Friday File: Quarterly Pressure on Small(er) Tech, plus a few buys and speculations
by Travis Johnson, Stock Gumshoe | August 5, 2021 1:43 pm
Roku, Fastly, Markel, Kambi, Boston Omaha and more are covered in my Latest thoughts (and buys and sells) from the Real Money Portfolio
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Source URL: https://www.stockgumshoe.com/2021/08/friday-file-quarterly-pressure-on-smaller-tech-plus-a-few-buys-and-speculations/
Travis, what is so depressing GAN and PENN valuations. According to your earlier analysis, this should not be happening, nor be as bad as it’s been.
I’ve never looked at PENN in any detail, but I think GAN is being undervalued by the market, perhaps in part because of fears that this vertical integration that pressured Kambi today will be a long term negative for all the smaller tech providers in online and sports betting.
I expect the spread of sports betting to continue, and for that rising tide to be good for most of the companies, but there’s also a pretty regular cycle of hype and then letdown that can hit hot “themes” like this.
Hello Travis ,
CAN, SYSX could you please look this two sticker I wanted to know it is good choice ?
I’ve looked at Canaan in the past and decided not to buy, they’re obviously levered to bitcoin prices so are doing fine lately. SYSX I’ve never looked at, but I would need a good reason to put any effort into researching a money-losing company whose revenue is shrinking. Looks like they’re trying to go beyond their money losing business and become a crypto miner, and I don’t really have any interest in miners — they’ll do well if prices rise, but they’re participating in an expensive arms race and have no pricing power or particular influence on that market, I generally prefer crypto companies that have some leverage or a business beyond mining.
Happy Birthday! Have a great weekend pondering why “there is no sign the US is going to meaningfully disarm”. Dang!
Did you ever have time to study Evolution Gaming, the more successful gaming business often mentioned in the same breath as Kambi? Skyhigh revenue and EBITDA growth, with a significantly wider moat than Kambi, given that their live casino games are difficult to copy and make profitable until you get scale and in turn attractive unit economics. As was the case with Kambi, their TAM is continuously expanding with US legislation and now also Korea and Japan. They are clear market leaders and their games are supremely popular. I’d love to hear your take.
Happy Birthday, Travis. I don’t celebrate getting older anymore 🙂 How can companies have greater than 100% retention?
Thanks! It’s net retention and net dollar retention that are usually mentioned — basically, they’re over 100% if existing customers spend more than last year (and enough to more than make up for the customers who leave or spend less).
My Dad used to say, of growing another year older – “It beats the alternative!”
Happy birthday Travis. May you and your family keep well & safe.
As always your Friday file and indeed your weekly comments are eagerly awaited and appreciated.
Thanks
Happy Birthday. Travis! Enjoy your weekend. Thanks for all you do!
Happy birthday Travis.
Talking of royalty companies i listened to the Curzio podcast this week and he interviewed the CEO of gold royalty co. Sounded impressive but dont they all 🙂
have you cast your expert eye over this one at all?
Thanks! Not recently, I speculated on that one ~5 years ago but took profits because there was no sign of ever getting close to production at their royalties, despite wildly self-promotional management — they’ve solved that to some degree with the Ely Gold merger, assuming it goes through, but I haven’t looked at it in any detail.
Happy Birthday Travis!
Happy birthday Travis! Could you please look at Steven Leeb’s new tease “Reset” and what stock he is hyping? Also, I saw a tease about a redux battery and vanadium miner from Canada, can’t remember who was teasing that… thanks
Travis, I own RPRX. I believe the dip is related to the recently priced HCRX IPO – smaller market cap & easier growth possibilities with similar valuation from what I have read. The big knock on RPRX has been the lack of sales growth given their HIV royalties have been deteriorating. I love the fcf here but a bit concerned over long term growth of the business at +20B, given many of their interests are capped & do not have the upside the drug makers have. I’ve added a bit more on the dip but with their more sophisticated shareholders putting downward pressure on share price ahead of earnings & many insider sells, I wonder if rumors of an underwhelming report are circulating.
Haven’t looked at HCRX yet, but it will be interesting to see how it looks when it begins trading. And yes, there’s always a cycle for these pharma royalties… some fade off and, if they buy well, others rise to take their place. The insider selling with this one is a challenge, since it was formed largely (like HCRX) as a private partnership and some of those partners will reduce (and have reduced) their stakes. I think RPRX is making reasonable acquisitions to build their future pipeline, and I generally think that the larger and more diversified portfolio, and leading position in the industry, are valuable — as they are in mining royalties, where the biggest player (Franco Nevada) has pretty much also always had the richest valuation.
