 2019 revenue, Postmates (acquired by Uber for $2.7B), doing $107M in Q1 2020. In addition, Instacart, which does grocery delivery is expected to file for an IPO in 2021.
Doordash has over 50% marketshare in the US (for restaurants), followed by 26% for Uber eats and 16% for Grubhub.
The biggest competition is consumers walking up to a restaurant (dining in), followed by restaurant owned delivery (e.g. Dominos).
Finally, as Doordash expands its addressable market need, it might run into competitors such as Instacart as well. Lyft (in the US) has still not made its plans known for delivery.
Doordash has made 4 acquisitions to date, including Caviar (competitor) and is likely going to keep acquiring companies in Canada and Australia to expand their footprint.
Aug 21, 2019
Aug 1, 2019
Apr 1, 2019
Sep 14, 2017
The company was founded in 2013 by the 3 founders as Palo Alto Delivery.
Tony Xu owns 5.2% of the company, while co-founders Andy Fang and Stanley Tang each own 4.7%. The fourth co founder no longer is with the company (Evan Moore).
On January 12th 2013, Palo Alto Delivery was born.
There are 5 companies planning to go IPO that I am tracking closely
If there is one company in the travel space that has benefited post Covid it is AirBnB. The company is looking to raise $3B, with an expected valuation at $25B – $30B. It generated $4.8 B in revenue last year with about $400M in losses. It has apparently been growing since May and is close to profitability.
The company provides short term loans (BNPL – buy now pay later) to consumers for *mostly* online purchases. Metrics are unavailable, but valuation could be in the $2B – $5B range. Another Covid winner, with revenues quadrupled post March.
The food delivery company filed its S1 last week revealing a 226% increase in revenue during the first 9 months of the year (another winner thanks to Covid).
The company posted $885 million in revenue for 2019, up from $291 million in 2018. For the nine months ended Sept. 30, 2020, DoorDash generated $1.9 billion in revenue, up from $587 million for the same period in 2019.
Meanwhile, the company reported net losses of $667 million for the year 2019 and $149 million for the nine-month period ended Sept. 30, 2020, compared to net losses of $504 million and $203 million, respectively, reported for the same time in 2018 and the same nine-month period in 2019.
The company said, it holds approximately 50 percent of the market share based on total sales, followed by Uber Eats at 26 percent
The Tom Siebel founded Enterprise AI company has filed to raise $100 M. It provides AI and data science technology and services. For 12 months ending Jul 2012, the company booked $162 M in revenue and is not profitable.
A leading online game developer, was founded in 2004. They provide a gaming environment safe for children. They are expected to post $225 M in revenue in 2020, up over 112% from 2019. It raised $150 M in funding (Feb 2020) valuing it at about $4B.
The deep discounter (eCommerce marketplace) company / app, has raised over $1.6B over the last decade, with most recent valuation at $11B. It has over 70 Million active users in 100 countries. Wish was estimated to drive $1.9 B in revenue in 2019, a 109% growth over 2018.
I wrote about ANT financial a few weeks ago. It was a much anticipated IPO and would have been the largest ever. Until the Chinese primer decided that was not going to be the case. The WSJ says, ANT has indefinitely postponed its IPO.
Chinese President Xi Jinping personally made the decision to halt the initial public offering of Ant Group, which would have been the world’s biggest, after controlling shareholder Jack Ma infuriated government leaders, according to Chinese officials with knowledge of the matter.
The rebuke was the culmination of years of tense relations between China’s most celebrated entrepreneur and a government uneasy about his influence and the rapid growth of the digital-payments behemoth he controlled.
Mr. Xi, for his part, has displayed a diminishing tolerance for big private businesses that have amassed capital and influence—and are perceived to have challenged both his rule and the stability craved by factions in the country’s newly assertive Communist Party.
In a speech on Oct. 24, days before the financial-technology giant was set to go public, Mr. Ma cited Mr. Xi’s words in what top government officials saw as an effort to burnish his own image and tarnish that of regulators, these people said.
At the event in Shanghai, Mr. Ma, the country’s richest man, quoted Mr. Xi saying, “Success does not have to come from me.” As a result, the tech executive said, he wanted to help solve China’s financial problems through innovation. Mr. Ma bluntly criticized the government’s increasingly tight financial regulation for holding back technology development, part of a long-running battle between Ant and its overseers.
