Our first IPO Candy portfolio "Named Candy" is designed to help investors focus on what we view as the most attractive newly-public names in the market. This portfolio has a growth orientation but will also seek to have some diversity by selecting "best of" companies across many different industries - we don't want to end up with a portfolio that is all technology and healthcare.
Before we get to the names here are a few facts to consider about how the portfolio will be managed:
- This is a long-only portfolio. Our aim is to have it substantially outperform the overall market and other IPO-focused ETF offerings.
- The portfolio does not have to be 100% invested at all times. We will scale our positions and exposure based on valuations. (not market timing)
- Our investment horizon is one to three years but we will take advantage of volatility by changing our weightings based on valuation relative to our estimate of "Present Future Value."
- Position sizes will be 3%, 6% and 9% with 6% representing our desired long-term weighting. This means the portfolio will be concentrated in about 15-20 names at a time. We could go as high as 33 and as low as 11 based on those weightings.
- Updates will be made from time to time and sent as alerts to subscribers who want to receive them.
- At the end of each quarter, we will publish our performance, aggregate changes and update this page with our investment rationale.
We'll look at the portfolio through a few different lenses - industries, themes, growth and valuation. We'll try and provide some of that "color" here to add some context to the investment positions.
|Size||Company||Ticker||Date Added||Entry Price||Recent Close||% CHG||IPO Candy Description|
|6%||SurveyMonkey||SVMK||2/5/2019||$13.69||$14.08||3%||Survey software and services|
|6%||Goosehead||GSHD||2/5/2019||$28.46||$27.50||-3%||Personal insurance agency for home, auto and specialty|
|3%||Anaplan||PLAN||2/5/2019||$32.04||$31.76||-1%||Business planning and management software|
|3%||DocuSign||DOCU||2/5/2019||$52.45||$51.77||-1%||Online e-signature and "agreement management platform"|
|3%||Zuora||ZUO||2/5/2019||$21.39||$21.30||0%||Online subscription and billing platform|
|3%||Elastic||ESTC||2/5/2019||$89.99||$87.02||-3%||Search-based data management and application platform|
|3%||Cardlytics||CDLX||2/5/2019||$16.56||$16.43||-1%||Banking focused consumer advertising platform|
|3%||Moderna||MRNA||2/5/2019||$17.18||$17.99||5%||mRNA-based drug development company|
|3%||Pluralsight||PS||2/5/2019||$31.46||$31.60||0%||Cloud-based technology learning platform|
|3%||Avalara||AVLR||2/5/2019||$41.96||$42.76||2%||Compliance solutions provider|
|3%||Spotify||SPOT||2/5/2019||$139.40||$134.71||-3%||Online digital music platform for consumers and artists|
|3%||GreenSky||GSKY||2/5/2019||$11.21||$11.05||-1%||Financing and payment solutions provider|
|3%||HubSpot||HUBS||2/5/2019||$163.78||$165.44||1%||Online sales and marketing software for SMB market|
|3%||Box||BOX||2/5/2019||$23.45||$23.51||0%||Cloud-based enterprise content management platform|
|3%||Funko||FNKO||2/5/2019||$17.46||$17.43||0%||Funko monetizes pop culture with playful products|
|3%||Twilio||TWLO||2/5/2019||$113.89||$114.78||1%||Twilio provides a library of API-based communication services|
|3%||Workiva||WK||2/5/2019||$42.50||$42.59||0%||Compliant enterprise information management platform|
|3%||StitchFix||SFIX||2/5/2019||$22.29||$22.47||1%||StitchFix is a personalized online clothing selling service|
It's true that "software has been eating everything" and this trend will continue. It will get even more dramatic because as more things come online (via IoT and other methods) the "reach" of software increases constantly. Increases in computing power and data make systems "smarter" using a host of "AI" technologies or good old fashioned statistical programming.
Given what we know about technology and investing this will generally be an area we are substantially overweight relative to industries like banking, energy and industrial companies. As you'll see below there are innovative companies in those industries that can be part of our core portfolio.
