With this update we add three mini-themes: cannabis, crypto, and sports betting to the mix along with the stocks we are using to play those trends over time. TLDR; Adding MAPS, DKNG, and COIN.
Cannabis should not be a Schedule 1 substance. It’s proven to be an important therapeutic and now that commercial interests in place the legalization wave will continue. States are also eager (desperate?) for new sources of tax revenue which helps to assuage concerns and prods legislators to act. Since the end product is an actual weed I find it hard to invest in that. But the technology to enable commerce in the business seems like a safe bet which is why we are going with WH Technology (MAPS) as our proxy for the growth of the legal cannabis industry.
WH Technology is better known as Weedmaps which started out as a kind of “Yelp for weed” but that’s not an accurate representation of the business today. They have a long operating history in the cannabis space and have developed a suite of online services to serve businesses with a “Business in a Box” model that provides a set of SaaS components for compliant delivery/fulfillment, on-site operations for the store, stock management, analytics and promotional tools.
It’s hard to pick a direct example but Zillow (Z) is somewhat illustrative. They started by capturing all the consumers on their platform and then started selling services to real estate agencies and companies. These were more about advertising and promotion than a legitimate SaaS solution though. More to the point might be Compass Real Estate (COMP) a recent IPO that provides a comprehensive suite of software solutions for the real estate broker.
Revenues are approaching $200M/year with a 40% growth rate and 95% gross margin. They have been profitable in past years to the tune of 15-20% EBITDA but lately have been investing for growth so running more like break even.
With ~150M shares outstanding and a current price of $18 that puts the market value at $2.7B which is certainly not cheap. However they have an ideal industry position and I’m impressed with the management team. I’ve looked for several years in search of what I consider an institutional quality play on this market so am willing to pay up to own this one. Consider how well Etsy (ETSY) has done. It was easy to be skeptical at the time of their IPO but now sporting a $22B market value the shares have been a huge winner.
People love sports. People love betting. The combination is a huge winner. All the major sports leagues have figured out that the biggest path to more opportunity and fan “engagement” is around sports betting. We’re likely to have a few plays here. Genius Sports (GENI) is already in our SPACvest portfolio. There are a bunch of offerings coming into the market now and it’s still fairly early in terms of consumer adoption. Despite the negative press that DraftKings (DKNG) has received from some short-focused research firms they are in a strong position to be the leading consumer-focused platform in this space. It’s a dodgy industry going legit which means a well-capitalized and trusted company can capture a large share of the market.
Perhaps it’s an uninspired choice but after looking at a number of the other, mostly smaller cap names, this one seems like the only safe bet given a long-term view. They certainly can and will acquire along the way and partnerships will be critical here as the sports betting and media industries are rapidly converging into tight working relationships.
In 2018 many thought that crypto had “arrived” with the explosion of token offerings and what seemed like the moment of adoption. That turned out not to be true (the SEC had some things to say about it.) But it didn’t mean that it was over, just a prod for more innovation.
We had a giant surge in crypto interest and prices this past year. It led many respected individuals and firms to adopt a policy acknowledging crypto as an “asset class” that deserves some specific portfolio allocation. That’s a big deal. Unfortunately, things like absurd NFT antics have clouded the legitimacy of the market. Burning a painting and selling an NFT of the destruction is just pure stupidity.
Eventually smart people will demonstrate just how powerful the NFT is when they deliver real use cases that people will understand, pay for, and be able to trade. My guess is that it will be a market counted first in the billions and ultimately in the trillions. The NFT will give us the ability to deliver smart contracts, deal with the thorny problem of provenance and open opportunities we’ve not had before. Here I am using NFT in a generic fashion to indicate the flexibility of digital contracts. Thinking about the NFT as it is often shown in the news today is like thinking about the internet by looking at a single website in 1995.
It is very early here. Part of the investment challenge is that companies who may be in a fantastic position to profit from this technology don’t understand it well enough to execute it. That’s why start-ups like Dapper Labs have done well by working with organizations like the NBA. But even that is lame based on where it should and will go. Companies like Endeavor (EDR) have a monster opportunity but I am sure management is incapable of grasping it. We do have a large position in Topps (MUDS) via the SPACvest model portfolio but it doesn’t quite fit here.
The level of activity in the crypto technology space is analogous to that of internet technologies back in the late 1990’s. But at this stage it’s not prudent to try and pick winners – better to go with the infrastructure providers and rent collectors. One illustrative quote from Jeremy Allaire of Circle is that “our partners are developing over 50 amazing projects but at this point it’s impossible to say which ones, if any, will be commercial successes.” (It’s possible I don’t have every word correctly in that quote but it’s almost exact.)
We’re going with Coinbase (COIN) which is a strong position with a good business model and the right management team to allow us to play this while sleeping soundly. Of course one should own some crypto assets too but we’ll save that for another post.
My biggest concern around Coinbase has been the competition – mainly due to potential margin impact. But Coinbase has built a strong management team and made investments in *both* retail and institutional segments of the business. That makes them unique. In most cases, institutional players are terrible at retail and vice versa. In this market, there are also the upstarts but trust is an important issue here. If you agree that this is going to be a mainstream category then it is likely to be dominated by a mainstream company like Coinbase.
Volatility is your friend if you are positioned correctly. I see Coinbase as very effective way to play both growth in the asset class and ongoing volatility. They know how to make money.
That’s it for part #3. Now that we are nearly done I expect #4 to add to some existing themes but not quite cover software. The reason is that our approach to software is going to be very different. There are too many companies chasing the same sub-themes there so we will be applying a filter that consists of several measures I like to use – recent business momentum, margins, and present future value. My expectation is that this will yield some good selections on both the long and the short sides of the software sector. While there will still be “thematic” names in the Model Portfolio I’ll introduce a separate “pairs trade” approach to software using this model which we will adjust on a quarterly basis.