Mr. Xi, who read government reports about the speech, and other senior leaders were furious, according to the officials familiar with the decision-making. Mr. Xi ordered Chinese regulators to investigate and all but shut down Ant’s initial public offering, the officials said, setting in motion a series of events that led to the deal’s suspension on Nov. 3. Investors around the world already had committed to paying more than $34 billion for Ant’s shares. It isn’t clear whether it was Mr. Xi or another government official who first suggested the shutdown.
Chinese regulators have long wanted to rein in Ant, according to the Chinese officials with knowledge of the decision-making. The company owns a mobile payments and lifestyle app, called Alipay, that has disrupted China’s financial system. Alipay is used by roughly 70% of China’s population, has made loans to more than 20 million small businesses and close to half a billion individuals, operates the country’s largest mutual fund and sells scores of other financial products.
Ant largely focused on serving people and companies that traditional banks long ignored, and it has emerged as an important cog in Chinese finance. It has long been spared from the tough regulations and capital requirements that commercial banks have been subject to.
Regulators earlier met with strong resistance to efforts to rein in Ant from the company’s financial backers, reflecting the support Mr. Ma has had from individuals in China’s top political and business echelons, according to a person familiar with the matter. Ant’s shareholders include Boyu Capital, a private-equity fund whose partners include Alvin Jiang, the grandson of former Chinese leader Jiang Zemin. China’s national pension fund, China Development Bank and China International Capital Corp. , the country’s top investment bank, all have large unrealized profits on their investments in Ant.
Mr. Xi sought to tighten financial regulations overall after the 2015 stock-market crash in China that tested the party’s firm hold on the economy. He also came to appreciate the benefits of having firms like Mr. Ma’s, whose payment app and lending operations changed the way the Chinese spend money, provided a reliable source of funding for small businesses, and made Alibaba Group Holding Ltd. BABA -0.50% , the e-commerce giant which Mr. Ma co-founded and used to run, the pride of China.
Tech Titan Shares in Alibaba Group have surged in the years since the e-commerce giant went public, cementing its place as one of the world’s most valuable companies. Alibaba currently owns a third of Ant Group.
Ant’s roots trace back to 2004, when Alipay was started as an escrow service to facilitate payment transactions on Taobao, Alibaba’s online marketplace. Mr. Ma split off Alipay from Alibaba in 2011, a move that sparked an outcry from some of Alibaba’s big foreign investors and later resulted in a settlement with them.
Mr. Ma controls 50.5% of Ant’s voting rights, but he hasn’t ever held an executive or managerial position in the six-year-old company.
In 2008, when he was Alibaba’s CEO, Mr. Ma had lamented at a public forum that traditional banks in China were ignoring businesses that badly needed funding. “If the banks don’t change, we will change the banks,” he said, explaining that he envisioned “a more comprehensive lending system that served the needs of small businesses.”
In 2013, as Alibaba’s chairman, he again took aim at traditional Chinese lenders, saying at a public forum in Shanghai that the country didn’t lack banks or innovative institutions, but a financial institution that could power China’s economic growth in the next decade. “The financial industry needs disrupters” and outsiders to bring about changes, he said.
Around that time, Alipay created an online money-market mutual fund designed to help individuals earn investment returns on spare electronic cash sitting in their Alipay wallets. It was an instant success. Some people moved money out of their bank accounts into the new fund to earn higher returns, drawing complaints from some lenders that Alipay was siphoning their deposits.
In 2014, Alipay, along with Alibaba’s other financial businesses, were folded into Ant Financial Services Group, the company now known as Ant Group.
For years, Mr. Ma largely managed to navigate Mr. Xi’s two seemingly contradictory goals: encouraging financial innovation and open markets to drive growth while keeping a rein on market forces to maintain control.
Ant’s big money-market fund became the world’s largest of its kind, with more than $250 billion under management by 2017. China’s securities regulator became concerned about the systemic risk the fund could create, and pressured it to shrink and lower its returns. Ant changed its strategy, letting rival money managers sell similar funds on Alipay to investors needing places to park their money, and its main fund shrank.
In 2017, China’s leadership revamped the country’s fragmented regulatory regime, which had often involved various regulators acting in isolation. It named Liu He, Mr. Xi’s top economic czar, head of a superregulator of sorts called the Financial Stability and Development Committee. One of its goals was to better coordinate actions by China’s various regulatory agencies.