Twilio (TWLO) - We're written quite a bit on this one. To put it simply Twilio is the connective tissue that runs between all kinds of systems including mainframes, smartphones, applications, and IoT devices. In a world with software and systems want to do more and more they will increasingly call on Twilio. Also management is top notch. Fred Wilson highlighted the CEO as the person who made the best one-line pitch ever in the history of seed rounds. It's a little geeky but we love it: "we have taken the entire messy and complex world of telephony and reduced it to five API calls." Simply brilliant. The stock is rarely cheap and probably overvalued now but it's a "must own" as long as they continue to execute. You can see our older post here: Time to Buy Twilio.
SurveyMonkey (SVMK) - The name we could improve on but the fact remains that getting information from customers is essential for any business, online or otherwise. Our initial read of this IPO was only lukewarm. You can read up on it here: Ask the Monkey. But since then the market leader, Qualtrics, was purchased by SAP for $8B on the eve of their IPO. That leaves SurveyMonkey as the only pure play and a very attractive acquisition target. In addition the shares have languished during a very strong market for SaaS offerings.
Workiva (WK) - This enterprise SaaS provider fills a niche in how companies handle their reporting and filing. It combines some workflow with collaboration and compliance. It's not sexy but it's a great and sticky niche. It's also the type of application that companies can be convinced to buy in just about any economic environment. Workiva may not grow as rapidly as more broadly appealing companies like Twilio and Smartsheet but they have a very durable position.
Anaplan (PLAN) - This is a company that serves very large enterprises. So their market isn't as large as some more general purpose technology companies but their ability to let organizations "weaponize their data" is compelling. See our write-up for more depth: Weaponizing Analytics. Like many software names the stock has done well and is trading close out our FPV estimate but we're willing to have a starting position in this name.
HubSpot (HUBS) - HubSpot is the go-to choice for small and medium-sized businesses for their sales and marketing. One might consider HUBS a smaller version of Salesforce.com with a more modern technology stack and business model. We view the SMB space as a secular growth story within enterprise software and HubSpot perfectly positioned for that. We might take a closer look at Wix (WIX) which has also done very well.
Box (BOX) - Box is basically the enterprise version of Dropbox (DBX). We like Dropbox as well but their position seems more at-risk given the inroads Microsoft (MSFT) and Google (GOOG) are making in online storage. Box has more enterprise-specific features that insulate it more from competition at the commodity level. We do like the CEO and their strategy of moving further "upstream" has some risks but is mostly a positive.
Avalara (AVLR) - Handling sales tax is much harder than you would think. The rules and regulations are arbitrarily complex and vary by locality. Not just state levels but counties, cities, even within cities and towns. There are over 12,000 tax jurisdictions in the US alone. You can read more from our note: The Astonishing Avalara.
DocuSign (DOCU) - Most of us have used one of these online signature systems. DocuSign is the biggest but there is also HelloSign which was just acquired by Dropbox (DBX). Everyone wants speed and efficiency but as soon as you hear "paper" you know that you're in for something slow and painful. DocuSign offers an "eSignature" platform for contracts of all shapes and sizes. They also provide tools for workflow and integration with other enterprise systems. Contracts are a major source of friction in commerce and DocuSign is focused on automating the process. Their offering is fairly "sticky" and most companies will prefer to use one rather than many so being the market leader is really worth something here.
Zuora (ZUO) - Zuora makes billing software. That's right, you heard me. But billing software is where the market meets revenue and the growing complexity of subscription and "pay as you go" models means companies require software that is *both* sophisticated and nimble. This company also knows how to sell their wares better than most. You can read more here: Zuora Strives for Sex in Billing Software.
Cardlytics (CDLX) - There are some less-than-perfect issues with the Cardlytics story - most notably that they share a good portion of the revenue generated from their system with their customers. Still it's a compelling model in terms of effective advertising. We wrote about this one here: Cardlytics Gets Banks into the Online Ad Game. The reason we like this story is that unlike most advertising algorithms this one works based on what consumers actually purchase. Advertisers don't see the individual data but they know that their ads are being shown to their exact target customer because they have purchased specific items in the past. They can also afford to send more valuable and potentially behavior-changing offers to these targets in some cases. For example if I am Flemings Steakhouse and I can target a consumer who goes to Capital Grille several times a year I might be willing to offer them a $50 coupon. That's something they just can't do with any other targeting method.
