The Motley Fool is out with yet another “upgrade” portfolio service in their Discovery series… this time, Tom Gardner and the gang are flogging The Ownership Portfolio, a service that aims to recommend the best founder-led stocks in an attempt to find their next Tobi Lütke, Reed Hastings or Jeff Bezos. As with most of these kinds of “upgrade” services, it’s pricey ($1,999, “on sale” for $1,799) and they do not offer refunds — so caveat emptor.
They do, however, hint at a few of the stocks they’ll be recommending in the service… so we can sniff through those clues for you and get you started on your thinking — and for that, you don’t even have to pull out your credit card, just give me a few minutes of your time so we can get the Thinkolator cooking on these clues…
Here’s how the pitch starts, to give you some context:
“After helping a select group of Motley Fool members like you achieve record-breaking 165% returns in just two years’ time…
“Tom Gardner is inviting YOU to follow along – trade for trade – as he builds a BRAND-NEW portfolio of founder-led stocks with 500% upside potential…”
That two-year return comes from what they called The Partnership Portfolio, which apparently was another high-end service that picked some stocks that have done exceptionally well recently — founder-led stocks like Shopify (SHOP), Zoom Video (ZM) and Okta (OKTA), which have also been dramatic beneficiaries, it turns out, of the COVID-19 pandemic. They were doing fine and probably beating the market nicely before that, of course, but this year’s topsy-turvy market has really spurred that outperformance.
The basic point is that the Motley Fool has, when you go back through their results from Stock Advisor and other services, apparently done best when picking founder-led companies. And Tom Gardner thinks that will continue, with his next crop ready to be announced as a new portfolio. More from the ad:
“… even though Tom Gardner has been pounding the table for market-crushing, founder-led stocks like Amazon, Baidu, Netflix, and MercadoLibre for years, we know from our hundreds of discussions with loyal Motley Fool members that many of you are still missing out on these returns.
“He also believes the small group of founder-CEOs he’s identified for The Ownership Portfolio could represent the next round of founder-led companies, with the potential to produce returns of +1,000%, +5,000%, and even +10,000%.”
There’s a certain logic to all of this, of course — it makes sense that strong management makes for a better company… and companies that are still founder-led, with the founder owning a large stake, are perhaps more likely than average to be relatively young companies that are growing fast, in exciting industries. That’s certainly what has led the market in recent years.
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And the Fool ad also backs this up with reference to a Bain & Co. study that indicated founder-led companies generated “3X the wealth” of “other companies” from 1990-2014. If you’re curious about that research, Bain published in in the Harvard Business Review back in 2016. That’s an interesting article, worth a look as it tries to identify what makes founder-led companies stand out (like a push to change industry norms, an obsession with the “front line”, and the transmission to lower-level employees of an “owners’s mindset”). Here’s a little excerpt:
“We found that the companies most successful at maintaining profitable growth over the long term were disproportionately companies where the founder was still running the business (such as Oracle, Haier, or LBrands), was still involved on the Board of Directors (like Four Seasons Hotels and Resorts), or, most importantly, where the focus and principles of how to operate that the founder had originally put in place still endured (as at IKEA or at Enterprise Rent-A-Car)….
“Our research shows that companies that maintain the founder’s mentality as they age are four to five times more likely to be top quartile performers. For instance, an index of S&P 500 companies in which the founder is still deeply involved performed 3.1 times better than the rest over the past 15 years.”
Whether that will be true for the next generation, I don’t know… but it does make sense. We also risk falling into the trap of the “cult CEO” if we fall too far into this idea, so it’s important to be mindful of that — there are plenty of disastrous companies that thrived on strong-sounding founders who told a great story and built something shiny and new, from Ken Lay at Enron (which, lest we forget, was named “America’s Most Innovative Company” for six years in a row before the wheels fell off the bus and their criminal accounting came to light), to Adam Neumann at WeWork, who managed, thanks in part to ample funding from Softbank and others but mostly because of his charismatic leadershiop, to build a massive company based on a culture and a brand, while underneath it was mostly just a massively risk-taking rent arbitrage company (lease buildings long term, rent out space in them short term) that was valued wildly beyond its potential. So it’s important to still look at risks… being led by a founder might improve the long-term odds, and the reasons for that are logical and reasonable, but it isn’t a criteria that can weed out the disasters by itself.
So… what stocks will Tom Gardner actually be recommending in this portfolio? They say they’re starting out with 12 recommendations that are available for folks who sign up right now, and they hint at three of them… these are the clues dropped in the ad for the first one:
“That’s why the founders you will find in The Ownership Portfolio tend to be higher-risk/higher-reward investments – I’m talking about leaders like:
“A brilliant, 39-year-old founder who created an innovative, rapidly expanding cloud-based platform that helps companies around the globe seamlessly deliver the digital content we consume each day. With a $1 billion stake in the business, this young founder is highly aligned with shareholders.”
