I covered Fiverr here in November 2020 as part of our free newsletter. In this report, I made the case that the trends we were seeing from Fiverr were not dependent on Covid, but rather accelerated by the pandemic.
I argued that these trends would be sustained post-pandemic and that the shift to a more remote and flexible workforce was permanent, especially in younger generations. Six months later, lockdowns have eased amidst the vaccination rollout, but we continue to see positive momentum in Fiverr’s platform.
I/O Fund is looking for signs of high-level business performance among indiscriminate selling in growth tech. When the value rotation ends, I believe FVRR is one of the stocks poised to benefit most. Moving forward, FVRR is unlikely to see triple digit revenue growth again. However, consensus projections show 40% revenue CAGR over the next three years, with tremendous growth on the bottom line as the company improves profitability.
Below I examine Q1 results and guidance, evidence of increased usage and engagement of the platform, and valuation.
Q1 Results and 2021 Guidance
Fiverr announced Q1 results on May 6, comfortably beating top and bottom line estimates while also raising guidance. Revenue came in at $68.3M in the quarter, representing an acceleration to 100% YoY growth. Non-GAAP EPS of -$0.01 beat by $0.10, while adjusted EBITDA improved to ($0.7M) compared to ($2.9M) in Q1 ‘20.
Active buyers grew 56% YoY to 3.8M, an acceleration from the 45% growth rate Fiverr announced last quarter. Spend per buyer came in at $216, representing 22% YoY growth. Take rate improved 10 basis points YoY to 27.2%, while the company also announced an impressive 84.1% gross margin.
Fiverr guided for $74M in revenue for Q2 (+57% YoY) and positive EBITDA of $6M. For the FY 2021, Fiverr raised revenue guidance to $305M at the midpoint. The company is now expecting YoY revenue growth of 61% in 2021 versus previous guidance for a 48% YoY growth rate. The FY outlook came in 6% above consensus estimates. Management also guided for positive adjusted EBITDA of $22M at the midpoint, representing 142% full year EBITDA growth.
Continued Momentum
In the company’s Shareholder Letter, Fiverr management talked about its expectation for continued strength and an elevated spend level that will be sustained well into the future. The platform saw its most ever monthly app downloads in March 2021, reaching 215,000 downloads from US app stores (+57% YoY). US monthly active users grew 40% YoY in March 2021, representing Fiverr’s highest ever monthly growth rate.
The Fiverr app is currently ranked 31st in “Business” on Apple’s app store and 22nd on Google Play. When I covered Fiverr on November 20, 2020, the app had a ranking of 39th in “Business” on Apple’s app store and 26th on Google Play. This data indicates that we are seeing continued strength from Fiverr’s platform into mid-May, even as over 32% of the US population is now fully vaccinated and over 45% of the population has received at least one dose.
We continue to see evidence that Fiverr’s platform is performing better than ever as lockdowns ease. Global internet and engagement trends from Alexa show Fiverr’s site currently ranks 139th in traffic and engagement over the past 90 days.
Fiverr’s ranking has improved 79 spots from mid-February, and is currently sitting at peak traffic levels.
Over the last 6 months, total visits to Fiverr have trended upwards and the platform is currently near peak levels with 60.6M average daily visits (+3% from 11/20). Fiverr ranks 530th globally in total visits according to SimilarWeb.
In comparison to my coverage of Fiverr in November 2020, we continue to see evidence of increased usage and engagement. The trends towards adaptation of remote work and shifting businesses online are examples of lasting changes brought about by the Covid-19 pandemic. A key component of the “New Economy” includes more remote and flexible work, where Fiverr continues to show it will be a key beneficiary.
Valuation
FVRR stock has historically commanded a premium valuation as the company has an exceptional revenue growth rate, 84.1% gross margins, and is already profitable on the bottom line. FVRR stock currently trades at 16.0x EV/NTM revenue after reaching a peak valuation of above 40x EV/NTM revenue in early 2021.
The sell off in high multiple stocks has hit FVRR hard and the stock is over 50% off all-time-high prices of $336. 16.0x EV/NTM revenue is the lowest forward valuation FVRR stock has traded at in the last 9 months.
Conclusion
We are unlikely to see a triple digit revenue growth rate again from Fiverr as the company now faces tougher comps. But consensus projections show expectations of 62% YoY growth in 2021 and a 40% revenue CAGR over the next 3 years. Analysts are also expecting tremendous growth on the bottom line as Fiverr ramps up profitability, with consensus projections for EPS of $2.09 in FY 2023 compared to the $0.29 FY 2020 EPS Fiverr just announced.
When the value rotation eventually ends and we see a rotation back to high growth tech stocks, FVRR is one of the stocks poised to benefit the most. We are looking for signs of high-level business performance during the indiscriminate selling in tech, and Fiverr continues to show why its business is performing better than ever.
If you want to see Knox’s recent thoughts on the market, please click here. He wrote out a long explanation on the forum as to what he’s seeing and correlates this to inter-market analysis, including money flow, breadth and sector rotations.
Below, I discuss TWLO, DDOG, MGNI and ROKU. We review what was pertinent from the earnings reports. Our thesis has not changed on these 4 companies.
Also, I have a LTBH webinar planned for next Monday to go over the IDFA changes from Apple with a highlight on Magnite and also Roku. We will briefly touch base on all ad-tech stocks we own and IDFA but this is mainly a CTV ads webinar from the product perspective. I’ll send instructions on the LTBH webinar mid-week.
Last but not least, if you have not transitioned over to the new website io-fund.com, please do so soon. You will need to set a new password. The Beth.Technology password will not work on the new site. You must also use the same email address you signed up with. We are redirecting the URLs on Beth.Technology this week in anticipation of our forum launching next week. Our old site will be archived and new content will not be published starting 5/13. Thank you! J
Twilio:
We recently had our second LTBH webinar on Twilio. I thought it was important to highlight this company for the important pivot taking place. In the webinar, we stressed the first-party customer data platform and why this was an important strategic approach for a company that has PII from phone numbers in its core product and PII from emails from the SendGrid acquisition. The vehicle to maximize Twilio’s position is Segment, and the company is showing us very clearly the future for by separating R&D into three departments and placing the former CEO of Segment in charge of two of those departments.
The earnings call also communicated the importance of Segment with management stating two-thirds of their sales calls centered around this product. There was an analyst on the call who nearly verbatim discussed what we talked about on our webinar. I find management’s response encouraging as to the accuracy of our thesis (and, I guess good to know that Alex Zukin shares in this exact thesis).
Alex ZukinAlex Zukin
That makes perfect sense. And then another again kind of big picture question, if you think about the rise of IDFA, the demise of – potential demise of third party cookies, it's our thesis that we're entering the world where the notion of CDP for first-party data is going to rapidly accelerate in strategic performance.
You guys mentioned – I think George you mentioned that Segment is now in two thirds or was in two thirds of your customer conversations. I guess a couple of angles around this question. Is this something – is this future world something you contemplated when making that acquisition? Are you, you know just now reaping even greater amount of strategic benefit? Just talk to us about how you think about segments in this new world, both integrated with the rest of your solutions as part of the platform, but also on a stand-alone basis with respect to Strategic impact to all these things.
Jeff LawsonJeff Lawson
This is Jeff. I'll answer, unless George, you want to?
George HuGeorge Hu
Go ahead, Jeff. I'll chime in.
Jeff LawsonJeff Lawson
Well, I'll give my point of view and I'll let George give his point of view. You know collaboration is the answer and is harder in this virtual world.
My point of view is yes, you know we did think about the importance of first party data and how every company is having to become great digital marketers and great digital executors, and you can't necessarily rely on some of the, let's say, sloppier ways of acquiring and re-engaging your customers when you've got a lot of third party data floating around that. So we did believe – we do believe that the CDP market in and of itself as a standalone becomes ever more important to companies, not just because of the plurality of systems you have to figure out how to make sense of, but also because outside their walls it's getting more complex to actually target and reach your own customers.So it becomes even more important that once you meet a customer, so there's your marketing and they buy something or whatever it is, you do a really good job of continually engaging them, because going back out to kind of reacquire that customer is getting harder and harder and harder. And so companies have to treat their existing customers incredibly well, and those relationships are getting even more valuable. And then you add in all the value of – and then integrating that and creating that journey that's going to achieve that using Twilio's customer engagement cloud, that is the next level of benefit on top of the core CDP.
Twilio grew revenue 62% year-over-year for $590 million and guided for $596 million next quarter, or 49% year-over-year at the midpoint. This represents a 4% raise above consensus estimates of $579 million, according to FactSet.
Adjusted EPS came in at $0.05, or $0.15 ahead of estimates. Active customer accounts totaled 235,000 at the end of the Q1 compared to 190,000 in 2020, representing 24% growth YoY. Dollar-based net expansion rate came in at 133% for the quarter compared to an organic DBNER of 135% in Q1 of 2020. Gross margins were 55% for the quarter and the company recorded a -2% free cash flow margin.
The blemish on the report was Twilio’s forward EPS as the company guided for adjusted losses of $0.14 per share compared to analyst expectations of adjusted losses of 4 cents per share. We posted on the forum that this does not concern us as the company had planned investments that did not materialize in 2020 due to Covid. These investments are focused on enterprise sales, flex and new growth products, plus core systems and infrastructure. Twilio management expects these investments to generate losses in the short term, but in the long term it will allow the company to grow at elevated levels.
Datadog allows us exposure to the market that AWS, Azure and Google Cloud participates in but with a pureplay. If the tech giants are communicating that cloud infrastructure-as-a-service is one of the most critical markets in the future, then who are we to argue with this by not investing in the leader across cloud monitoring products?
The company capitalizes on the trend that vendor-specific is becoming unpopular due to issues that vendor lock-in creates. On the flip side, the company competes with open-source options, such as OpenTelemetry.
Here is what the company stated as to why customers choose Datadog in light of many competitors: “We lean into open-source format and libraries to instrument obligations for a very long time. And we support a large number of them. The way we see the problem is not like what matters is not with technology we use to get from here to there. What matters is to solve the end-to-end problem for our customers. And to make it as easy as possible for them to just plug us in and everything just work everything to show that we don’t get our mess, a gigantic mess with all these different technologies and applications and clouds, everything else. We turn that into something that the understanding is well ordered, without any effort.”What matters is to solve the end-to-end problem for our customers. And to make it as easy as possible for them to just plug us in and everything just work everything to show that we don’t get our mess, a gigantic mess with all these different technologies and applications and clouds, everything else. We turn that into something that the understanding is well ordered, without any effort.”
Datadog deserves an updated LTBH report as the product has evolved since we last covered the company with the acquisition of Sqreen. Keep an eye out for this after we get through cloud earnings.
I had said on a Motley Fool podcast in February that we faced a unique environment for cloud stocks this year with a tight pack of cloud stocks guiding between 20-30% and then another tight pack guiding between 30-40% on forward growth. Only Snowflake and Kingsoft Cloud were guiding higher than 50%. We provided a chart here. This is unusual as cloud guidance usually tells us our leaders in advance. Tougher comps from last year require cloud companies to show endurance and prove that any growth last year was not a pull forward from the one-time event of Covid.
You can view my explanation of cloud valuations going into 2021 here at minute 2:15 – YouTube linkYouTube link
What we want to see are cloud companies breaking through the ceiling of 40% growth. That is exactly what Datadog did this quarter and also provided >40% guidance for next quarter and full-year guidance, as well.
Notably, the tone on the earnings call was that their guidance is conservative in light of many unknowns. I can’t guarantee this but I’m hoping to see Datadog come in above guidance in the future, per comments like this: “Now, some notes on our guidance, while usage growth was strong in Q1, when providing guidance as usual, we use more conservative assumptions.”, we use more conservative assumptions.”
The company grew revenue 51% YoY to $198.5M, representing a 6% beat above consensus estimates. Management attributed the revenue beat in Q1 to stronger than expected usage growth from existing customers. On the bottom line, EPS came in at $0.06, topping consensus estimates by $0.03. The company logged a record EBITDA total of $24M in the quarter and free cash flow of $44M (22% FCF Margin).
Customers with $100K+ ARR totaled 1,437 at the end of Q1, representing growth of 50% YoY. These customers generate over 75% of Datadog’s ARR.
Additionally, Datadog announced that 75% of its customers are using two or more products at the end of Q1. This is up from 63% in Q1 of 2020.
For Q2, Datadog guided for $212M of revenue, or 51% year-over-year at the midpoint, beating the consensus estimate by 8%. The company is expecting $0.03 of EPS and $10M of operating income in Q2.
For the FY21, DDOG raised revenue guidance to $885M, or 47% year-over-year at the midpoint, and 6% above consensus estimates. The company is expecting EPS of $0.15 and operating income of $50M for the full year.
We laid out our thoughts here on Magnite and our conviction and thesis remains the same. We go over why Magnite’s Q1 report came in weaker than expected and why we aren’t concerned as management has provided enough statements Q2’s guidance being stronger than expected. We take short-term misses as long as guidance remains strong and the story is intact.