RPRX reports tomorrow, so we’ll see if they surprise us either way, and over the next few months we’ll get some comparisons with HCRX to chew on as they begin to file and get analyst coverage. There’s risk in the ebb and flow of their portfolio, but they’ve done well at managing that for many years now so I have some faith that they can continue. I think the biggest risk is regulatory pressure on pricing.
Trade Note:
MetroMile (MILE) stunk up the joint with their quarterly update this quarter. The model continues to be generally appealing, with the ability to cut prices for customers pretty dramatically in a large percentage of the quotes they offer, but the combination of the return to “normal” driving as people begin to commute again (which has led to worse numbers for all the auto insurers, since more miles means more accident claims, as well as to lower signups since fewer people have the low-mileage lifestyle that allows for a big MILE price cut now), and, most importantly, the lack of meaningful growth in Metromile’s customer base, has led to this being a terrible investment to date.
Maybe they’re just moving too slow to build up their marketing, maybe there’s too much competition emerging, maybe the edge they can get with their higher-quality data is not good enough to offset the massively larger data sets owned by Progressive and GEICO, I don’t really know what the reason is… but as I was deciding whether or not to stick with MILE this morning I read through their update again, and saw that their net promoter score is still unimpressive, though they do brag about it (the number they claim is 49, which means roughly half of their customers would recommend them to a friend — better than the average auto insurer, but in the same ballpark as Progressive and GEICO, and these are self-reported so shouldn’t be relied on with any precision), but, perhaps more important, their retention numbers are lousy — their customer retention rate was only 68%.
If they’re going to have to ramp up spending dramatically to recruit new customers as they expand into new markets (as seems likely, given the sad level of growth currently), and yet can only keep 2/3 of customers after a year, it’s not going to work… or at least, it’s not going to work quickly, and they’re too small and too richly valued to grow that slowly, particularly because their flexible “pay per mile” offering, including letting your insurer monitor your driving behavior daily through your phone, still requires a hard sell to convince customers to try something different.
The recent performance is not necessarily a lot worse than other insurers, to be fair, or worse than their recent past, in part I’m just thinking more critically about it today, so it’s possible that I’m overreacting. But I don’t think so. It has been a crazy year and auto insurance has become a more fluid business in recent years as huge marketing campaigns from GEICO and Progressive have inspired more switching than used to be the case, but even in that context Metromile is not doing well — overall insurance retention rates tend to be pretty close to 90%, though some of the biggies have dropped below that recently, and if Metromile is going to build up quickly enough to justify even this much lower valuation, they’ll probably have to be well above average, not below average as they are now. They need to be beloved and benefit from viral marketing, or they really can’t compete.
So this quarter brings a reminder that InsurTech companies have to not just have a great product or service, but also be able to market themselves and scale up, and that’s really hard to do when you’re competing with the marketing budgets from GEICO, State Farm, Progressive and the other major national brands, all of whom also had a tough year last year in terms of customer retention and are fighting hard to recover and gain market share as claims pick up again.
Metromile thinks their marketing revamp with new post-COVID messaging will improve, and they think that regulatory delays on some of their pricing changes hurt the business in the quarter and that they’ll bounce back to some degree, and that may be true, but at this early stage if they can’t grow their policies in force pretty dramatically every quarter, and keep their customers, I don’t want to continue to bet on them. I’ve sold my equity stake at roughly a 50% loss now, though will continue to hold my warrants, just in case they’re able to surprise me, turn things around, and get a little growth ginned up in the next four years. I like the company, I liked their strategy, and I like the management team a lot… but for whatever reason, it’s not working on a basic level, they’re not recruiting customers aggressively enough (or keeping enough of them) to stake out a meaningful share in a crowded marketplace, and I don’t see any clear indication that they can turn that around dramatically in the next year or two. This won’t have a huge impact on the portfolio, it was a tiny stake, but there’s no sense in holding on to growth stocks that can’t grow.
Similar woes are hitting several other InsurTech names who have been trying to stake out new ground and have failed to build a strong enough base yet, like Hippo (HIPO), Root (ROOT) and Lemonade (LMND). We’ll see how it goes. A story and a cool product are not enough by themselves, you do need to also bring on customers very, very fast to justify your existence at these valuations, and they’re all struggling at that so far. Those names are all down at least 40-60% or so this year, while Progressive (PGR) is up 12% and Allstate up 25%. Disruption is cool and enticing, and the early stages of disruption are very volatile, so perhaps we give up too early… but often the incumbents adjust pretty well to the new world, and the disruptors don’t win.
Happy belated birthday Travis.
Agree with you on Metromile’s less effective marketing. I looked at their Facebook ads and I should have sold it long time ago. Judging from the likes and comments, it doesn’t look like the company was attracting much attention from the public. So it’s pretty inline with your excellent analysis.