Thinkolator sez our best match here is Fastly (FSLY). The clues are not good enough for us to be definitive, but I think that’s very likely a reference to Artur Bergman, who founded Fastly and still owns a large stake but, earlier this year, stepped down as CEO to become Executive Chairman and “Chief Architect.” I like reading Bergman’s work, and I’m also impressed with Joshua Bixby, the CEO who replaced Bergman in late February just as the coronavirus hit the US (“Congratulations on your new job! Now, should we send everyone to work from home for six months?”).
Fastly has been recommended by at least one Motley Fool service in the past, it is young and growing very fast, and it’s objectively quite expensive — just like a lot of other stocks that have some connection to the “cloud”. Their focus is on building a flexible and software-driven network of edge servers that move more computing out of centralized data centers and closer to the end user, improving both speed and security. They’ll probably report their next quarter right around Election Day, so it wouldn’t be surprising if that gets lost in the shuffle a little bit, but so far their performance this year has been exceptional — you can their August shareholder letter is worth a read. They’ll probably become sustainably profitable at some point next year, though the surge in demand for the coronavirus means they did report some surprise profits in the last couple quarters (just barely, and only on an adjusted basis, but at least they’re not burning cash).
The valuation will probably make you choke on your coffee, Fastly trades at almost 40X trailing sales and about 25X expected 2021 sales, but it’s a great company and I think they’ve got a chance to build something with enduring value… and a network edge delivery and security service that could be nicely scalable as they bring more large customers on board. It has traded largely as a TikTok story over the past few months, soaring with TikTok’s popularity and collapsing when they confirmed that TikTok was their largest customer (12% of revenue for the first half of 2020) at the same time that investors feared TikTok would be shut down by the US government, so I’d expect the nuttiness to continue but, with TikTok still operating and the fight proceeding to court and back-room negotiations, we appear to be back in a period of relative optimism for the shares. I have a stake in Fastly shares and options that has grown to be quite meaningful in the Real Money Portfolio, and it’s easy to say that I knew it would be this successful when I first bought back in January, but sometimes I find it useful to look back and see how I was thinking of a stock before it became a big hit. This is what I wrote to the Irregulars when I first bought shares, in late January:
“1/24/20: Fastly (FSLY) has issued a lot of stock and is investing heavily in growing the business, but they are also growing their revenue line nicely… and on a conceptual basis, the stock has some similarities to strong winners that appeals to me: They bring acceleration and better services to content providers who don’t want to be under the control of the major platforms (Amazon, Google, etc.) — their business is similar to Akamai, but structured as a cloud service that developers can easily implement to move their cloud to the edge to speed up and improve the experience of their customers.
“The risk is that they might not grow fast enough for investors to tolerate the expense… and they disappointed a bit earlier this year, but I like the evangelical outlook of management and I expect that they’re going to appeal to developers. Numbers-wise, that risk shows up in the fact that their overhead and their marketing costs are growing more rapidly than their revenue, which is OK if they’re building out a company that can become truly large but not very sustainable if they’re wrong about that future growth potential.
“We’ll see how it works — I’ve put on a small speculation split between call options and shares (overall, about 0.5% of the portfolio, split roughly equally between equity and options). At 9X forward sales, Fastly looks downright cheap compared to other cloud services companies, and it’s still quite small, with a market cap of only $2.3 billion and a market that they’ve barely begun to penetrate… though it’s true that growth, recently at 35% on the top line, is also a little lighter than many. This has the flavor of one that could really take off over a few years if they can get some bigger contracts, and they have plenty of cash from the IPO to try to get growth accelerated… but it could also fall apart quickly, this is a high-risk speculation.”
Since then they saw Bergman step down as CEO and the market crash in March, both of which took the wind out of their sails and gave us a chance to buy more on the cheap, but then the growth, which had been a little disappointing at the end of 2019, took off as the work/play from home pandemic revolution (including TikTok) pushed companies to improve their speed and security at the edge of the network, and they were off to the races. So Fastly is now a $10 billion company, I still like their prospects, but it’s no longer trading at a discount to anything… odds are pretty good that we’ll see some big ups and downs, so I imagine we’ll see better buying opportunities ahead at some point, but one never knows — I’m likely to be very patient with Fastly, given their still-small market share and growth potential, so I wouldn’t talk you out of nibbling at these prices but the last time I convinced myself to add shares waswhen it collapsed from $120 to $80 in August.