Per my post on the forum, I do believe some of the weakness we saw in ad-tech today is due to IDFA changes from the April 30th iOS update. There was a report from Flurry, as reported by Mashable, over the weekend that stated “only 4 percent of iOS users in the United States let apps track them.” Here’s the full post from Flurry. I believe this partly caused the weakness today in TTD, MGNI, Unity plus other ad-tech companies as there is a lot of confusion in regards to IDFA.
On one hand, we have companies like Unity saying it’ll impact low single digits for their revenue, and on the other hand we see sensational comments from mobile analysts that this is an Apocalypse and “Book of Revelation” stuff
I’ve been covering the IDFA specifically since October of 2019 after attending Advertising Week and I followed up again in 2020 with free version here. I also covered Facebook’s tracking behaviors in-depth for public investors around Q1 2018, when I criticized the company for not talking about Audience Network in their earnings calls (the IDFA threatens Facebook’s Audience Network the most).
With that said, I don’t think information is easily accessible to public investors on this topic, and meanwhile, iOS 14.5 rolled out at the end of April. Therefore, seeing the reaction to Magnite and The Trade Desk today, Citi’s downgrade, and Flurry’s report, I think it makes sense to have our next LTBH webinar on the IDFA this Monday with a primary focus on Magnite and Roku but we will touch on other ad-tech stocks we own too (Unity, Snap, Pinterest, etcetera).
The summary of my thoughts can be found in the links above if you want the information before Monday. Similar to the tide of all boats, I believe we will see the supply side come out better than the demand side – but that’s my personal opinion and the way that we’ve structured I/O Fund with our positions. I’ll present the information from a product perspective and you can make your own conclusions when we review this on Monday.
Although I don’t think it will be Apocalypse, I do believe it will affect the ad industry enough that we should do the next LTBH webinar on this topic. We will dive deeper into Magnite and Roku, as well.
Magnite’s Earnings:
I had said that Magnite is not the “shiniest company to analyze if you’re a financial analyst” and this earnings report validated that statement. There have been two acquisitions and a major rebranding, so what we really have is really three companies reporting earnings: Telaria, Rubicon and SpotX.
Magnite reported revenue growth of 67%, up 18% on a pro-forma basis. CTV revenue was up 32% on a pro-forma basis or $12 million. Compare this to last quarter’s report which was 69% revenue growth, up 20% on a pro-forma basis, with CTV revenue up 53% on a pro-forma basis, or $15.4 million. Therefore, Q1 was meaningfully weaker than Q4 on CTV (more on this below).
The company was profitable on an adjusted basis at $0.03 EPS compared to a loss of $0.06 EPS in the year-ago quarter.
SpotX results showed considerable strength on CTV with overall revenue excluding traffic acquisition costs of $31.2 million. CTV revenue was at $19.7 million, up 70% year-over-year.
Management is guiding for revenue of $94 million with CTV revenue of $32 million, at the midpoint. This represents 90% growth if the company had closed the acquisition on SpotX on April 1st rather than April 30th. The company raised its long-term revenue targets from 20% to 25% and had raised long-term adjusted EBITDA targets to 30% to 35% in the last quarter.
This comment here provides color for the weaker-than-expected CTV revenue:
Yes, so I think, March was a bit of a disappointment for us at Magnite. I think if you look at the combined company going forward, you're just going to have a greater line of CTV products that each kind of address a different sliver of the marketplace. We talked a bit about the SpotX managed service business, which was able to extract linear dollars into CTV capability that we did not build out at Magnite, but saw as something incredibly attractive in its products, along with a few other products. But as we said, severe acceleration in Q2 for Magnite's business, and if you look at the two combined, you're 90% plus growth range for Q2. So, so all is well there.which was able to extract linear dollars into CTV capability that we did not build out at Magnite, but saw as something incredibly attractive in its products, along with a few other products. But as we said, severe acceleration in Q2 for Magnite's business, and if you look at the two combined, you're 90% plus growth range for Q2. So, so all is well there.
Another analyst also asked about March, which management provided this answer:
Suffice to say, Magnite is growing in terms of — its back to where we always thought it would be and then some. So, I think that this isn't a case of — in q2, particularly SpotX coming in and saving the show, if you will, I think both are growing exceptionally well. And any kind of slowdown that we witness in Magnite in March has been more than made up for, but David, do you have any more color to bring to that?its back to where we always thought it would be and then some. So, I think that this isn't a case of — in q2, particularly SpotX coming in and saving the show, if you will, I think both are growing exceptionally well. And any kind of slowdown that we witness in Magnite in March has been more than made up for, but David, do you have any more color to bring to that?
And there was yet another question about the weaker guidance in March. Management stressed how early in the cycle the Connected TV market is and how some inventory is still being sold direct versus programmatic.
So, I think that there's in any kind of nascent marketplace and CTV is certainly nascent … I would say that Q2 is behaving what in excess of what we would have thought going into it, and that Q1 was strong going in, and then had a weaker March. And, again, probably a handful of reasons there, but nothing systemic or anything that takes the bloom off the rose in terms of our position in CTV or the attractiveness of that marketplace.
As I said, we are comfortable with short-term misses as long as the story is intact and guidance remains strong. There was also more to the earnings call in terms of IDFA, which we will unpack during the upcoming webinar on Monday.
I’ve written a library of research about this company from very early-on. If you want more information as to how we arrived here, I encourage you to read my analysis as it dates back to a time when the market doubted Roku and we withstood two 60% drawdowns.
On that note, Roku is the perfect example of how long it takes for a trend to play out. While many investors are conditioned for instant gratification following last year, we know that tech trends are a 3-5 year exit or longer. In the meantime, our job is to make sure a company is consistently reporting along the thesis we’ve laid out.
Here’s what I want to emphasize: the 3-5 year investment period for Roku begins this year. If someone were to learn about Roku for the first time today, I’d say they’re right on time. In fact, there is less risk now as Roku is a mature and consistent performer. As an analyst, I’m on cruise control with this stock as it’s been performing as we laid out nearly three years ago.
Rarely, do we get a full-stack opportunity that is centered in the middle of a future trend. It’s my belief that Apple’s IDFA deprecation will positively impact Roku – and I hope a few others we have picked out too.
That’s what my library of research answered through the past few years. We will touch on this in the upcoming webinar, as well. The simple answer is Roku delivers the targeting capabilities of mobile with the completion rates of Pay TV. This was outlined in May of 2018.
“For example, according to Nielsen in March, ratings, linear TV ratings for adults 18 to 24 was down 22%. Q1 TV ad spending was down 11% and according to Media Radar. Meanwhile, we doubled, monetized video ad impressions on the platform, ad spending by major agency holding companies with Roku more than doubled. We saw strength really up and down the ad business.”linear TV ratings for adults 18 to 24 was down 22%. Q1 TV ad spending was down 11% and according to Media Radar. Meanwhile, we doubled, monetized video ad impressions on the platform, ad spending by major agency holding companies with Roku more than doubled. We saw strength really up and down the ad business.”
Since my coverage began, Roku has become an even bigger force in the Connected TV ad space. OneView is Roku’s move into the demand side while The Roku Channel provides original content to optimize ad formats.
This sums up some of Roku’s strength competitively speaking:
I will say that the use of OneView to buy media on Roku, whether that's media we're selling, for example, a video ad that runs in The Roku Channel or an ad bought from a publisher on Roku through one year. That segment is growing even faster because, of course, we have data and identity and optimization capabilities to help them do that better than were they to buy through a third-party DSP.we have data and identity and optimization capabilities to help them do that better than were they to buy through a third-party DSP.
And also here …
“The second part of your question was about volume and CPMs. Our product remains a premium product. If anything, we've added, better data, better targeting, better measurement, newer ad products over time. And I think that, that bodes well for continuing to be able to command premium CPMs, but I will also call out to the earlier question from Ralph that streaming is increasingly also a performance media.”we've added, better data, better targeting, better measurement, newer ad products over time. And I think that, that bodes well for continuing to be able to command premium CPMs, but I will also call out to the earlier question from Ralph that streaming is increasingly also a performance media.”
Roku also recently acquired Nielsen’s advanced video advertising business and is expected to close in Q2 2021. The automatic content recognition and dynamic ad insertion will help Roku show different ads to different households based on Nielsen data.
We’ve written quite a bit on Roku and I hesitate to spend more time on the company when we have other stocks we are forming a thesis on and/or need a reiteration of our conviction. However, that should not be confused for lack of conviction by any means as Roku has received my highest conviction for some time and continues to.
Here’s a clip we created of me explaining Roku in October of last year – view on YouTube here.
Roku delivered excellent Q1 results on May 6th led by strong growth in advertising and the expansion of content distribution partnerships. Total revenue grew 79% YoY to $574.2M, representing a 17% beat above consensus estimates.
The growth was led by platform revenue, which increased 101% YoY to $466.5M. Gross profit rose 132% YoY to $326.8M while operating income came in at $75.8M after negative operating income $55.2M in the year-ago quarter.
Roku also announced positive EBITDA of $125.9M in Q1 from a loss of $16.3M in the year-ago quarter. Roku added 2.4M active accounts in Q1 to reach 53.6M in total, representing 35% growth YoY.
Streaming Hours increased 49% YoY to 18.3 billion, while average revenue per user (ARPU) grew 32% YoY to $32.14.
For Q2, Roku management is guiding for $615M of revenue at the midpoint (73% YoY growth), representing a 13% raise above consensus estimates. The company is also guiding for total gross profit to rise 104% YoY to $300M and EBITDA of $65M after recording negative EBITDA of $3M in Q2 ’20.
We made a point to cover Shopify last December to emphasize that we did not believe the company was covid-dependent. We spelled out exactly why we were writing a second LTBH PDF on the company during a time of doubt for “covid stocks” (and during the exuberance for small caps).
Most importantly, the trends we outlined in December were recently confirmed in the most recent earnings report. This is what we want to see – analysis that gets in front of results so that we can confirm our ongoing conviction and increase our position (transparently with real-time trades).
The reason we want to increase our position in Shopify throughout the year is fairly straight forward – Shopify is now reaching billions of consumers through social media. The distribution potential of these partnerships reminds me of an avalanche trigger as Shopify will reach billions with Facebook and Tik Tok and hundreds of millions with Pinterest. Now, they only need to build out the Fulfillment Center and focus on improving their own app; although borrowing these mega size audiences is probably the fastest path to growth for our purposes.
I don’t believe Facebook will let Shopify dominate its platform, so keep an eye out for attempts to strengthen Facebook Marketplace. I’m not too worried because Shopify has merchant relationships and it’ll be hard for Facebook to replicate their business model although they may certainly try.
Here are some highlights regarding Social Commerce from the call:
· “The number of shops actively selling on Facebook Shops has more than quadrupled since Q1 a year ago, as well as the GMV through Facebook. While still small, the launch of Facebook Shops in May of last year is clearly starting to make a difference here.”
· “In Q1, we expanded our marketing partnership with TikTok internationally to an additional 14 countries in North America, EMEA and APAC. So far, we've seen good traction in the adoption of TikTok in the U.S. since we launched the integration last October. And we've recently expanded our Pinterest channel into 27 additional markets, opening discoverability and sales opportunities worldwide.”
There are many exciting things going on at Shopify, which we’ve covered at length in the past, including the Fulfillment Center and Shop Pay. Most importantly, we covered exactly why Shopify had taken market share from Amazon and eBay shortly after we launched our premium site. Access October 2019 analysis here.
We also covered Shopify’s positioning in terms of taking over eBay here when we re-iterated our LTBH conviction back in December of 2020. We had been discussing why this was important leading up to the report, and why moving from third position to second position was key for investors during a time of doubt for Shopify.
We also discussed in the LTBH PDF in December of 2020 that “e-Commerce is eating retail” and the various demographics that a company like Shopify can target when partnering with social media apps. The younger demographics is key for social commerce.
To summarize, there are a few reasons that Shopify is set to continue its winning streak and why we plan to increase our position:
1. New distribution channels will reach billions of customers via social media
2. Product-market fit to be achieved in 2021-2023 (we covered this in 2019)
3. Social media spending on ads will increase 18% this year as covered in our free newsletter
4. Second place and has overtaken eBay (we covered this in December)
5. Behavioral ad targeting coming under pressure with Apple’s IDFA – look for an increase in social commerce to offset the shift towards potentially lower CPMs.
We were the first to talk about Snap as an AR/VR stock. The story is moving faster than we previously predicted and we hope you remember the site that brought you this trend first. J
One day, every person on Twitter will say “Snap was clearly a AR/VR story from the beginning” but nobody is talking about this right now. In fact, it’s buried under Facebook’s beat, Pinterest’s DAU concerns and Twitter’s nose dive.
Our job is to talk to you about future trends, and to also silence the noise during periods of extreme sentiment or even around earnings (lots and lots of noise around earnings). We wouldn’t want to add to that noise and assume you read the highlights of any companies you own from the dozen or so sources who cover them.
What’s not being spoken about is that Snap owns the perfect audience for AR/VR. Facebook is in a dilemma here as their subscribership skews older and are less likely to adopt a visually stimulating technology. We will see as time goes on but our money is on Snap. What is the 18-35 year old demographic and also the under 18 demographic really worth? We have yet to find out. Where most tech companies must aggressively take market share or compete at a high level, Snap has to simply keep doing what it’s doing.