Trade Note:
Today I cleared out my position in Yellowstone Acquisition (YSAC) and added some to my YSAC warrants (YSACW), which ends up being mostly a wash. I don’t expect YSAC shares to soar into the consummation of their deal to buy Sky Harbour and take it public, since it’s not a particularly sexy company and the business requires some patience while we wait for them to build out their network, and as I noted earlier I expect most of my exposure to Sky Harbour to be through my stake in Boston Omaha, Yellowstone’s sponsor and the biggest beneficiary of this deal. I do love long-term warrants, so I put a little more of a YSACW position into the portfolio, but in the end my YSAC position really just ended up being a way to get free warrants. The redemption price should be at least $10.16 per share, so there’s no rush to pull out even if you don’t like the deal, but given that I’ve run my cash balance down a bit I’d rather have the capital available for other things.
And speaking of other things, I also boosted my stake in WESCO (WCC) by 15-20% today, following a very strong earnings report that included a lot of positive news about the Anixter integration and a substantial upgrade to their revenue and earnings forecasts for 2021. WCC is now a buy for me up to the $120s ($129 would be 15X their guidance for 2021 earnings per share, that’s where I’d max out for now).
More on both of these shifts on Friday, but that’s your basic update.
Travis. Thanks to you, I bought WCC and it has done well for me.
I hope it continues to do so!
I bought YSACU to follow your lead and learn more about Warrants.
If I sell my shares now I guess I do not get the warrants because they have not completed a deal.
Am I to understand that you also did not get warrants but with the money from the sale of YSACU bought Warrants?
Thanks
Chuck
I split my YSACU units into YSAC shares and YSACW warrants (1/2 warrant per unit) a while back, a broker can do that for you upon request, but I did also buy a few more warrants today when I sold my YSAC shares.
How is it determined what the cost p/warrant will be when splitting from the units? What they traded at when the units were purchased?
I am also an enthusiast for warrants. Another company with them which you have mentioned recently is MarketWise -MKTWW. I cannot find out very much about them. Any thoughts anyone?
They just reported earnings, which were more or less as expected (and represent very strong growth), and the float is still very small (most of the SPAC shareholders redeemed instead of keeping shares), so the shares will probably be volatile for a while. Here’s a very little bit of a longer piece I wrote about them a few weeks ago:
If you happen to have a few moments to spare while trying to clear your email inbox, reading through MarketWise’s investor presentations is a good way to remind yourself that we, dear readers, are the commodity — the entire goal is to drive subscribers into that “ultra high value” bucket by getting them to eventually buy a bundle/lifetime deal for $15-30,000 (with, like a time share, ongoing maintenance fees of at least a few hundred bucks).
As you might guess, the first hurdle is the toughest one, getting you to pull out your credit card — it looks like they get only about 6% of their free subscribers to upgrade to a paid membership… but once you’re paying something, anything, you immediately become the most valuable prospect imaginable — a third of paid subs, they say, even those who just sign up for a $29 or $59 subscription, will eventually upgrade to a $500-1,000 subscription, and a third of those high end subscribers will upgrade further to that “ultra high” level. That means almost a half of a percent of their free members end up eventually buying a $15-30,000 package. Which means a new free member is worth at least $75-100 in the end, even if you ignore that middle step of the $500 upgrade subscription, which means they can spend heavily to bring subscribers in and still have high margins… it’s a GREAT business, and that’s why they’re fighting so hard to get you to sign up for a free sub or a low-end $50/yr subscription, once they get you in the door they know exactly how to push your buttons and get you to upgrade (well, not you, I mean, but, you know, regular investors).
Of course, despite the attractive financials for the company, I can’t buy it — the conflict would be too direct, since I write about these publishers a lot. But there’s a lot to like in those numbers. The skepticism, I assume, comes from the fact that investors, especially those who consider themselves professionals, like to look down their nose at the investment newsletter business, and don’t like these heavy marketers (for good reason, in many cases)… and, perhaps more justifiably, from the fact that MarketWise is going public at what has been a fantastic time for investment newsletter financial performance, driven by the big mass of new investors who got interested in the stock market over the past year, and had planned to use essentially all of that SPAC money (now redeemed, so no longer available) not as growth capital, which investors prefer, but as cash compensation for the sellers. If we’re at the peak of that investor sentiment, and the markets crash or just get boring for a couple years, selling newsletters will get tougher and cancellations will likely rise — though I expect the big players like MarketWise and the Motley Fool will hold up better than most.
Anything attractive in Industrials?
The only real traditional “industrials” I own right now are WESCO (WCC) and 3M (MMM), both of which are still in buy range for me. I haven’t been specifically looking for opportunities in that space, but I’m generally under-exposed to cyclical stocks (those which depend on economic growth to grow revenues, broadly speaking, which typically includes a lot of industrial companies). I’ll let you know if I find anything else I want to buy.