Wix (The Future of the Web) Ticker: Wix
When we consider the importance of the web in our future it is easy to see. Every person & company needs a website nowadays - whether that’s a blog to post about their ideas & passions (wink,wink), or as a business that is trying to convert leads. Wix has built a name for itself as the premier player in the industry - with a brand synonymous with website building. Of course, there are a lot of competitors because of the growing value of the industry. This “Creative Subscriptions” segment represents the majority of their business, and is a very predictable source of revenue. Through the service, users gain access to a url, website building/management services, email marketing, ads… This ecosystem makes switching costs very high & churn thusly low. Once you’re hooked on building & managing your website/customers on a platform, you are unlikely to switch. Also, if your readers/customers are used to a certain UI, you are also unlikely to want to change - which is what allows them almost 80% gross margins, a sign of very high future free cash flow margins. This is why the company expects to bring in 15.4 Billion over the next 10 years from just its existing customers (including Business Solutions).
Business Solutions are the new Shopify
This brings us to their next growth avenue - Business Solutions. After seeing the massive success of Shopify’s platform, Wix decided that it was time to begin monetizing their massive online marketplace business, and offer a better service at the same time. This makes up around one fourth of their business, though it is temporarily the lower margin segment at only 19%. This is primarily because of their facilitator for all other business services - Wix Payments. They have a very low take rate as they scale & get users to ramp quickly on the platform (which seems to be working rather well at 55% growth). Once they get critical mass on their platform, and get businesses to run on their payment solution along with the website, they will have an unbeatable ecosystem that will be virtually impossible to switch from. That future is what will create a stable business in an excellent industry, but with a great moat, as opposed to the commoditized industry it is today.
Reasonable valuation after meteoric drop
Over the past year, wix is down almost 50%, and though that sucks for anyone that owned shares, it means that we have an opportunity to pick up shares at an excellent bargain. At current prices, the shares trade for around a 7 p/s (price to sales) ratio. For a business with excellent margins, and a fast growing business (expected 20% sales growth next year), 7 times sales seems a cheap price in comparison to their future profits.
Upstart (The Future of Banking) Ticker: Upst
The banking system has long been the backbone of our economy and consumer spending. With their low rates and useful products have made their services ubiquitous. However, this success has left the market uninnovative, allowing players like Upstart to get involved. Upstart is down 80%-ish from its 52-week highs as investors rapidly rotated out of high growth stocks with valuations that had gotten a little ridiculous - of course, now, the stock no longer fits into that category. Often the biggest costs that banks face are sourcing the customers to give loans to, or the administrative costs associated with evaluating customers and again, giving out the loans. Banks, traditionally, have more deposits than they have the ability to give loans. This is where Upstart’s unique value proposition comes in. Upstart both generates and approves leads for banks, essentially then selling these leads to the banks and collecting fees. They are able to do this incredibly economically because of their proprietary algorithm; without taking into account credit score, Upstart’s models are able to consistently approve about 70% of its deals automatically (with this improving every time it processes an application). This automation is incredibly convenient for customers who go through a very simple & quick process, while it is also very cheap, since the algorithm gives both higher approval rates, lower interest rates and lower delinquency rates. Overall, their business model is an incredibly successful one that could change the banking industry going forward. If you believe in their algorithm, a company that both provides and evaluates loans for a bank, basically taking their job away and making them just money printers is of course an excellent value proposition that has an enormous runway for growth.
Fast Growth & Best-in-class algorithm
Upstart has a few growth avenues. Of course, as it expands into more banks, the company's corresponding revenues and profits will go up. Additionally, as it enters more verticals, specifically auto loans through its prodigy software acquisition, or the mortgage sector down the road, it's addressable market for loans, and therefore its revenue run-rate potential goes way up. More importantly, because its business model is based on an algorithm it has basically infinite scalability without the need for massive capital injections - that’s how it grew sales over 200% last year while maintaining an over 8% profit margin. That’s right, you heard me, a healthy profit margin on a company growing over 200%. It gets all the more surprising when you consider that the company currently trades for about 42 times forward earnings despite forecasting 50% sales growth on top of last year’s unbelievable numbers. Additionally, an algorithm-based business model means that just by existing its product becomes more valuable - every time it processes a loan and gets data, the performance of its machine learning improves. Overall, it is also key to keep in mind that there is also the potential for the company to eventually start giving out its own money as a bank since they will own the supply chain for the banks essentially - it’s not often that you can buy a company that could become a bank in the future at a market of just 8 billion.