Here is the more important take-aways and why are looking to increase our position:
· The company is positive free cash flow for the first time and has strong forward EPS growth this year and next year
· Off-platform AR opportunities such as Camera Kit plus partnerships with companies like Samsung and expanding Android base to reach audiences outside the United States
· Ability to surface premium content through Spotlight and Snap originals and augment these with AR; i.e., Snap is moving beyond social media into original content
· Increased monetization opportunities with AR merging with e-commerce. An example of a successful campaign can drive 30%-40% lift in incremental sales
· Although DAU growth is slow in the United States, it’s strong internationally at 57% this past quarter for Rest of World. Forward growth of 22% on DAU next quarter is impressive considering tough covid comps
· United States ARPU is on a tear at 66% growth leading to 75% revenue growth in this region. Rest of World ARPU is also healthy at 46% growth YoY. Strong guidance on revenue of 85%
Probably the most important statistic from the ER is of the countries that comprise over half of the world’s digital ad spend, Snapchat reaches 70% of 13 to 34-year olds. We want to be AR/VR investors and this is the correct demographic for this trend. Plus, this is important for targeting purposes assuming we do see the IDFA changes from Apple.
Telehealth: We remain in Teladoc …but also still like Amwell
If you want to know what it feels like to invest in the early stages of a trend, telehealth is the perfect example. Remember when I said Nvidia would be an AI leader and dominate the data center, and then there was negative growth in this segment for the first two quarters after my analysis? Seems preposterous that the data center was a low-yielding segment for Nvidia and had negative growth YoY with barely a blip being reported from AI only two years ago.
However, Nvidia/data centers is not an apples-to-apples example for Teladoc because this company faces a much bigger challenge … and nobody knows how it’ll turn out.
I’m not talking about the need for the health insurance companies to reimburse telemedicine permanently (rather than a temporary covid provision). I’d consider this a hurdle and one that I think telemedicine will clear over time.
The big challenge I am talking about is the incredible amount of competition that Teladoc faces. There are many startups receiving funding in the private markets. Zocdoc, a professional booking platform for doctors, launched video consultations last May with the help of Twilio. The company raised $150 million in its last round. Kry is a company popular in Europe that has helped over 3 million patients see a doctor, nurse or psychologist. The company recently closed a $312 million Series D round after its telehealth tools grew 100% year-over-year. Epic Systems, a medical records software company that is used by 54% of patients in the United States, also tapped Twilio for telehealth video conferencing at the start of covid.
Last year, health-tech funding broke records in 2020 with $15.3 billion in funding in the private markets, up from $10.6 billion in 2019. For the first time, healthcare surpassed biopharma with 614 total deals.
Health insurance companies are also in the space, such as United Health Care, with a motivating drive to offset reimbursement costs. This many players commoditizes telemedicine and puts pressure on pricing. This isn’t reflected in the current earnings right now, and in fact, Teladoc is able to increase revenue per user. However, the market is growing nervous because key metrics are flat and there is uncertainty as to how telemedicine will perform in a post-covid world.
Telehealth Trend Overview:
Prior to 2020, telehealth was projected to grow at a CAGR of 25.2% with the global market growing from $61.4 billion in 2019 to reach $559 billion by 2027. The global market is especially important to ensure healthcare is available in remote areas of underdeveloped countries. Internet access remains a barrier for telehealth in remote regions, such as rural India for instance, which has a 20.2% high-speed internet penetration.
In the United States, telehealth was a $26 billion market in 2019.
According to the Centers for Medicare and Medicaid Services, the U.S. spent 17.7% of GDP, or 3.6 trillion on health care in 2018, partly due to an increase in mental and chronic health conditions. The study also highlights that patient monitoring is popular with the elderly with 1 million remote cardiac monitors being used in America.
There is no denying that telehealth had a breakthrough year in 2020. Despite the many breakthroughs ushered in by covid, such as remote work (Zoom, Teams), gym workouts at home (Peloton) and online shopping (Etsy, Overstock), telehealth showed the most rapid growth by far of nearly 4,000% growth across key metrics. Therefore, it’s understandable that the market is attempting to weigh what the growth in telehealth will look like after the one-time event of 2020.
In addition to the market and management attempting to predict what a normal rate of growth will be, the telehealth trend is dependent on federal and state legislation dictating how private payers reimburse telehealth. Full reimbursement is called “payment parity.”
There are 43 states that have some state telehealth statute for commercial payers, yet only 22 states maintain laws that address telehealth reimbursement with a mere 14 states that offer payment parity for telehealth. This is up from 16 and 10 states in 2019.
In the meantime, temporary waivers were offered during covid. We’ve covered in the past how the federal government has passed telehealth bills for Medicare under the CARES Act and other covid legislation. As of now, many of the temporary waivers and emergency legislation is set to expire 90 days after covid’s emergency status is removed.
According to Blue Cross Blue Shield of Massachusetts, the insurance company will continue to support and cover telehealth. However, states like New Hampshire are discussing a bill that would eliminate payment parity as the bill asserts that in-patient care should be paid at a higher rate than telehealth. Opponents point towards mental health and substance abuse as primary reasons the bill should be struck down.
Teladoc ER Overview – Big Revenue Growth but Flat Key Metrics
Teladoc beat on revenue of $453 million, representing 151% growth. The company raised guidance for the year to $2 billion at the mid-point for FY2021 for an increase of $20 million. Revenue in the United States was up 175% and international up 29%.
Despite a strong report on revenue, Teladoc reported a net loss of $1.31 per share – missing expectations by $0.71 for a net loss of about $200 million. This partly contributed to the stock selling off nearly 12% since the report. According to management, “the larger net loss was primarily attributable to increase stock-based compensation, amortization of acquired intangibles, and income tax adjustments primarily related to the merger at Livongo.”
Gross margins increased to 67% up from 59.2% in the year-ago quarter. The adjusted gross margin was 67.8% compared to 60% in the year-ago quarter.
Total visits were up 56% to 3.2 million with the number of consumers enrolled in more than one chronic care program “tripling year-over-year.” The United States made up the bulk of this growth at 69% with international growth at 8%.
Forward revenue guidance is quite strong for Teladoc in the next quarter with $500 million at the mid-point on revenue and positive adjusted EBITDA of $61 million to $64 million up from $56 million adjusted EBITDA in the current quarter.
The management points towards increased revenue per customer as to one reason they are able to sustain this level of revenue growth. Average per member per month (PMPM) was $2.24 in the first quarter, up from $1.76 in the prior quarter. According to management, of the $0.48, half was driven by an extra month of Livongo revenue in the first quarter.
The key metric that showed lower growth (and was most alarming) was 20% growth in paid memberships from 43 million to 51.5 million and 15% growth in U.S. Visit Fee Only access from 19.2 million to 22 million. Forward guidance on this important key metric is expected to be in the range of 52 million to 53 million – in other words, flat sequentially.
For full year, the guidance isn’t much better for this metric with paid membership in the 52 million to 54 million range. Visit fee access is also flat per guidance at 22 to 23 million for FY 2021.
Pictured above: Teladoc US Paid Members are to remain flat year-over-year (YoY)
Total visits are re-accelerating, however, from a plateau in Q2-Q3 2020 where the company stagnated at 2.3 million and 2.4 million, or growth of about 100K visits. Teladoc grew to 200K visits in the last two quarters and is guiding for growth of 400K to 600K visits between Q1 and Q2 2021.
The utilization rate is also climbing, which is important to note. Telemedicine utilization is equal to the number of consults divided by the number of covered employees. Industry averages were between 1-10% prior to covid, yet we see strength in this number sequentially even after many doctor offices have opened up. Besides showing the penetration of telemedicine, the number is important because it affects the cost savings to employers.
Data points from Livongo are also growing nicely and actually accelerated in the most recent quarter compared to when Livongo was a standalone company in Q1-Q2 2020.
Teladoc has strategically added debt over the past several years as the company focuses on growth at all costs. TDOC ended Q1 with $1.35B in long term debt and $723 million in cash.
While debt has increased notably over the past year, Teladoc’s balance sheet still appears to be in very good health. Teladoc’s Debt to Equity Ratio currently stands at 0.086, which is near its 5 year low. A low debt to equity ratio indicates lower risk, because debt holders have less claims on the company's assets.
A Debt to Equity Ratio under 1.0 is ideal because it indicates that for every $1 of equity, the company has less than $1 of debt. In the case of TDOC, we are seeing a strong Debt to Equity ratio of 0.086 that has improved over time, even as the company has taken on more long-term debt.
Teladoc also has a strong Debt to Assets ratio, which is a ratio used to determine how much debt a company has on its balance sheet relative to total assets.
A Debt to Assets ratio under 100% is ideal because it indicates that the company owns more assets than debt. The lower the Debt to Assets Ratio, the less risk the company is carrying on its balance sheet.
Teladoc’s Debt to Assets Ratio is currently standing at a healthy 7.7% and near a 5-year low. Teladoc’s Debt to Assets Ratio means the company is backed by 7.7% of debt, which is a significant improvement from 2020.
While Teladoc’s debt has increased over time, it is much more a factor of a company that is in hypergrowth mode than a company that is struggling financially. This becomes evident when we compare Teladoc’s long-term debt to its equity and assets. Management appears content to strategically use debt in order to fuel growth. This is not uncommon for a company in hypergrowth mode and it is evident in analyzing Teladoc’s balance sheet that the company’s debt is at sensible levels and not a major risk to the business.
Valuation
Teladoc is now valued at 13.58x forward revenue after peaking above 25x at the end of 2020.
In comparison to some others in the space, TDOC looks attractively valued with forward growth expected to eclipse 80% in 2021. The other three stocks we listed for comparison (VEEV, GDRX, AMWL) are not projected to eclipse 40% YoY revenue growth in 2021.
In Q1, legacy Teladoc grew roughly 69% YoY and 9% QoQ. Below is a breakdown of Teladoc’s revenue mix in Q1 from Credit Suisse:
Credit Suisse notes that it is not an apples-to-apples comparison as if Livongo were still a standalone company due to the realization of deferred revenue following the acquisition of Livongo. We are still seeing strong growth from Livongo and legacy Teladoc with 9% and 10% QoQ growth rates, respectively.
It should also be noted that InTouch is now part of TDOC’s single Hospital & Health System business. In Q1, TDOC’s Hospital & Health System business grew YoY as well as QoQ.
There is some investor concern about TDOC missing on EPS two quarters in row, with both misses being caused by expenses related to M&A.
While some Teladoc’s M&A has been more expensive than originally thought in the short-term, this does not affect the long-term thesis. Teladoc is built to be able to incur short term losses and focus primarily on top line revenue growth.
Amwell:
We closed our Amwell position after the company provided low revenue guidance for FY2021 and analyst estimates also showed low revenue guidance for 2022. We simply can’t force timing on a trend even though we continue to keep Amwell on our radar. Notably, Knox trimmed Teladoc in the high-$200s as his technical were also telling us we were too early to the trend.
After Teladoc’s earnings report, there were a few press releases that telehealth has become commoditized. If we were talking strictly about the ability to have a video call with a doctor, then this would be true. But obviously, the goal is how to provide multiple data touchpoints for virtual care. Teladoc has moved into remote monitoring while Amwell is gearing up for AI assistants/carts.
What is intriguing about Amwell is the Google backing, which we covered in the Amwell PDF last year. Google has $100 million of stock in the company with plans to merge AI with health care, including digital waiting rooms, language translations, offloading tasks from the provider to conversational AI and to help manage chronic conditions. Anthem is a large client of Amwell’s and accounts for about 25% of revenue.
The company’s customers often deploy telemedicine through a variety of proprietary Carepoints, which are medical carts and kiosks designed for various clinical and community settings. The company also offers software development kits (SDKs) and APIs to integrate telehealth digitally and to embed into workflows. This includes web and mobile apps, 24-hour nurse and customer support, and electronic health record (EHR) software.
On the same day as Teladoc’s earnings report, Amwell released an announcement on their new telehealth platform that will allow developers to host and deploy telehealth applications. The platform offers a single code base to build a unified care experience to develop apps that utilize Google Cloud’s AI and NLP technologies, TytoCare’s handheld exam kit, connections to clinic physicians (looks like the beta version will be in Cleveland), and Biobeat’s patient monitoring devices. I assume the list of integrations will grow over time.
The new platform may not change Amwell’s revenue trajectory in the short-term but it’s certainly something we are keeping our eye on.
To be frank, we don’t with who the winner is between TDOC and AMWL as long as we get to participate. Therefore, the I/O Fund is remaining flexible between these two and will be looking for signs of strength to determine what position(s) we hold and our allocation as time goes on. Notably, there is a lot of deal flow in the private markets because this a big market to crack for the company who does it.
Mohawk Group is a technology enabled consumer products goods (CPG) company. I first covered MWK in detail here. MWK is a high beta small cap stock with a current market cap of $720M. The stock is down roughly 50% from all-time-highs as many small cap growth stocks have recently undergone a significant correction. Below, I explain why there is a favorable risk/reward proposition in MWK at this valuation.