Fastly is not a dot-com nothing company like those that created the first internet bubble, it’s got real customers and real growing revenue… but it is clearly a crazy momentum-growth story like so many others this year (yes, including Shopify, Okta and Zoom — and I say that as someone who has long owned both SHOP and OKTA), and quite often all of those usual suspects will rise or fall together… so be careful not to get too sucked into any one story and forget that larger context. If investors suddenly decide that they’ll stop paying 20-30X sales (or more) for hot growth stories, those few dozen of the hottest “cloud” growth stocks could all fall 50% in a week and still be pretty expensive compared to average valuations through history. A lot of them are great companies that are probably still worth owning if you can handle the ups and downs… but know that you’ve got a tiger by the tail.
And how about the second stock being hinted at for this Ownership Portfolio? Here are our clues…
“A 43-year-old founder who’s leading the charge to disrupt a $652 billion advertising industry. With a personal stake in the company worth over $2 billion and roughly 44% of the voting power, we believe this trailblazing founder is “all in” on stealing market share from slow-moving competitors.”
Again, here we’ve got a story that’s been told many times before — I expect that’s Jeff Green at The Trade Desk (TTD). He is 43, and does hold about 44% of the voting power in that company, which focuses on providing a programmatic buying ad platform for advertisers. Green currently holds a total of about 3.7 million shares, most of them supervoting Class B shares (he can convert those into Class A as he wishes, they have the same economic value — Class A shares are the ones traded on the exchange). At $570 a share today, with TTD at all-time highs again, Green’s shares are worth roughly $2 billion. And that’s despite selling some of the shares that he receives as compensation each year.
This is a stock I’ve held for a long time, and it has grown so strongly that it’s now my second largest position in the Real Money Portfolio — though I confess that my most recent trade in TTD was a sell, when I took some profits at $290 or so back in February. I actually first bought shares because it was brought to my attention by a teaser pitch from Tom Gardner, almost exactly three years ago.
What’s to like about The Trade Desk? They’re creating a real competitor to Google and Facebook, by providing a strong platform for advertisers that is not beholden to any particular outlet or publisher, and by bringing programmatic advertising to more platforms for data-driven decisionmaking. They don’t own ad inventory, and aim to help advertisers choose their outlets objectively… including web, online and app advertising, as well as the fast-growing streaming TV market and others. Jeff Green does a good job of selling the company’s vision, he’s frequently on CNBC with Jim Cramer and has helped to lift the profile of the company with investors, and the Fool has pitched the stock almost nonstop, primarily as a “Netflix killer” idea that would profit from streaming video, since I originally wrote about that teaser in October of 2017.
And unlike a lot of great young “story” companies, TTD has always been profitable. The valuation is still nutty, with a 2022 PE of over 100 and at 40X trailing sales, but profitable is good — a benefit of being really a pure “cloud” company, with those enticing high margins that you get from truly scalable software (their gross margin is 70%), and the growth potential is still pretty extreme — digital advertising is still growing fast, and the share of “programmatic” advertising within that segment is growing faster, still.
What’s not to like? Mostly, just fears of recession… and a crazy valuation. Advertising is recovering but is still quite challenged, so some of their customers are spending much less than usual… particularly in heavy-advertising sectors like entertainment (no hit movie releases right now) and travel. That’s clearly taking a bite out of the business, and TTD even reported a drop in revenue last quarter as a result. It’s quite apparent that investors really are buying into the “things will be back to normal and grow fast” story when it comes to the ad market and The Trade Desk, and I expect that’s probably likely… but it’s not at all guaranteed. There could be an ugly year ahead, and it’s unclear whether investors will stick with a company that’s trading at a nosebleed valuation if they report a few quarters of faltering growth.
TTD is roughly the same size today as the three biggest global ad agencies put together (WPP, OMC and IPG), so it’s a little challenging to imagine it getting dramatically larger… but then again, those three big advertisers report a total of about $40 billion in revenue per year, and they estimate that the global advertising market is roughly $700 billion a year, so it’s pretty easy to throw around big numbers in this space. Heck, Alphabet posted $166 billion in revenue over the past year (a number that is also falling right now, down 1.5% or so from a year ago), and that is almost entirely driven by ad spending. So if you want to be more optimistic, there’s some fuel for that.