Goosehead Insurance (GSHD) - Thanks to the name I missed this one the first time around. I might have been too busy (rightfully) bashing EverQuote (EVER) with our note EverQuote or EverCrap. Luckily I took a second look at Goosehead. These guys are actually doing something about the tremendous inefficiency in P&C insurance. In their case they start with better systems (built around Salesforce.com) versus the legacy hodge-podge that most agencies rely on. Then they hire and train younger, more entrepreneurial workers who deliver high product and a much higher level of service compared to industry norms. We will do a stand-alone note on this one later this year. As an added bonus their younger staff is much better positioned to work with the coveted millennial new home owner than the "normal" 55 year old insurance broker.
GreenSky (GSKY) - This one is a broken IPO. They came public at $23 and now trade just over $11/share. A big part of their challenge is positioning. They certainly provide some leading-edge FinTech innovation with their consumer loan origination, funding and servicing platform. Most of their revenue comes from transaction fees that are paid upfront by merchants at the point of sale. The two key markets are home improvement and elective healthcare with the typical costs are large enough for consumers to be interested or even require on-the-spot financing options. GreenSky also collects fees from loan servicing. Late in 2018 management reduced their EBITDA guidance for 2019 based on the steep and sudden increase in rates. Now that rates have stabilized and The Fed has indicated that rates may remain unchanged for some time we will see if GreenSky management can demonstrate results and improve their outlook for the current year. At current prices we like the risk/reward.
Spotify (SPOT) - Spotify has built a great asset in the consumer music space. We covered the IPO in some detail here: The Spotify. We note that the shares have declined some since their original IPO listing and are well-below our own estimates of PFV provided in the note. The highly-contested nature of the space is not lost on us. Small companies like Amazon, Apple and Google. We have to mention SiriusXM (SIRI), especially after their purchase of Pandora. Most of the value in SIRI however is in their exclusive, non-music content. As for the big boys, they certainly have an advantage in terms of size and ability to offer low-cost or even free options directly to customers. But so far their software efforts have been abysmal. On top of that their lack of cooperation mean that consumers are often left scratching their heads about the best way to consume and access content. Spotify has remained focused on being the best platform period and over the long-term this may enable them to continue to gain share.
StitchFix (SFIX) - For us StitchFix is about *data* not clothing. Yes they sell clothing via the "subscription model" and the service is a good fit for some segment of customers. Apparel is notorious for the near-total lack of real data. With data and some focused execution StitchFix could gain a meaningful share of the (massive) apparel market. We know that it's possible because a skilled person can successfully revamp your wardrobe though a combination of one onsite visit and a 1/2 day shopping excursion. This kind of personalized service might cost $500-1000 a day. But technology can deliver something close to this for far less. So far we give StitchFix management a C+/B- on execution versus potential but it's been enough. If they can improve that in the coming quarters the stock would perform very well.
Funko (FNKO) - These guys make the "Pop" figures you might have seen in stores or online. Most investors have seen these companies before and know that they are in a lousy business. There's more than meets the eye to the story though. The business is more durable than you might think. Funko has a giant selection and when we talk to store managers they say "every person who looks at them finds something to love and makes a purchase." It might be a cartoon figure, a pop star, an athlete or one of the many obscure and bizarre models. There has been something of a "mania" for these as well, many sell on eBay for large premiums. Investors don't like the whole "beanie baby" aspect of the story but it's not clear how much of that is really driving growth. This one will probably be a roller coaster.
Pluralsight (PS) - We were lukewarm on this IPO when it came out in May of 2018. However the company has improved their positioning since then and the industry dynamic driving their business is stronger than ever. Businesses can't find enough skilled workers and the need for technology expertise and innovation has never been greater. Pluralsight provides a learning platform that helps enterprise employees develop new skills and get considered for new assignments and advancement. We'll be looking at more stocks in here including the higher education space where companies like 2U (TWOU) have done better than most expected.
Moderna (MRNA) - We're starting out a little light on healthcare. Mainly because clinical trials are a crapshoot where even the "experts" seem to lose as often as they win. So why Moderna? They do have a kind of "platform" that attempts to kind of short-circuit gene therapy by directly manipulating cells with messenger RNA (MRNA). It's controversial but they have many partnerships and a great management team. Although their drugs will require clinical trials they have a lot of them already, 21 active compounds. That helps to provide some level of risk management. We acknowledge that it's yet to be proven that MRNA-based therapies can deliver on their promise. (Kind of like the whole CRISPR segment if you consider Editas (EDIT), CRISPR Therapeutics (CRSP) and Intellia (NTLA.)
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