The rise of e-commerce has made it easy to sell products directly to consumers online. This has created an enormous amount of competition among third-party sellers and a space that is ripe for consolidation. Many successful third-party sellers selling DTC (direct-to-consumer) on different marketplaces such as Amazon, Walmart, etc. lack the technology and resources to scale their businesses beyond a certain point.
Mohawk has built an efficient consumer product platform for CPG brands with its proprietary software platform AIMEE. AIMEE is the data driven AI engine that effectively supports various tasks such as market research, forecasting, pricing, inventory management, marketing & advertising campaigns, supply chain logistics, fulfillment, and more. It is impossible for many of the third-party sellers that Mohawk’s brands compete with to replicate what AIMEE is able to do.
Mohawk currently has over 1,000 SKUs across 12 brands that sell DTC primarily on Amazon, Walmart, and Shopify. The growth that Mohawk has been able to achieve speaks to the success of the AIMEE platform, as the company has nearly tripled its number of products with over $500K in sales over the last 2 years.
Source: Mohawk Investor Presentation
Mohawk leverages AIMEE to launch new products organically and acquire existing products at accretive multiples of generally 3x-4x TTM EBITDA. As previously mentioned, there are a large amount of small third-party sellers on marketplaces like Amazon and Walmart that have built successful businesses but lack technology and scalability to compete long-term. Many of these small businesses are looking for a successful exit strategy but are not big enough to be acquired by large CPG companies. Mohawk uses AIMEE to decipher which products would make successful acquisition targets and is able to integrate and onboard these new products to AIMEE in as little as 48 hours post-acquisition.
Marketplacepulse projects GMV in the 3PS (third-party seller) space to grow at a CAGR of 16.3% from 2019-2025. Mohawks plans to continue to use its accretive M&A strategy to opportunistically add new products and categories through acquisitions. There is potential for equity dilution as a means to finance future M&A deals, but it is important to understand that any equity dilution will be accretive. Shareholders should not be concerned about equity dilution at very accretive multiples because these acquisitions will unlock shareholder value.
Many of Mohawk’s acquisitions are financed through equity and/or debt. The company recently announced that it is refinancing all its outstanding debt with a $110M senior secured note at an 8% annual interest rate with warrants convertible to equity. This refinancing deal represents an improvement in funding with a reduced annual interest rate.
Financials
For the FY 2021, Mohawk is guiding for $365M in revenue at the midpoint of its projection, representing 96% YoY revenue growth. This growth rate represents an acceleration from the 62% YoY revenue growth Mohawk recorded in 2020.
In 2020, Mohawk recorded its first full year of positive EBITDA with $2.5M. The company is guiding for $32M of positive EBITDA at the midpoint of its 2021 projection, or nearly 13x YoY growth.
Management is targeting an 8%-10% EBITDA margin for the full year, a significant improvement from the 1.3% EBITDA margin the company recorded in 2020. Long term, the company is targeting a 13%-15% adjusted EBITDA margin.
Analysts are projecting Mohawk to reach bottom line profitability for the first time in 2021 with a $0.08 FY EPS estimate, up from -$0.18 in 2020. The company has seen a significant improvement in its margins over the last year and management expects continued margin improvement in 2021.
Going into 2021, Mohawk is showing strength and positive momentum in the fundamentals. Revenue growth is expected to accelerate 34 percentage points to 96% YoY while the company is guiding for 13x EBITDA growth YoY.
Analysts are projecting Mohawk to reach EPS profitability for the first time in 2021 with improving gross margins, operating margins, and free cash flow.
Analysts are currently projecting MWK to grow revenue 26% YoY in 2022. After its Q4 earnings report, MWK raised 2021 revenue guidance 12% above consensus. The company has not guided for 2022 yet, but we believe the current consensus estimate from analysts is very conservative. We believe there is great potential for MWK to guide significantly above the consensus 2022 estimate as we get into the second half of 2021.
Valuation
The positive momentum in Mohawk’s fundamentals has not translated to a higher valuation recently, as MWK stock is currently trading at just 2.2x 2021 revenue.
MWK stock has seen a significant contraction in its forward multiple over the last couple months, as it is currently 45% off its peak valuation. When accounting for forward growth and improving profitability, we view MWK’s 2.2x forward multiple as an attractive valuation.
Risks
MWK has proven to be a volatile stock since we first entered, and we expect continued volatility in the future as it is a high beta small cap stock. One of the main risks for Mohawk is that the company is reliant on Amazon’s marketplace and also competes with Amazon Basics. While Mohawk uses various channels for their brands to sell products, Amazon marketplace is the most important channel. While this is a risk, most third-party sellers are reliant on Amazon to some degree and we believe it would take anti-competitive and monopolistic strategies from Amazon to dominate its own 3PS marketplace that has over 1.9M active sellers.
Mohawk’s business model also carries a degree of execution risk. The company is currently dependent on certain key products and is reliant on the continued success of these key products in the future. However, as the company continues to diversify its product portfolio, they will be less reliant on any one product or brand and this risk will be mitigated.
There is also execution risk in Mohawk’s M&A strategy as future growth is reliant on the continuation of successful acquisitions. Mohawk cited an 80% success rate on its acquisitions, meaning there is a risk that this success rate will drop on future acquisitions.
Conclusion
At a 2.2x forward multiple, we believe these risks are more than priced in to MWK’s current stock price. Mohawk has an efficient proprietary software engine in AIMEE that has demonstrated proven success in the 3PS CPG space. 2021 is shaping up to be a breakthrough year for Mohawk as they accelerate top line growth to 96% YoY and reach bottom line profitability for the first time. We believe MWK can achieve high growth for years to come in addition to profitability, and the risk/reward looks favorable at this valuation.
As I write this, we haven’t gotten Snap’s earnings which will be followed by other ad-tech companies reporting next week. This will be our first glimpse into the rebound from the economy opening back up. My hunch is that both of these names (MGNI and FUBO) will see a boost from increased ad spend (as well as a few others we hold in the portfolio). There was an excellent post on the forum about the boom in advertising.
Magnite
When we look at the messy ad ecosystem, it's rare to find a management with this level of focus in capturing a specific market. The market that Magnite is focused on is the Connected TV programmatic and omnichannel supply-side market. That's a mouthful, and at first glance, it may sound like every other ad platform out there, but that’s why we look deeply at product to give our readers and the I/O Fund a competitive advantage. Nuances matter.
Magnite is not the shiniest company to analyze if you’re a financial analyst. The former company, Rubicon, struggled after the walled gardens of Facebook and Google were built, which led to total domination of digital advertising.
Prior to this, Rubicon was a well-known name in online programmatic. Still, it's understandable if more traditionally trained financial analysts saw the negative revenue growth between 2016-2017 and wonder how this management can stage a comeback.
Magnite’s CEO was the former CEO of Millennial Media, a company that took an incredibly hard hit when the walled gardens (Facebook, Google) leveraged their first-party data to compete with traditional ad-tech companies.
There are critics of the CEO’s background but we are neutral and don’t extract anything meaningful here as the fate of Millennial Media was out of the CEO’s control. Google and Facebook wiped out many ad-tech companies around 2014.
In early 2020, Rubicon acquired Telaria, and then the combined company, Magnite, faced a tough two-quarters due covid's shelter-in-place. We saw juggernauts like Google report negative revenue growth, which reflects the challenges all ad-tech faced. To complicate matters, Magnite is acquiring SpotX, which requires extra work for a financial analyst to piece together, and there is uncertainty with Apple’s IDFA changes.
My point here is that Magnite requires in-depth product analysis – and we can’t solely rely on the financials. I will touch on financials and future growth, but the main key points are hidden in the product and the unique advertising environment that is Connected TV. The stock has seen extreme volatility, as has Fubo, yet it's important to revisit why we have conviction so that market sentiment doesn’t push us to fold our hand.
What “Independent SSP” Really Means
My webinar on Twilio spelled out why PII and an omnichannel marketing platform could take some budget from data management platforms, which primarily deal with second-party and third-party data. In the presentation, I had discussed how Facebook and Google have the strongest positioning for DMPs because they also mix their own first-party data (anonymously).
First-party data is always owned by the publisher. Facebook and Google are publishers, which is why they have first-party data to mix at the DMP level. Magnite is on the publisher side of the transaction. This was less desirable with display where 10 or sometimes 25 SSPs would compete on an open programmatic marketplace for a $0.20 placement.
However, Connected TV inventory is unique as the inventory is premium and goes for $25 to $40 for placements on a private marketplace. This means that publishers will work with maybe one or two SSPs total as the private marketplace does not result in higher bids because the pricing is already agreed on.
When I talk about ad-tech, I repeatedly say there’s no such thing as a moat. It’s a convoluted space and even Facebook/Google are seeing their moat become challenged by Apple. The only moat is owning the audience. The other pieces are in a state of constant flux.
However, there are advantages that a company can have to gain market share – for Roku, this is the operating system and owning the whole stack. Roku owns the audience and there is an even bigger bonus to owning the stack as Roku has access to data at the device level from thousands of apps on the device and any publishers on its ad platform.
SSPs and DSPs especially come under pressure because they don’t own the audience. However, Magnite is leveraging a few key strengths, such as becoming the primary independent SSP in the Connected TV arena. On the earnings call, the management stated that it would be hard for other SSPs to compete at this point, given the unique private marketplace environment of Connected TV. This is due to Magnite’s acquisition strategy, and we see the effects of this in the Disney partnership, where Magnite is the obvious choice on the supply side.
“And as it relates to the ability for an SSP that has never done in CTV to jump in. I just put myself in their shoe before we bought Telaria, and we were going through that build by partner scenario, and it just dawned on us that the build scenario would cost a lot of money. You'd have to hire a lot of talent, and there's a lot of risk because the market is always moving. And by the time you build your first version, the market might be onto the fourth version.” – Magnite management on why they are likely to be unrivaled as the leading independent SSP” – Magnite management on why they are likely to be unrivaled as the leading independent SSP
Being the leading independent SSP on Connected TV may mean that Magnite will likely outpace all other SSPs; however, they still have Comcast's FreeWheel and Google to compete with. For the next 18 months at least, this is very doable because the company has Disney’s data and publisher segments to work with (more on Disney below).
Being the preferred partner for Disney on CTV inventory is a considerable head start for Magnite, while the company builds out the best software solutions for publishers. With the SpotX acquisition, Magnite now has 250 software engineers aimed at building the best product possible on the supply-side.
Google clearly is not the easiest company to compete with on engineering talent yet small and mid-size publishers are more likely to work with Magnite. Case in point, Magnite and SpotX work with the following list: Discovery, Disney/Hulu, Roku, Samsung, Sling TV, ViacomCBS, Vizio, WarnerMedia, A+E Networks, Crackle Plus, The CW Network, Electronic Arts, Fox Corp., fuboTV, Microsoft, Newsy, Philo TV, Pluto TV, Tubi, Vudu, and Xumo.
As stated, it’s not uncommon for a publisher to work with more than one SSP but the private marketplace greatly reduces the number of relationships a publisher has to the point where it’s inconsequential to work with multiple SSPs.
“As I said before, on a previous question, I don't see this becoming an open market world. It will be private marketplace. And when you do private marketplace deals, you tend to do hundreds of deals and you create a deal library, and buyers get used to where this deal library sits. And they're generally not sprinkled around 10 SSP players. They're sprinkled around 1 or 2 because there's just no advantage to it. Because they're not open market, the pricing has already been agreed upon. You're just transacting through pipes. And so keeping the deal libraries with 1 or 2 players is what's occurring today and, I believe, is what you're going to see long term. So I don't see this evolving to 25 SSPs like you would see in the display world.” -Magnite management on why their positioning on CTV should not be compared to the SSP positioning on displayAnd they're generally not sprinkled around 10 SSP players. They're sprinkled around 1 or 2 because there's just no advantage to it. Because they're not open market, the pricing has already been agreed upon. You're just transacting through pipes. And so keeping the deal libraries with 1 or 2 players is what's occurring today and, I believe, is what you're going to see long term. So I don't see this evolving to 25 SSPs like you would see in the display world.” -Magnite management on why their positioning on CTV should not be compared to the SSP positioning on display
Software and Identifiers
Magnite is currently in beta on their proprietary CTV Unified Decisioning solution. This will help programmatic ad rates (CPMs or cost per one-thousand) exceed ad rates sold direct (CPMs). The software solution helps publishers drive higher yields by mixing direct and programmatic in the bidding process. This allows publishers to sell direct and programmatically in a hybrid format. Management indicated this won't be something that can be financially modeled this year as it's still in beta.
Comcast’s FreeWheel launched Unified Decisioning a year ago when the company decided to leverage its audience, create publisher segments and work with 20+ DSPs to cut SSPs out of the media buying process. This is Magnite’s primary competitor and notably Comcast owns the audience.
Regarding identifiers, Magnite packages first-party data as publisher segments and these are more insulated from Apple's mobile ID and tracking changes.
