Undisclosed Position #1: This quarter, our partners will notice a new investment in their portfolios (it’s our first new investment in over a year). We are still building the position, so I’ll refrain from publicly speaking about the opportunity in detail8.
However, I’ll note that this is a recent IPO, and is one of the earliest points in a company’s lifecycle that I’ve ever invested at before. The firm has been operating for over 8 years, still unprofitable, and faces intense competition from well-funded rivals (it’s currently neck-to-neck for the #1 spot).
While all of our research indicates that it has every “right to win”, with a clear path to monetization, it hasn’t proven this out yet. Investors tend to be the “show me” type and are waiting to give it credit. But within five years, I think it will be in a drastically different competitive position and investors will view it with a very different lens. We chose to participate earlier in the company lifecycle, because the risk-reward of the situation was too good to pass up.
In terms of valuation, it’s trading at a very large (even irrationally large, in our view) discount to its most comparable peer – even after accounting for the differences in business model, industry competition, ARPU per user, etc. In terms of relative valuation, this peer trades at 3x the multiple (or a “30-cent dollar”). This is particularly surprising, seeing as our company is growing 20% faster than its peer (we expect 40% CAGRs), in a more nascent market, and only in the beginning innings of monetizing its user base. Given this, we have a pretty clear idea of what “winning” would do for the stock’s valuation.
The [potential amount (i.e. margins)] x [runway (i.e. duration of cash flows)] for profitable growth is magnitudes larger, but the market is missing it since most investors are overly focused on the next few years of short-term competition and losses9. In terms of re-investment returns, I estimate the company is earning as high as 500% returns on its most profitable projects. Additionally, I expect the distribution of returns between low-performing and high-performing investments to narrow over time, as the company collects more data on its users and their habits. This enables them to invest / bid more accurately for projects, which provides greater selection and customer value, and in turn provides more data to hone the project selection process – thus completing a “data-driven” flywheel effect.
Shares dropped as low as -15% from its IPO price, and we were buying on this opportunity. But given its early stage, don’t expect this company to become one of our top positions anytime soon. Instead, I view it like investing in a Series B venture round – it has a real business model, proven financials, users who value the service, and a roadmap to profitability. But it hasn’t necessarily “won” yet10. Similar to venture investing, I plan to size the position small for now, and “double-down” as the company continues to hit our KPIs and prove that the thesis is on track11.
Once I’m comfortable with the position size, I’ll discuss the investment in more depth, in subsequent letters and/or write-ups.
So this stock is either poorly covered or misunderstood. My theory is that it’s the former, and possibly not listed in the US.
I thought Spotify, thinking that he’s comparing Spotify to the divisions of Apple and Alphabet (because he’s giving up a lot of info there for an unsure position, no?). But they were founded in 2006, so i know i’m wrong (i know my biases are getting in the way here).
It’s not JD.com, because he literally discussed that prior and after the above excerpt.
Any thoughts? I’m so curious (not even a desire to make money, just curiosity) I’ve decided to spend this day researching until i have a decent idea of the stock.