Diversification Risks
Of course, with a stock, it’s never just sunshine & rainbows. There are real risks with the business model. For anyone that knows companies like Zillow - you know that algorithms are not perfect and any failure for a company that depends on it can lose it billions of dollars. Importantly, upstart is slightly different in that it simply passes the risk onto its lender partners, so it wouldn't lose money, but if losses mount so will sales drops… Additionally, it has a substantial concentration of business. Around 84% of its business is dependent on just two loan purchasers. Luckily, they have been diversifying their business rapidly, since last year it was just one player with a similar business makeup (they added 50% more bank partners this year).
Good Buy for those willing to take a little risk
To finish it all up, at the end of the day, this is a company with an excellent, profitable business model, with a long runway for growth and the ability to change the massive financial sector - trading for a cheap price. Of course, there are risks, but if you think the company's algorithm works and will continue to get better, it's tough to see a company with better prospects on the market today.
Roku (A unique way to play the streaming wars) Ticker: Roku
We all know that streaming is a bloody battlefield, and figuring out who is going to come out on top is a mystery. However, there is one way that you can play the whole field and win no matter what. Roku makes a streaming stick that allows anyone to connect their streaming services to their TV. Of course, this is a much more enjoyable experience for watching since it’s a bigger screen than a laptop or phone that you would normally use to connect to the web. This position as the host of the streaming services means that Roku gets to be the gatekeeper and collect money as a cut of every subscription made through roku. Additionally, they get paid fees if streaming services wnat direct connections from their remote to the service without clicking around. Finally, the company makes money through advertising - the home page for Roku for example is an excellent ad for any company since the whole family sees it in massive form as soon as they boot up the TV. They also run their own streaming service called RokuTV, that airs cheaper/older content and is ad-supported.
Duopoly in Streaming-Adjacent Platforms
Roku has been growing at an incredible pace, boosted by the pandemic. They have been so successful in fact that they consistently outsell their closest competitor (the Amazon Firestick), in new adds, recently matching the previous leader! They have managed to accumulate 56.4 million active users & have managed to upswing ARPU massively to $40.1 (up 50% year over year). Revenues in the future are expected to grow 37% next year as a consequence of all of these factors. Unfortunately, this growth has been seriously slowing on the user growth side as the TV market as a whole struggles. The new sales on TV’s fell below 2019 levels recently, and supply chain issues continue to constrain future prospects. On the flip side, the new deal with Google to keep Youtube should help maintain & grow users as well.
Cheap valuation after meteoric drop
This brings us to valuation. The company is being valued for around 136 times forward earnings & 12.5 times sales. This is a very low valuation for a company that is growing this fast and is in such an exciting industry. Comparable high-flyers with 50-ish% gross margins & sales growth close to 30% annually go for about 17-18 times sales. The biggest thing dragging down the stock and yielding this massive discount is the pessimism surrounding the company & its lack of moat/slowing growth. The slowing growth in my opinion is easily attributed to the supply chain weakness. Over the long-term, the streaming industry is virtually guaranteed to go up substantially, and Roku’s march towards better monetization seems right on track through things like RokuTV & general Connected TV increasing its value. This is bolstered by privacy intentions like Google's cookie elimination & Apple’s IOS 14.5 changes - since Roku uses first-part data collection, their business can only get a boost as these changes continue. On the competitive advantage side, it is true that any stream stick is basically the same, and easily interchangeable. It is this fact that forces Roku to sell the sticks at a loss. However, once installed, they keep their customers since there is no real motivation to change your provider - and since Roku has a massive installed base, their monetization is likely to keep going up safely. Although gaining new users is likely to be a struggle, they do have a market leading position, brand and UI, and so should be able to at the very least maintain their current market share in a growing industry. Not to mention that they recently cleared up a huge dispute with Google over Youtube viewing on the platform, and so managed to keep users using the app just as happy as before.
A little Risky, but a good long-term bet
Overall, the stock has been pummelled as it came down from an astronomical valuation. The pessimism around the future of its business & competitive advantage are real risks in the supply chain environment. However, I believe that the unstoppable march of streaming growth, the growing importance of connected TV, and the relief on supply constraints during 2022 could easily allow the stock to resume a similar value to its peers growing at above 30%. Though there is risk with high-flying growth stocks in this market environment, I think that the risk-reward principles are far out of sync.
By: Mateo Gjinali
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