Ant raised three rounds of private capital. By mid-2018, it was the world’s most valuable startup, worth $150 billion, based on the prices private investors had paid.
This year, deteriorating relations between the U.S. and China gave Mr. Ma an opportunity to win points with the ruling party. With Washington threatening to delist Chinese companies from U.S. stock markets, Beijing was eager to build up its own exchanges. Its securities regulators saw having a company such as Ant listed in both Shanghai and Hong Kong as a big endorsement of China’s markets.
Ant changed its name in the summer, dropping the words “Financial Services.” Shortly after, it announced plans to go public, right around the first anniversary of China’s Nasdaq-style Science & Technology Innovation Board, better known as the STAR Market. After Ant filed listing documents in Hong Kong and Shanghai, the stock exchanges and Chinese securities regulators moved quickly to green-light its IPO.
But trouble was brewing with banking regulators, who were growing concerned about the risk banks were taking on by lending to Ant’s customers online. Since the summer, a spate of government regulations, guidelines and notices were rolled out to contain potential risks from the growth of digital finance and microlending.
The world’s biggest stock sale proved extremely popular with large and small investors. Privately, however, some Ant employees were worried about potential regulatory changes that could hurt the company’s growth prospects, according to people familiar with the matter.
On Oct. 24, Mr. Ma took the stage at a financial forum in Shanghai attended by top regulators, politicians and bankers. He said Ant’s IPO was “a miracle,” being such a large deal taking place away from New York. Attendees included China’s Vice President Wang Qishan, central bank governor Yi Gang and some senior state-bank executives.
During his 21-minute speech, he criticized Beijing’s campaign to control financial risks. “There is no systemic risk in China’s financial system,” he said. “Chinese finance has no system.”
He also took aim at the regulators, saying they “have only focused on risks and overlooked development.” He accused big Chinese banks of harboring a “pawnshop mentality.” That, Mr. Ma said, has “hurt a lot of entrepreneurs.”
His remarks went viral on Chinese social media, where some users applauded Mr. Ma for daring to speak out. In Beijing, though, senior officials were angry, and officials long calling for tighter financial regulation spoke up.
After Mr. Xi decided that Ant’s IPO needed to be halted, financial regulators led by Mr. Liu, the leader’s economic czar, convened on Oct. 31 and mapped out an action plan to take Mr. Ma to task, according to the government officials familiar with the decision-making.
At a meeting of the Financial Stability and Development Committee headed by Mr. Liu, the group decided to “put all kinds of financial activities under regulation and treating the same businesses in the same way,” according to a government statement.
The decision was aimed squarely at Ant, the government officials said, and cleared the way for the pro-stability members of the group to dust off draft regulations they had been working on for a long time.
Among them was one regulating online microlending. With Mr. Xi’s blessing, the central bank and the banking regulator made the draft rule even tougher than previously conceived, according to the Chinese officials familiar with the decision-making. The new rule had a requirement that didn’t exist in previous drafts: Firms such as Ant would need to fund at least 30% of each loan it makes in conjunction with banks.
Ant’s Alipay platform has facilitated loans to numerous individuals in China. Its activities have recently drawn scrutiny from financial regulators, in part because banks fund many of the loans. The draft rules were published on Nov. 2, the same day Mr. Ma and a couple of his executives at Ant were summoned to a rare joint meeting with the central bank and the regulatory agencies overseeing banking, insurance and securities.
The next day, the Shanghai Stock Exchange suspended the Ant IPO, citing the meeting and changes in the regulatory environment. The China Securities Regulatory Commission, which previously signed off on the listings, now says it was a “responsible move” to protect investors and markets, as the regulation, once implemented, would severely limit Ant’s business scope and profitability.
Ant could try again to go public. Market participants believe it will reorganize its business units, rethink its business model and inform investors of additional risks. All this likely will mean that Ant’s lofty valuation will be cut when it tries to list again, and the company may not be able to raise as much money as it aimed for this round, analysts say.
If you are following eCommerce companies (not Retail Commerce such as Home Depot, Walmart, etc.) there are 11 publicly listed companies that I am following. Of those 8 have reported earnings as of Nov 12th. JD.com reports on Nov 16th, SEA limited reports on Nov 17th and Chewy on Dec 14th.
Q3 2020 Earnings estimates and analysis
Companies tracked (ranked by market capitalization)