I have no real interest in buying more TTD shares, since it’s such a large part of my portfolio, so I’m probably pretty biased and “anchored” by my history with the stock — but I can’t take it seriously at these prices. I am not selling, crazy valuations can always get crazier, but I won’t buy more, either, even though I really like Jeff Green’s leadership and think he’s building a company that could endure. Your perception might differ, but I think we’re dealing with a lot more risk here right now than the market is acknowledging — The Trade Desk can certainly “grow into” this valuation, they are the leading programmatic ad buying software platform and they’ve continued to add large new markers, including Connected TV (with a strong Amazon Video partnership) and China (working with huge providers like Alibaba, Baidu and Tencent), so I might be too cautious. Maybe the shakeups to the ad market will serve to accelerate data-driven programmatic ad buying, and that will make up from the general weakness of ad budgets in a lot of sectors this year, I don’t know… I hope it works out and I’ll continue to hold, but I just can’t chase the stock here.
They will probably report in that first week of November, too, right around the same time as Fastly, so that should be an interesting few days.
And one more:
“A pair of Israeli founders who are running a $13 billion software company that has been growing like gangbusters on the heels of COVID-19 by utilizing one of the most innovative subscription business models Tom has seen since he first discovered Netflix over 15 years ago.”
That’s a little more mysterious, without as much to go by when it comes to clues… the Thinkolator’s best guess here was that they’re teasing NICE (NICE), which is an older and established company that is focused on transforming its leading products in Financial Compliance and Customer Engagement into cloud businesses. Like many older enterprise software companies that are transitioning to the cloud and to a subscription/recurring revenue business, the top-line growth during this transition has not always been fantastic (it was only about 3% last quarter), but the overall income statement has been gradually improving, with margins getting better and, presumably, the income picture into the future becoming a bit more predictable with this sticky “cloud” revenue (which has recently been growing at 30%).
But NICE is not founder-led. The company was created about 35 years ago by a team of engineers who wanted to commercialize the phone logging and recording software they had developed for the Israeli Defense Forces… but I don’t think any of the founders are still involved in the company. NICE is an active recommendation from at least one Motley Fool service as of August, per their disclosures, but given the lack of a real “founder” presence I doubt it’s being pitched here by Tom Gardner. It may be worth thinking about for other reasons, and certainly the management team embraces some of those same qualities that Gardner talks about with founders, but I’ll look elsewhere.
Other interesting founder-led companies with Israeli connections that we might consider? There are tons, unfortunately, Israel is a huge source of founders whether those companies are birthed in Israel or in the US, particularly in technology… but we can narrow it down a little. Lemonade (LMND) might apply as sort of like a “subscription” for insurance, but it’s too small at $3 billion. Digital marketplace Fiverr (FVRR) offers up a subscription for content creators, sort of, but is likewise too small, with a market cap of about $5 billion. Check Point Software (CHKP) is a pretty obvious choice whenever you’re talking about a leading Israeli company, and it remains founder-led… but it was founded by three Israeli technology entprepreneurs, and only one of them, (so not “a pair”), is still listed as a board member or executive (that’s Gil Shwed, who remains CEO). SolarEdge (SEDG) could be a match, despite the fact that one of its Israeli co-founders passed away last year, but there’s not much in their business model that really speaks to “subscription” concept or growth through or due to COVID-19 (though the stock, for sure, has been on a tear this year).
Probably the best match, though it’s less-than-certain because it’s also a “three founders” company (so not “a pair” as teased), is the Israeli “easy website builder” company Wix (WIX). Which is a company I have completely missed at this point, because I dramatically underestimated the growth potential (just as I did with Zoom Media (ZM), regrettably, and for the same reason — there are lots of competitors), so I’ll probably be pretty biased about this one as well. Wix definitely has some things going for it — they had their best growth quarter in about a year just recently, so it does seem like some of the same “I need to build an online presence, quick!” push that drove a lot of new Shopify stores also drove the creation of a lot of new Wix websites.
Growth at Wix has been fairly steady over the past decade, and while it’s clearly been slowing somewhat the expectation, at least among analysts, is that they’re going to stay in this 25-30% revenue growth range for a few years — which would be impressive. The stock trades at “only” 15X trailing sales, and they should become sustainably profitable by next year. So that’s a guess for you, I’m not as sure about Wix being the match for this as I am about Fastly and The Trade Desk for the first two… but it is, at least a stock that Tom Gardner and the Motley Fool own and have certainly recommended in the past.
So I’ll turn it back over to you, dear friends — think these are fine founder-led stocks to be buying these days? Have other “Ownership” ideas that might be more compelling founder-led investments? Let us know with a comment below.
Disclosure: Of the companies mentioned above I own shares of and/or options on Fastly, The Trade Desk, Alphabet, Shopify and Okta. I will not trade in any covered stock for at least three days after publication, per Stock Gumshoe’s trading rules.