Magnite and Adform measured monetization lift based on first-party identifiers, including environments that currently disallow third party cookies such as Firefox and Safari. Initial results from Q1 2021 showed significant lift, with overall eCPMs increasing more than 30%, compared with ad requests which did not contain first-party identifiers. A similar study also showed click-through rates on Safari impressions doubled, showing an increase in performance for buyers. including environments that currently disallow third party cookies such as Firefox and Safari. Initial results from Q1 2021 showed significant lift, with overall eCPMs increasing more than 30%, compared with ad requests which did not contain first-party identifiers. A similar study also showed click-through rates on Safari impressions doubled, showing an increase in performance for buyers.
SpotX Acquisition – Why It’s Important:
In February, Magnite agreed to buy SpotX for $1.7 billion for combined revenue of $350 million, of which 67% came from CTV and video advertising in the fourth quarter. Meanwhile, the merger results in $35 million in cost savings. Non-video business will comprise 33% of total revenue.
It’s easy to see the synergy with Magnite pursuing more CTV market share. Beyond the obvious OTT ad synergies, the two main strengths of the SpotX acquisition is omnichannel online video (OLV) and also SpotX’s global reach.
By offering CTV and OLV through one SSP, Magnite can gain strategic positioning as most advertisers will want to buy omnichannel inventory across multiple digital video formats. Roku with DataXu is also omnichannel and excels at Connected TV omnichannel advertising due to first-party data. The obvious question here is why not double down on Roku – especially since the company owns the audience? It is because I believe Magnite can move faster globally than Roku.
SpotX is the largest global supply-side platform. Last year, global ad spend on SpotX grew 42% and was driven by OTT, which accounted for 70% of ad spend. Business in EMEA and APAC grew 107% and 66% respectively. SpotX reaches 25 million CTV households in EMEA, or about half of all ad-supported CTV households.
SpotX’s biggest market currently is the United States as it’s also the most mature market. The supply-side platform reaches 70 million CTV households with a 40% increase in household reach since May 2020 and a 67% increase since December 2019.
Disney Partnership:
In March, Disney announced the Disney Real-Time Ad Exchange (DRAX) which follows the launch of Disney Hulu XP (DHXP) in January. This positions Disney as a bidding solution and leverages Disney’s data for audience targeting. Specifically, DRAX is for “programmatic buys and Disney Select for data-driven targeting,” which means Disney inventory will be more attractive due to the company leveraging its audience graph.
As investors, we have to look at both scenarios – best case and worst case. The best-case scenario is that Disney renews the partnership with Magnite after 18 months. The worst-case scenario is that Disney removes the need for a SSP and handles the auction themselves like Comcast Freewheel.
Right now, Magnite is a preferred partner on Disney inventory but not ESPN.
Disney, obviously, being a far-reaching media empire with many, many, many media formats, the exclusivity or the preferred partner lies around the cross-platform inventory. So if you were to buy inventory from the DXHP that Disney cross-platform sale, all of that goes through Magnite. all of that goes through Magnite.
And specifically, if you were to buy Hulu only and didn't buy any of the cross-platform inventory, that too would go through Magnite. You're capable of buying ESPN without going through Magnite, but conversely, Magnite is very capable of selling ESPN inventory, as well. So, we have access to all of it. Some of it's in a preferred partnership, others is in an open market partnership.
The case for Disney staying with Magnite on SSP:
Comcast FreeWheel will need to attract more publishers in order to scale. If Disney becomes a SSP, then they are limited to only their inventory (Hulu, ESPN, etc) or they must attract publishers to its ad platform. It would be better if Disney sold its segments on its inventory first and then across hundreds of thousands of applications second.
Secondly, Disney will need to do omnichannel, which is desirable as advertisers can reach customers across multiple digital formats and measure campaigns.I don’t see Disney launching (or acquiring) an omnichannel ad platform on the supply side to compete with Magnite but I could be wrong. (I must admit, I do wonder if Disney would acquire Magnite someday though).
If we look at the path that Facebook and Google took, it was not only to transact on their own inventory but they eventually took the place of the SSP and signed on many publishers to build a walled garden across mobile applications. These tech giants knocked out demand side platforms, as well, because the advertisers could go direct. Therefore, it’s not clear which side Disney would go after if they entered the ad-tech market. You could argue they’ll do what Comcast did or maybe they’ll encourage media buyers to go directly to Disney with Magnite’s omnichannel programmatic offering on the backend. Right now, Magnite is building a custom marketplace for Omnicom, for example.
The case for Disney not staying with Magnite as SSP:
I think it’s very (very) unlikely that Disney would work with another independent SSP on CTV ad inventory. As stated above, Magnite really is the best choice when it comes to an independent SSP and Disney’s nod with a preferred partnership supports this.
However, the other option is that Disney becomes the SSP like Comcast’s Freewheel. There is a 50/50 chance this happens after the 18 months is up. Nobody can tell you what will happen here.
As an investor in Magnite, I prefer to see what Magnite can do with Disney’s data and preferred partnership plus the recent SpotX acquisition before jumping to conclusions around the impact this might have. Meaning, Magnite should report solid earnings over the next 1.5 years and it’ll be hard for the market to ignore this. My hope is that the global footprint is large enough by then to where Magnite will be prepared for growth without Disney’s partnership (should the worst-case scenario play out).
Financials Snapshot
In Q4, Magnite grew revenue 69% YoY, or 20% on pro forma basis, to $82 million. CTV revenue was $15.3 million, representing an increase of 53% YoY on a pro forma basis. Online Video (OLV) revenue grew 35% YoY on a pro forma basis.
In total, Magnite recorded 34% of revenue from its CTV segment, 33% of revenue from its OLV segment, and 33% from its display, audio, & other segment.
When combining Magnite with SpotX for revenue of $350 million, 67% came from CTV and video advertising in the fourth quarter.
GAAP based gross margin for Q4 was 74%, up from 66% in Q3. Net income was $5.9 million in Q4 versus net income of $1.5 million in the fourth quarter of 2019. Adjusted EBITDA was positive $30 million while free cash flow totaled $20.7 million, representing an impressive 25% free cash flow margin.
Magnite guided for $60 million of revenue at the midpoint of its Q1 outlook, representing 65% YoY growth. In the company’s Q4 earnings call, Magnite management talked about their expectations for a strong year-over-year growth rate led by CTV. Management also raised its long-term adjusted EBITDA targets to 30%-35%, based off the successful acquisition of SpotX to reflect the higher margins from SpotX.
Below is a comparison of three ad-tech stocks: MGNI, TTD, and ROKU:
Magnite management has set a long-term target of 20% top line revenue growth annually. The company expects the acquisition of SpotX to accelerate both growth rates and margins. In total, analysts are projecting 30% YoY revenue growth for Magnite in 2021 and 21% YoY revenue growth for Magnite in 2022. We don’t make earnings calls but we think the company is more than capable of meeting this guidance.
We are on the cusp of earnings from Snap and it will be interesting to see what management teams are saying in regards to the economy opening up. There are industries that spend a significant amount on ads that are finally able to reach paying customers – such as travel, auto, entertainment and sports.
When you compare Magnite’s growth during this challenging time to other ad-tech companies, it has done an excellent job despite travel, sports, etc not participating in its revenue growth.
FuboTV
FuboTV is not for the faint of heart. Regardless of the price weakness, which is probably more broad market driven, we remain long as we see a nice set-up for a company centered in the important trend of live sports OTT and a near-term catalyst with sports betting.
We outline the main risk we see below fundamentally in the Conclusion (yes, that’s my way of saying you should read the whole thing).
I’ve said since early January that the short sellers have one solid argument which is the negative gross margins. The issue is they are hammering on the lagging financials (and scaring retailers) and are not modeling the sports betting opportunity. In fact, the short argument has only gotten weaker since the reports were released in December, which asserted FuboTV’s traffic had fallen off a cliff and the sports betting book was an impossibility.
As you can see in the chart below, not only did Fubo’s traffic not fall off a cliff but the company’s growth stands out compared to other top growth stocks when you look at both Q4 and forward estimates.
The sports betting book launch is the easiest part of the equation, so I did not waver on this point before there were any announcements. Now, we have both free-to-play and the betting app coming out this year. The hard part to tech and all media is amassing an audience. It doesn't matter if you're as big as Facebook or as small as FuboTV – your company's value is determined by the size of the audience and the growth of that audience year-over-year. Products and features can be built and launched fairly quickly if you have the audience. You can pivot, expand, etc – again, as long as you have the audience.
That doesn’t mean FuboTV doesn’t have hurdles to clear – my point is that as investors we should have a mental checklist of what is most important for the stocks we own. The first for a media company is always audience.
As FuboTV investors, it's in our favor that the world's two biggest global sporting events coincide this year – the Olympics and the World Cup. What's even more interesting is the economy is re-opening this year and we may see record advertising levels during a time when FuboTV is reaching important live sports audiences.
I’m not going to say it’s a slam dunk (i.e. there are no guarantees) but FuboTV’s path to beating guidance and improving their financials is easier than it appears right now. It probably has the most tailwinds of any company we own in that regard. I say this because the Olympics and World Cup content will demand sizable ad revenue.
North American football rights are in a tug-of-war with even Amazon Prime now in the mix. Hulu announced a carriage deal with the NFL Network and NFL RedZone for Hulu’s Live TV service. The reason why I’m not too worried is that the live sports audience is massive – in fact, these moves may signal a time when cable TV no longer exists and that’s the ultimate goal for a $5 billion market cap company like FuboTV, which will see tremendous windfall if this occurs.
Roku makes this argument frequently when analysts are concerned about competitors, such as Peacock. The argument Roku management makes is that any eyeballs that cut the cord is a windfall for them. If the media conglomerates help push the remaining 74 million cable subscribers in the United States to cut the cord, this helps Roku because the stats show that about 35% to 40% of those 75 million will choose Roku.
We aren’t sure what FuboTV’s true share of the live sports OTT market is because I’ve repeatedly said live sports OTT is too early to draw definitive conclusions. Remember when I said connected TV ads was the future for Roku in 2018 and here we are three years later? I'd say that's similar to where we are with live sports OTT. Another analogy would be subscription video on-demand in its early days (maybe circa 2006). I'm not saying FuboTV’s path to monetization will look like those two companies – I’m trying to give you an understanding of how early we are to the live sports OTT microtrend. We are very early.
FuboTV is not the next Netflix or the next Roku although time will tell if the story is as misunderstood as those two stories were. I believe FuboTV could have similar staying power because of the monetization method — which to be crystal clear — is betting and gamification. Before I expand on monetization, I want to reiterate that live sports is the holy grail for cable subscribers and the microtrend we are invested in – but this is different from a monetization method. Live sports were the last to convert because sports fans are, well, fanatical. In this case, OTT saved the best and highest-paying customers for last.
I don’t have access to Board meetings, obviously, but we can follow the money to see that Disney and Comcast don’t see FuboTV as a competitor. They are backers, and in my opinion, they want a piece of the gamification of live sports. This means free-to-play, betting, and AR/VR. Fubo’s oddball merger with Facebank can lead to AR/VR integration – for instance, a virtual reality boxing match starring Floyd Mayweather. The possibilities here are endless and it doesn’t take much imagination to consider a sports audience to be the perfect AR/VR enthusiasts.
Despite short sellers not seeing how or why a sports betting app could merge with live sports content, we now see DraftKings partnering with Sling/DISH. I guess content and sports betting does go together, after all (insert sarcasm). It’s surprising that the short reports written by telco and media analysts said it cannot be done despite Sky Media having the most successful sports betting model globally.
From purely a user acquisition standpoint, in-app ads with your own content is nearly frictionless and you have a mountain of data to effectively target. FuboTV with Comcast and Disney as backers is much more interesting to me as an investment – and I also believe the NFL Network carriage deal with Hulu will affect DISH more than FuboTV.
Regarding Fubo’s monetization potential, David Gandler has made it clear in this excellent article that 22% of their customers plan to spend more than $100 a month on betting. The number will likely be higher once the product has actually launched. There is also an enviable customer acquisition cost (CAC) and lifetime value (LTV) user acquisition loop between the content and betting. For instance, Fubo can give free sports content away and offer other rewards that are not possible unless you own the audience.
Financials Overview:
In Q4, Fubo grew revenue 98% YoY to $105 million. Subscription revenue was up 91% YoY to $91.4 million, and advertising revenue was up 157% YoY to $13.1 million. Paid subscribers at the end of Q4 totaled 547,880, an increase of 73% YoY.
For the first quarter of 2021, Fubo guided for $102 million in revenue at the midpoint, representing growth of 100% YoY. In the Q4 earnings call, management talked about their expectations for a softer Q1 sequentially, which is in line with historical seasonality trends.
Fubo management discussed their plans to continue to focus on expanding the business through growing its top line. Although the key focus is on top line revenue growth, Fubo still expects to make progress in its path to profitability and margin improvement:
“In terms of the adjusted contribution margin, we don’t provide guidance at this point about these metrics, but we are clearly very focused on expanding our business focusing on growth with an eye to ensure that we continue to improve in our path to profitability delivering an year-over-year improvement of our margins.” – Fubo CFO Simone Nardi
Fubo defines adjusted contribution margin as a “figure to measure the variable costs against subscriber revenue. ACM is calculated by subtracting ACPU from ARPU.”
In the full year 2020, Fubo recorded a 10.1% positive adjusted contribution margin, up from -3.1% in 2019. In turn, gross margins improved from -16% to positive 4.6% in Fubo’s most recent quarter. Fubo did not give Q1 or 2021 guidance for contribution margin or gross margins but management confirmed that they are expecting continuous year-over-year improvement in margins. This is a positive sign for a company whose main focus continues to be growing revenue and expanding the business.
Fubo guided to end Q1 with subscribers of 520,000 to 530,000, representing growth of 82% YoY at the midpoint. Data from Apptopia shows that Fubo ended March with approximately 585,000 daily active users (DAU) versus the Q1 guide for 525,000 paid subscribers at the end of Q1.
Download data from Apptopia also revealed what appeared to be a strong Q1 in terms of app downloads.
Further, we are seeing a strong start to Q2 for Fubo as app downloads are currently tracking above 100% YoY in April.
For the full year, Fubo management guided to end 2021 with subscribers of 762,000 to 770,000, an increase of 40% YoY at the midpoint of the range. Fubo also raised its revenue outlook by 9% above the previous guide in its Q4 earnings call. In total, Fubo is expecting revenue of $465 million for the full year, representing growth of 75% YoY.
Downloads give us a one-dimensional viewpoint yet it’s important to compare downloads with sessions. When broken down week by week, we see sessions up a minimum of 100% at the low point end of March and ticking up towards 200% for about 150 million sessions by mid-April.
Here’s another glimpse of the quarterly data on FuboTV’s total sessions.
You’ll have to decide for yourself after looking at Fubo’s numbers in Q1 if you think the company can exceed this guidance.
Please note, that while Apptopia provides app data, we do not make earnings calls with this data. It is purely for informational purposes and you must draw your own conclusions based on the data provided.
We've laid out our thoughts on the Olympics, World Cup and sports betting app. These points aren't lagging, they are forward-looking, and that style isn't for every investor. It's certainly our style, however, and we are comfortable with our position in FuboTV.
Conclusion:
The risk I see will be in Q2 numbers. This should be the weakest quarter for FuboTV and this may be what’s being priced in right now. We are tracking decent growth here right now so let’s see what management says in the earnings call.
We recently increased our allocation to Stem Energy (STPK) and we are revisiting the stock in the write-up below. I originally covered Stem Energy (STPK) in detail in early February here and later here.
On a fundamental basis, nothing has changed with Stem (STPK) since the last time I covered the company. The stock has followed the way of most all SPACs during the recent Nasdaq correction. In a risk-off trading environment, SPACs and more speculative investments with little or no revenue are typically the hardest hit. The Defiance Next Gen SPAC ETF SPAK still sits over 23% down from its all-time-high price.
SPACs have been grouped together by many investors and sold off together with no attention paid to the underlying company beneath the shell. The fact is SPACs typically have little or no revenue, so investors can easily rationalize selling these stocks first when the market environment turns bearish. That is why it is important to step back and remind yourself why you invested in these companies in the first place. In the case of STPK, we continue to have a high conviction because nothing has changed with the thesis that led to our initial investment. The only thing that has changed is the stock price as STPK has been sold off along with hundreds of other SPACs that have been grouped together in one category.
STPK has shown solid relative strength in the face off the recent SPAC sell-off, outperforming the SPAK ETF notably YTD. Below, we compare STPK’s performance to some of the most notable SPACs of 2020:
As time goes on, SPACs will no longer be categorized as just that. In the future, the underlying business fundamentals of these public companies will be the biggest factor in how the stock performs. To get to that point, these companies may need to announce real revenue and cash flows to separate themselves from the hundreds of other SPACs with lofty projections. SPACs may never recover to all time-highs as a category; however, the very best SPACs will recover and shareholders will be rewarded. The goal is always to pick the leader and this may be more crucial in a high-risk category such as SPACs. Our allocation to STPK has increased as we believe the company is fundamentally stronger than other SPACs.
As previously mentioned, investors are taking a more cautious approach to SPACs and stocks in general. For SPACs specifically, the market is taking a skeptical view that these companies can actually deliver on their projections. From the market’s perspective, these companies are in “Prove It” mode in regards to their projections. As time goes on and these companies begin to announce quarterly financials, it will become crystal clear which SPACs are actually able to deliver and which are not.
We embrace the concept of letting the financials do the talking because we are comfortable with Stem Energy’s probability of delivering strong results. Stem utilizes its proprietary AI software, Athena, to smartly store and deploy energy, resulting in 10% – 30% monthly electricity bill reductions for its clients. Athena AI reduces volatility and enables solar generation time-shifting to support local grid capacity needs. Stem currently has over 900 systems operating on its Athena AI software in over 200 cities worldwide. The company currently has a 75% market share in California’s BTM storage market, which is the largest in the US. In 2019, Stem was the leading commercial energy storage installer in California with 3x the kW installed as its closest competitor.
Source: Citron Research
Over 75 countries, including the US, have committed to net zero emissions by 2050. An additional 35% of Fortune 500 companies have made a commitment to Carbon Neutrality. These are two massive tailwinds for Stem, as management estimates there is a projected $1.2T in new revenue opportunities for integrated storage that are expected to be deployed by 2050.
Electricity production is the #2 polluter responsible for 27% of greenhouse gas emissions. Stem’s product effectively reduces its client’s electric bills 10-30% and helps them meet their corporate ESG targets without changing the way the operate.
Stem’s full revenue projections are below:
Source: Stem Investor Presentation
Stem has two distinct business segments comprised of hardware and software. Stem makes money from their hardware segment with upfront payments for initial purchases. The company is targeting 10%-30% gross margins for the hardware segment of the business.
The more profitable segment of the business is expected to be the software segment. Stem’s software segment is a recurring SaaS model secured by 10-20 year contracts with monthly recurring cash flow. Revenue is recognized ratably during life of the contract with additional upsell revenue opportunities from Athena applications. Stem is targeting 80% gross margins for the software segment of their business and is expecting the software segment to be the main driver of gross profit by 2026.
Source: Stem Investor Presentation
Stem currently has over $200M of contracted backlog and over 100% of its $147M revenue projection for 2021 already locked in. While many SPACs will likely fail to meet their estimates, we expect Stem to deliver a nice upside surprise on the $147M estimate.
After the transaction with Star Peak Energy Corporation is complete, Stem will have $525M in net cash and 0 debt to capitalize on growth opportunities. The company plans to use the majority of this cash to fund future growth while also using about 3.6% for estimated repayment of debt.
For a more detailed report on Stem’s business, I first covered the company in detail here and again in late February here. Jim Cramer, who has been critical of the SPAC market in general, has recommended STPK as 1 of his top SPACs to own for the future.
Stem has a solid management team that includes former executives at First Solar, General Electric, and Siemens. CEO John Carrington worked as General Manager and Chief Marketing officer at General Electric for over 16 years where he led global innovation, new technology efforts and product strategy. In total, Stem has 145 employees and a management team with former leadership experience at technology, energy, and industrial companies.
Stem has a list of clients that includes Apple, Amazon, Google, Facebook, and Walmart and a backlog of contracts that will drive future growth beyond 2021. We believe Stem is positioned to win many more contracts in the future as renewable energy becomes a bigger part of the economy. In my last report covering Stem, I wrote the following:
“There remains a great deal of untapped potential for energy efficiency improvement through implementation of new technologies. Stem is ideally positioned to be an industry leader in the energy storage market as more companies follow the path that Apple and Amazon have already taken.”
This remains true despite short-term price movements in the stock. We believe Stem is one of the best companies to go public via the SPAC method and has a very bright future ahead of it. We remain bullish on the name and bullish on the renewable energy industry. We look forward to the company releasing financials because we are confident it will serve as validation for our investment.
Due to SPACs being volatile in nature, we lean heavier on technical analysis and only buy at key levels. Knox Ridley will update readers as he enters new tranches in this company.
After being nearly 50% off from all-time highs, Snowflake still has a neck-breaking valuation. In this premium analysis, we spend time digging into the financials and valuation as this is a critical piece for this particular company. We also discuss product, especially as it relates to the upcoming Databricks public offering, and a few reasons why Snowflake outpaces this important competitor in terms of revenue growth. We also discuss areas where Databricks is stronger and what Snowflake must do to maintain its lead in the future.
Best-in-Show Key Metrics:
Snowflake is a leading cloud software company in terms of revenue growth, net retention rate and remaining performance obligations (RPOs). Like all cloud software, Snowflake is declining year-over-year as the base increases.
Snowflake went public with 121% year-over-year growth, which has settled to 117% in the most recent quarter. The outlook for Snowflake is growth of 82% at the midpoint with adjusted operating margins of (19%) up from adjusted operating margins of (38%) last year.
Snowflake's two areas of strength include a net retention rate that improved sequentially from 158% to 168% in the most recent quarter. The reacceleration is important as it shows customer satisfaction and is a number that tends to decelerate.
Remaining performance obligations (RPO) is also very high at 213% year-over-year, with $1.3 billion in the pipeline. This represents the revenue that is contracted but not yet realized. The number is higher than forward revenue guidance because the future period may require more than a year. Regardless, the point is it provides a glimpse as to Snowflake’s strength in the future and 200%+ growth shows customer satisfaction. The topic of Snowflake’s future strength, particularly 3-5 years out, is discussed in the valuation section below.
The company grew Fortune 500 customers by 46% from 127 to 186. These customers tend to remain loyal due to their size. I also pointed out Snowflake's impressive growth in customers with product revenue greater than $1 million in my previous analysis.
At the time of IPO the accounts >$1M had grown 56% compared to 22% in the year-ago period. The most recent growth shows an acceleration at 88%. The company is also a usage-based model rather than subscription. The more the world relies on data, the more revenue Snowflake will make. These larger accounts also matter more in a usage-based model.
It’s important to note that Snowflake is bleeding on the bottom line on a GAAP basis with sales and marketing costs equal to its revenue. Sales and marketing costs were at 111% of revenue in FY2020 and at 81% of revenue FY2021. These costs are high due to growing the sales and marketing departments. The company plans to hire 1,200 new employees this year with an emphasis on these two departments.
The operating expenses are nearly 200% of total revenue after R&D and G&A. The translation is that Snowflake is in the middle of a land grab. I imagine the aggressive sales and marketing budget strategy is that the high switching costs of data warehousing solutions will support the LTV needed. In other words, the strategy of establishing customer relationships at any cost should pay off in the long run.
Frank Slootman, CEO of Snowflake and prior CEO of ServiceNow and Data Domain, is the main reason investors are not concerned about the bottom line. The CEO improved the cash efficiency of Data Domain, a company he took from near bankruptcy to a significant acquisition after "selling more than all its competitors combined.” He also grew Service Now from $75 million to $1.5 billion.
The free cash flow margin is set to improve this upcoming year again to "break-even" with operating losses of adjusted (19%) compared to (38%) in FY2021. The operating losses saw a 5X improvement from two years ago when the adjusted operating margins were (105%) in FY2020.
Ultimately, Snowflake has best-in-show key metrics. There is a lot of supporting evidence that Snowflake is well-loved by its customers and is positioned well for future/sustained growth. Databricks has an upcoming IPO and this is a primary risk to Snowflake as there will be a competitor on the public markets once this happens. I expect Databricks to split investor interest – more on this below.
Product Overview:
Snowflake’s decoupled architecture allows for compute and storage to scale separately with the storage provided from any cloud provider the customer chooses. By processing queries using massively parallel processing (MPP), where each node in the cluster stores a portion of the data set locally, the virtual warehouses can access the storage layer independently so as not to compete for compute power. With the competitors, such as Redshift, where compute and storage are coupled, more time is spent reconfiguring the cluster.
Snowflake calls this offering a virtual data warehouse where workloads share the same data but can run independently. This is crucial because Snowflake’s competitors combine compute and storage and require customers to size and pay based on the largest workload.
Data warehouses are centralized data repositories that collect and store information across many sources that are both internal and external. The raw data is ingested into the data warehouse and processed to answer queries. To ingest data, warehouses follow the ETL process, which is: (1) Extract the data from the internal or external database or file, (2) Transform by cleaning and preparing the data to fit the schema and constraints of the data warehouse and (3) Load into the data warehouse. The ETL method helps to organize the data into a relational format. Notably, Snowflake supports both ETL and ELT, which allows for data transformation during or after loading.
One key product differentiator is that Snowflake is not built on Hadoop, rather the company usesa new SQL database engine with cloud-optimized architecture. Overall, this translates to faster queries and also reduces costs by scaling up or down for both capacity and performance. This also allows the shift to the cloud while still honoring traditional relational database tools. Just like cloud infrastructure does not require you to hold server space for peak times year-round, a cloud data warehouse does not require you to plan, acquire or manage resources for peak data demand (i.e. elasticity).
The need for resources could change by either increasing or decreasing (scaling up or down). Customers that have a need for storage but less of a need for CPU computations do not have to pay up front and can shrink the environment dynamically. Users either pay for terabytes or are billed on a per-second basis for computations. Notably, Snowflake charges by execution-based usage and is not a cloud SaaS-company that charges by subscription.
Snowflake has a multi-cluster architecture which is unique from single cluster databases. The multi-cluster approach allows the clusters to access the same underlying data yet to run independently. This allows for heavy queries and operations to run very quickly and with fewer errors because the queries are not accessing the same data warehouse.
Queries are made with standard SQL, for analytics, and integrates with R and Python programming languages. The company delivers the ability to handle all incongruent data types in a single data warehouse. Because the data is accessible through SQL, there is widespread developer uptake as it’s the most common database language.
Snowflake supports both structured data and semi-structured data. As machine-generated data grows to include applications, sensors and mobile devices, Snowflake allows semi-structure data to be handled without preparation or schema definitions. The result is handling JSON, Avro, ORC, Parquet or XML data as if it were relational and structured.
Snowflake uses a compressed columnar database. Columnar databases are optimized for the fast retrieval of columns of data and is used for analytic data queries. Other features include centralized metadata management that is stored in a single-key value store that allows cloning of tables and databases. Security is baked into the platform to where Snowflake automatically encrypts all data to the point where unencrypted data is not even allowed. There is third-party certification and validation for security standards like HIPAA.
Beyond the value proposition of separating storage from compute for speed, and also scaling up or down to reduce costs, the third takeaway is that Snowflake is also much easier for customers to use as it’s designed to remove the role of a database administrator for monitoring and/or to tune query performance.
The end goal of choosing Snowflake is that you load data, run queries, and do little else – which is an immense value proposition due to the amount of time wasted prepping, balancing, tuning and monitoring traditional data warehouses originally built for on-premise.
Snowflake is capitalizing on the multi-cloud trend and growing rapidly with customers who want a choice in public cloud provider despite the cloud giants having their own data warehouse systems, such as Amazon Redshift, Azure Synapse and Google Big Query.
Generally speaking, Big Query is a closer competitor as Google’s offering also separates storage and compute. The differences between BigQuery and Snowflake include pricing structure where Snowflake is a time-based pricing model where users are charged for execution time and BigQuery is a query-based pricing model, where users are charged for the amount of data returned from the queries. BigQuery has a serverless feature that makes it easier to begin using the data warehouse a the serverless feature removes the need for manual scaling and performance tuning. Dremel is the query engine for BigQuery.
When it comes to deciding between BigQuery and Snowflake, it can come down to what you do with the database due to pricing structure differences. For instance, Snowflake is a better choice for concurrent users and business intelligence. It’s also a great choice for data-as-a-service, where you might give client access to your data in the form of analytics. BigQuery is perhaps a better choice for ad hoc reporting, where you have occasional complex reports on a quarterly basis or recommendation models and machine learning that require high idle time. Again, these examples are mainly due to pricing structure.
Despite BigQuery having a strong following with nearly twice the number of companies as Snowflake and growing around 40%, it tested slower than Snowflake in field tests performed by GigaOm in 2019. Vendor lock-in from BigQuery is also undesirable as companies may prefer AWS or Azure and/or more interoperability or best-in-breed solutions – we can see this in the growing trend of multi-cloud. AWS Redshift has the biggest market presence but growth is nearly flat at 6.5% and AWS is the leading partner for Snowflake.
Here's a great write-up from the Hashmap Engineering and Technology Blog that points out why implementing optimized row columnar (ORC) format data loads is ideal for either Snowflake or Amazon Redshift due to the ORC file format. Again, ultimately the choice in which system you use comes down to the individual needs for implementation although Snowflake is designed to be a competitor in nearly every case.
There’s a great write-up from analyst David Vellante that discusses how Snowflake competes with cloud native database giants. His analysis discusses survey responses from CIOs and IT buyers with Snowflake having a lead over the tech giants in spending intentions. The Enterprise Technology Research study he highlights showed 80% of AWS accounts plan to spend more on Snowflake in 2020 relative to 2019 with 35% adding Snowflake as new compared to 12% adding Redshift as new. In Azure, 78% plan to spend more on Snowflake with 41% adding new. On Google Cloud, 80% plan to increase spending on Snowflake. We can see the people have spoken.
Pricing pressure is the weakness we must monitor with Snowflake as it’s sandwiched heavily between tech giants in an area where these tech giants are very protective of their turf. How cheap will BigQuery become to attract developers to Google Cloud, which Google can then monetize the life span a customer in various ways?
You'll also see below that the tech giants are also private investors in Databricks.
Valuation Update:
Snowflake is the fastest growing cloud stock with 124% revenue growth over the last 12 months and a projected 85% over the next 12 months. The recent sell-off in tech stocks has led to a significant contraction in Snowflake's valuation. Snowflake trades at 56.8x EV/NTM revenue after seeing its valuation peak above 80x forward revenue following its IPO.
Snowflake guided for 82% revenue growth in 2021 at the midpoint of its target. As covered in the financials, the company is also targeting breakeven in Free Cash Flow for the full year in 2021 after a -12% FCF margin in 2020. Snowflake sees Operating Margin improving to -19% in 2021 from -38% in 2020.
SaaS stocks are typically valued based on a multiple of forward revenue. Below, we take a look at the ten highest valuations in the space:
As we can see, Snowflake has the highest projected growth rate over the next 12 months by a wide margin. Only one other SaaS stock in the table is projected to grow over 40% YoY in 2021 (CRWD). Conversely, Snowflake is projected to grow 85% YoY in 2021, 48 percentage points above the median.
Consensus expectations show that Snowflake is projected to grow revenue 65% YoY in 2022 and 57% YoY in 2023. In fact, Credit Suisse’s DCF Model on SNOW calls for its growth rate to exceed 40% YoY in 2024 and 2025, before retreating to 37% in the year ending 2026.
This growth is unparalleled by any other public SaaS stock, as the median NTM growth rate for the 10 highest valuations is currently 37%. This means that analysts are expecting SNOW to grow revenue in 2026 at the same rate that Cloudflare, Zscaler, and ZoomInfo will this year. It becomes even more extraordinary when you consider that Snowflake is projected to achieve this growth rate after posting $3.5B in revenue in 2025.
This revenue number comfortably exceeds the combined annual revenues of Cloudflare, Zscaler, and ZoomInfo. To put Snowflake's growth into perspective, analysts expect a higher growth rate from Snowflake in 2025 than any SaaS stock this year outside of CrowdStrike.
This is why we believe it is essential to look beyond the NTM revenue multiples, as Snowflake will separate itself by continuing to grow faster than any of its peers over the next 5 years. With this level of growth, SNOW will be able to compound its revenues to bigger and bigger totals.
The farther out we look into the future, the more reasonable SNOW's valuation becomes compared to its peers.
Major Competitor: Databricks
In my most recent Motley Fool podcast, I pointed out that Databricks planned to go public, which was a risk to Snowflake's valuation.
We don't have an S-1 filing at this time, but TechCrunch has done some preliminary work based on a $28 billion private valuation. The tech media site estimates that the company grew from a $200 million annual run rate to a $350 million annual run rate between Q3 2019 and Q3 2020.
TechCrunch's current number is a run rate of $425 million to $485.6 million for Q1 2021. CNBC reported, "$425 million in annualized sales," representing 70% growth for last year. This is quite a bit lower than Snowflake's growth last year, which was 123% for full-year growth.
We believe Databricks could open up at a higher valuation than where Snowflake is currently trading. This is because the forward growth is lower, which we estimate to be 60% for FY2021. We are assuming a $50 billion market cap at the opening. The $50 billion represents about 2X the private valuation while Snowflake opened around 3X its last private valuation.
Early backers for Databricks include Microsoft, which was later joined by Amazon Web Services, Google via CapitalG, and Salesforce. Venture firm A16Z and Tiger Global are also among the investors. This strong lineup participated in the latest $1.9 billion round. The articles that reported on the recent round point out the rarity in getting backing from all four major cloud vendors.
What’s the difference between Databricks and Snowflake?
Yesterday on our forum, there was an excellent post by a subscriber around the differences between Snowflake and Databricks.
The major difference between Snowflake and Databricks from a customer standpoint is that Snowflake is laser-focused on the public cloud/cloud native while Databricks is differentiated in that it can build information pipelines across silos, including on-premise and hybrid architectures. Snowflake's main value proposition is to reduce the time required to prep and monitor data so that a customer does not need to manage software or hardware. Even if a team has the technical skills, they may not want to spend the time required for Databricks, which is perhaps one reason why Snowflake is reporting decent growth in the Fortune 500 and other key accounts.
The architecture of a data lakehouse allows for business intelligence and machine learning through a more open paradigm. The idea is to combine best of data warehouses and data lakes to span unstructured and semi-structured data while keeping costs low. By combining both, teams can move faster and without duplicating the data. This is a key benefit to Databricks DeltaLake, and this is especially important for data analytics and machine learning. With that said, Databricks is more advanced and expert-level.
I want to point out that Snowflake is very clear as to why it's done well – which is that it handles migrations to the public cloud from legacy on-premise systems better than the competitors. Snowflake's priority is to compete with other SQL databases right now, although the company will need to eventually compete with Databricks. Management has discussed rolling out support for unstructured data, for instance, but no timeline has been set.
Looking longer-term, what Snowflake needs to answer is how will it compete with Databricks on machine learning? Databricks is superior here for ML as it’s built on top of Apache Spark and supports Spark, Python, Scala and also SQL. This was discussed in the thread on the forum here.
The forum thread points out that Databricks is more complex to upload the data, monitor and manage, but there are benefits to going through this hassle. One of the primary benefits is support for Python and Scala, which are programming languages for machine learning. For now, you must use an outside vendor or tool as connectors or integrations in order to support these programming languages and libraries with Snowflake. It’s also worth mentioning that Databricks is cheaper for processing a lot of data at petabyte scale.
Growth is the great equalizer when comparing products and my preliminary understanding is that Snowflake is growing much faster than Databricks and expects to continue to outpace the competitor. I will need to look into Databrick’s financials and see an earnings report or two to determine more about the competitor’s sustained growth rate. Here’s a snapshot of Snowflake Google search queries compared to Databricks. We should ignore the spike as it was IPO related.
What I find to be very intriguing is what Snowflake will do to compete on ML. This gap in product capability is not lost on the Snowflake team and management. Being laser-focused on the public cloud/cloud-native lends itself well for Snowflake to compete here theoretically, yet its laser-focus on SQL is getting in the way strategically speaking. The company is aware of this and plans to roll out support for unstructured data. Essentially, Snowflake is capable of evolving to meet the growing demands of ML … so let’s see what happens here as Snowflake's management likely has a plan.
Conclusion:
Snowflake is disrupting the data warehousing market (or cloud data market) with a superior cloud data platform that delivers across key differentiators. Snowflake demonstrates excellent product-market fit, clear competitive advantages, and strong management — the primary ingredients for a great growth stock.
I prefer to not pay over 40 forward P/S and certainly not over 50 forward P/S yet Snowflake's forward growth requires additional consideration as it promises to outpace its peers. In this case, we initiated in the 55x range and will build more into the position either on a pullback or a breakout.
We are considering a short-term trade on FUTU due to the technical setup.
Quick Overview:
Futu Limited (FUTU) is a holding company that operates in Hong Kong. They are an online broker and wealth management platform that provides a one-stop ecosystem for investors. They provides news, market data, trading services, wealth management for Mainland China, Singapore, Hong Kong and U.S. equity markets. They even own a popular social media platform for investors.
There is nothing disruptive or technologically unique about Futu. It operates as a relatively standard online broker, much like the online options we have in the U.S. What differentiates it from other the well-known brokerage firms is its location and timing.
Since the March 2020 crash, we have seen a relative explosion of retail interest in stocks. This retail interest in equities is a global phenomenon, including China. China’s stock markets have been open for just over 30 years, compared to the U.S. that has been in operation for 229 years. As a result, in the mature U.S. equity markets, about 52% of Americans participate in the stocks markets, compared to about 13% in China. This number is up nearly 7% from a year ago.
With the growth of China’s wealth coupled with the opening of the tech focused Star Market in China, the interest in equity markets is only expected to increase, which should bode well for FUTU.
This growth shows within Futu’s projected revenue growth. It’s expected to grow revenue by 164% this year from $337M to $891M, although the 1-year forward is around 50% projected growth from $891M to $1.32B for FY2022. We will see in time if the estimates will be revised or if Futu is having its breakout year and growth will level off quickly.
Futu has strong growth this year, however, it is not anchored by a long-lasting microtrend. Instead, it’s riding the popular trend of Chinese stock investing. As long as the Chinese stock markets perform well, we believe the interest and growth in Chinese equities will continue to grow. Gains attract more retail investors, and Futu has a strong competitive edge for retail Chinese investors.
The story is not one that we would consider for the I/O Fund’s LTBH or even a longer-term momentum position. What we mainly like about Futu is its current technical setup. We like it enough to write-up a quick chart and consider taking a swing trade. We will set an initial stop to protect our losses, just in case our timing is off, and we will look to exit into strength when we believe the trend is coming to an end.
We believe FUTU is about to breakout and into the 5th wave (red count) within a larger 3rd wave (green count). The 5th wave within 3rd waves tends to extend, especially in high growth names like FUTU.
Also, note the RSI pattern. It’s flashing a reversal warning (the RSI is making a higher high, while the price is making a lower high). This, I believe, will setup for a drawdown into the $135-$125 region. It will also setup a nice inverse head and shoulders pattern just below the primary breakout price at $169.
We will look to buy on the coming pullback, or a breakout above $169. We will use a stop to limit our loss, and seek the targets overhead.
We recently initiated a position in CrowdStrike and want to take the opportunity to update you on the company. Previously, I covered CrowdStrike in October 2020 here. In the report, I explained how cybersecurity would continue to be a key initiative for organizations in the remainder of 2020 and beyond. I also covered CrowdStrike’s product offerings and explained how the company was uniquely positioned as the top vendor in a critical subsector of cybersecurity. We discuss the previous coverage below and examine why the company has become even stronger, as well as numerous industry catalysts.
We continue to see strong C-level survey results for cybersecurity in 2021, in particular, with CrowdStrike and Zscaler the undisputed leaders. We discuss why we have chosen CRWD, yet it seems ZS is a strong second choice. We also cover Cloudflare and why we have passed for our own portfolio.
Security Software: Top Priority for 2021
Security software has consistently ranked as a top spending priority among C-level executives, but our research shows it has become the #1 priority in 2021. The Covid-19 pandemic and shift to a more remote workforce uncovered a number of major gaps in the cybersecurity of organizations.
The high-profile Sunburst hack further highlights the need for businesses to transform their legacy security architectures, as legacy tech is no match for today’s adversaries. As a result of the Sunburst hack, the current administration has talked about how cybersecurity spending is a top priority, calling on Congress to “launch the most ambitious effort ever to modernize and secure federal IT and networks.”
Credit Suisse’s recent CIO survey suggests that security spending is the top spending priority in 2021, even more so than in July.
We view CrowdStrike and Zscaler as the best positioned cybersecurity companies to benefit from the growing security spending cycle. We are still in the early innings of the shift in security architecture towards Zero Trust and SASE, of which we believe CrowdStrike and Zscaler will benefit the most.
Here’s a snapshot of government spending and the triple-digit increase in FY2020 growth in federal spending for Zscaler and CrowdStrike. The current administration’s commitment to cybersecurity should also benefit CrowdStrike and Zscaler as they continue to gain more share of federal spending.
1. CrowdStrike (CRWD)
In my past coverage of CrowdStrike here, I explained why the company would thrive as the fastest growing endpoint security vendor. Endpoints are frequently the first point of entry for attackers, so endpoint security is an integral part of a multilayered security strategy. CrowdStrike has thrived in this area, leading to the addition of a record 1,480 new subscription customers in Q4.
While CrowdStrike has demonstrated tremendous expertise in endpoint security, the full CrowdStrike Falcon Platform now encompasses much more. The full CrowdStrike platform, designed to define Cloud Security, includes managed services, security & IT operations, threat intelligence, identity protection, and log management. The power of CrowdStrike’s platform is demonstrated in the financial data, as 63% of CrowdStrike’s subscription customers have 4 or more Cloud Module Subscriptions. This number has grown from 47% two years ago and 55% last year.
The growth of this metric is important to CrowdStrike’s growth, as they have expanded their TAM through acquisitions and the launch of new modules that cover untapped areas of cybersecurity. We are now seeing the majority of CrowdStrike’s subscription customers, almost 2/3, adapt 4 or more modules meaning most customers are subscribing to the idea of having CrowdStrike handle most of, if not all of, their cybersecurity needs. CrowdStrike management has talked in the past about how most customers typically sign up for 1 or 2 modules but adapt more modules over time. This shows the success of the CrowdStrike customer life cycle. From the time the company onboards a new customer to the adaption of more modules, they are able to add new sources of revenue from already existing customers.
In Q4, CRWD grew revenue 77% YoY and added a record 1,480 new subscription customers (+82% YoY), with a number of marquee customer additions including Pfizer. CRWD also enjoyed a record quarter in profitability metrics with its best ever quarter of non-GAAP EPS (+$0.13), Free cash flow (+$97M), FCF margin (+37%), EBITDA (+$45M), and EBITDA margin (+17%).
CrowdStrike guided for 50% YoY revenue growth in FY 2021 and EPS of $0.29. The projected growth rate leads the security SaaS industry and our comparisons of ZS and NET, despite the stock trading at a slightly lower valuation than those stocks.
As previously discussed, with its recent acquisitions of Preempt and Humio, CrowdStrike has enhanced its capabilities beyond endpoint security to also encompass cloud workload security and identity protection. With Preempt Security, CrowdStrike is leading the charge with a Zero Trust solution focused on endpoints and workloads. In its Q4 earnings call, CrowdStrike CEO George Kurtz talked about how customers have become increasingly interested in its Zero Trust offering derived from Preempt following the Sunburst hack.
The acquisition of Humio will combine Humio's data ingestion and analysis engine with CrowdStrike’s technology. CEO George Kurtz discussed the Humio acquisition the company’s Q4 earnings call:
“With Humio, we are now redefining next-gen XDR through a platform that spans endpoints, identities, applications, the network edge and the cloud… Humio provides us the ability to expand our data leg and to solve more security and non-security use cases in real time… providing CrowdStrike with a greater time advantage over the competition and the adversary.”
It has become evident that CrowdStrike has continued to successfully enhance the capabilities it can offer and has taken a big step toward its goal of providing the “fastest, most cost efficient, and extensible cloud data platform that will deliver best-in-class visibility for security as well as observability for IT operations.”
2. Zscaler (ZS)
Zscaler ranks #2 behind CrowdStrike on our list of cybersecurity stocks to own. Like CrowdStrike, we believe Zscaler is well positioned to capture the industry wide shift to Zero Trust and SASE. We covered Zscaler’s Fiscal Q1 Results here. Fiscal Q2 was another solid quarter for Zscaler as they continue to show their strength as a major cybersecurity player. In Fiscal Q2, Zscaler grew revenue 55% YoY and gross billings an impressive 71%. Although Zscaler is an industry leader with strong fundamentals, our analysis shows that the company is not as strong fundamentally as CrowdStrike despite having a slightly higher valuation.
Over the next 12 months, Zscaler is projected to grow revenue 37% versus CrowdStrike’s 51%. ZS has slightly higher gross margins over the trailing 12 months at 78% versus CRWD’s 75% but lags CRWD in Operating Margin and FCF margin. We compare ZS to CRWD and NET fundamentally in the table below.
3. Cloudflare (NET)
We covered Cloudflare’s Q4 earnings here. Although Cloudflare is not purely a security company, approximately half of their products are security related. A lot of Cloudflare’s focus on the future is related, according to CEO Matthew Prince. In its Q4 earnings call, Cloudflare management talked about their expectations for a big shift in 2021 from a traditional hardware-based security approach to a much more modern Zero Trust approach. Cloudflare is well positioned to be one of the leading companies in enabling organizations to make this shift. However, we still view CRWD and ZS as better ways to play the shift in cybersecurity spending.
We feel NET is not as strong fundamentally as CRWD or ZS. The stock is also not as attractive from a valuation standpoint. For these reasons, NET ranks third behind CRWD (#1) and ZS (#2) on our list of security SaaS stocks to own moving forward.
Source: YCharts; data as of 3/25/21
Conclusion:
Selloffs are tough, but the silver lining is getting quality companies at much more reasonable valuations. CrowdStrike is a company that we think will do well when the market remembers that tech is not going anywhere and growth in this sector is not Covid dependent. CrowdStrike is my favorite company that had a stretched valuation throughout this past year and we see the selloff as a buying opportunity.
We hope you’re doing well. The new site is now fully launched at io-fund.com. We are also working on a new Forum Guide, FAQs and customer service flow so we can respond to account access issues faster.
We will continue to update you as we find opportunities in this selloff. Many of the stocks we own, including recent additions like CRWD and SNOW, are gifts at these valuations. We are also looking to add renewables exposure to the LTBH portfolio during this sell-off.
This week, you will get an update from David Marlin on security software stocks and why we entered CRWD. I’m working on a Snowflake update that should be out Monday of next week. There’s a chance the update on SNOW gets bumped for an analysis on renewables so we can figure out our allocation here. In the meantime, please reference this past analysis on Snowflake in Forbes here.
LTBH Update
I posted on the forum that we are adding Ethereum and Snowflake as LTBH positions. When the correction is over, we feel these two will more than make up for our losses in BAND and AMWL, which we have now closed. After the weak relative strength in both these positions on the bounce, we felt it was better to log a small loss and put those funds into stocks that we believe will continue to have stronger relative strength coming out of this correction.
Fundamentally, we closed AMWL because the forward is too low. During a few interviews about Unity, I discussed the downside to being early to a trend. For early trends we prefer to keep low allocations.
We were able to log a nice gain by cutting our position in TDOC in half close to the high. We think telehealth will be an important trend in the future. However, we could be very early to this trend. The health industry in particular is very slow moving and this could also be contributing to the reason telehealth is facing a tough year.
We closed Bandwidth because BAND should have had a breakout year with the digital transformation and work-from-home trend. Instead, we hold a large position in Zoom as we are bullish on Zoom Phone and the platform that Zoom is building that extends beyond a web conferencing app. I also don’t think Zoom is dependent on the work-from-home trend as I believe those who have Zoom accounts will continue with those accounts, except perhaps the education sector. Many of the education accounts were provided for free or at a reduced cost and this weighed on margins recently.
I am writing a free article update on Zoom Video as it’s part of my free coverage since last year. I think the market and financial news is confused as to where Zoom can go next and I am happy to go on record by revisiting my hardware-as-a-service thesis. It’ll also allow me to follow up on my free Bandwidth analysis and to let people know we closed the position.
Quick Note on the New Site
We will continue to have the old site available for six weeks as we expect to launch our new forum in May. At this time, we will archive Beth.Technology so the team can focus on the forum launch. The next six weeks will ensure we have sufficient time to handle any customer service issues due to the site transfer.
There are a few common mistakes we are seeing for access to the new site:
People have two or more emails and are running into issues because the system requires the email address you signed up with through Stripe.
Credit card info was inputted wrong and our system did not return an error message. You can check if your account is active with this link: https://io-fund.com/account. We have fixed this to where an error message is now returned.
Attempting to use the Beth.Technology password on IO-Fund.com. Due to security reasons, passwords can’t be transferred and you must set a new password for the new website.
To access the new site, you must set a new password. To set a new password, go to https://io-fund.com/welcome.
We plan to check in periodically with our returns. Please note, audited returns supersede any information we have provided that was unaudited. We pay an accountant to get our returns audited to build trust with readers and reduce any chance for error as we hold equities and crypto in separate accounts.
Our fund was founded on May 9, 2020, and this marks the inception of our fund to where the equities were combined. This is the date the auditors preferred to track returns for 2020, which makes sense because it represents our true YTD for the fund in 2020.
Below are the terms of the audit and our results from May 9, 2020 through December 31, 2020. We narrowly beat Ark with results of 115.5% compared to Ark Innovation’s returns of 113%.
Please note, although we are sharing our final number with you as a courtesy, we own the audit and we do not give consent for you to share this publicly. Although we will likely discuss our final number from time to time, the terms in which we do this are determined by our agreement with the accountant.
The performance of Ark Innovation from May, 2020 through December 31, 2020 was 113.5%
YTD Returns
We were up nearly 2X the Nasdaq on March 19 and more than 4X the Nasdaq with crypto on March 19. You can see this screenshot below.
We decided to start buying, which hurts returns in the short-term as we are fully aware the correction may not be over. Therefore, everything we buy right now immediately weighs on our results – whereas during an uptrend, what you buy immediately improves your results.
By March 19, ARKK was negative (1.7%) per Ycharts on equities alone compared to our positive 3.7%. With crypto and equities, our returns on March 19 is positive 15% with Bitcoin being up 96% and Chainlink being up 149% YTD.
After buying many equities last week, we have now dipped to negative (5%) on equities for March 26 compared to ARKK’s negative (8.5%). However, with crypto we are at positive 7.78% YTD with 12% allocation to crypto and 88% allocation to equities.
We started the year with a higher allocation to crypto than 12%, so the 7.78% YTD is conservative.
We hope our transparency and investment in an auditor demonstrates our integrity and builds trust with you. We realize you have a choice in who you subscribe to and we want you to know that we invest in our convictions and are right alongside you during the ups and downs. Competitively speaking, we think a research site that is audited is putting forth their best effort to earn your trust in what can be a very convoluted and (sadly) sometimes unprincipled space.
As we continue to build out our services with integrity, we believe the strength of our team will become even more apparent. Please keep in mind, we launched in July of 2019 and are about 18 months from the launch. I can only imagine what the team will be capable of over the next five years as we were comfortably positive with crypto during a major and severe selloff in tech.
We are also accomplishing this as a 4-person team compared to Wall Street funds who have hundreds of analysts contributing to portfolio decisions and machines calculating entries and exits.
We do understand that we are often painfully slow in making changes to our site and the forum. We do this to make sure we don’t take our eye off the ball with the market.
With that said, the site is now live and the new customized forum will be launched in May. We think the new site is simple, effective and fast to load. The forum is an important project that we plan to continually improve on and we can’t be more excited to share this with you in May.
Thanks for your readership and for being part of the I/O community.
