I’ve had one persistent reader ask about this one a few times in the last week or so, and it’s a publisher I haven’t heard of before… and the kind of idea that sounds intuitively interesting, since I do love subscription businesses… so we’re going to check it out today.

The pitch is from Swen Lorenz, selling subscriptions to his his Undervalued Shares service — the service appears to give you an almost monthly analysis of a stock that he likes (10 a year) for $49/year, though what he’s selling currently is the lifetime membership ($999), which gives you four additional reports per year that focus on smaller and less liquid names. Lorenz seems like an interesting guy, going by his web presence, and he’s been an investment blogger and/or analyst for a decade or so, including a fair amount of published work for the UK’s Master Investor publication and some commentary I’ve read from time to time about frontier markets… but I don’t know what his track record might be.

And it’s one of those reports about a smaller companies that he dangles as bait for potential subscribers, calling it a “world-leading subscription business.” Whatever might it be?

Let’s check out our clues, shall we? Here’s what he says on undervalued-shares.com:

“I am not giving away too many clues about this company…

“A US-based investor recently ploughed about UD 60m into the stock and bought 10% of the entire company. However, the stock got caught up in the recent tech sell-off. Now is a great opportunity to get in at an even lower price than just a few months ago.

“Based on the estimates of that investor, the stock could rise 580% by 2025 and more than tenfold by 2030.”

What does the company do? He doesn’t really say, just this:

“This company’s business is timeless and benefits from secular trends. Over the past decade, the company has grown by 23% p.a.”

OK, so it’s at least been around a while…

Where is it? We don’t have to buy shares in Uzbekistan or something like that, do we? Apparently not…

“It’s a stock that is listed on one of the world’s largest stock exchanges, so anyone can easily buy and sell it.

“With a market cap of less than USD 500m, though, the stock has limited trading liquidity.”

The other clue on the site is this:

“It has developed a truly unique, little-understood model for selling a subscription-based service — combining online retailing, financing, and social media.”

That’s kind of intriguing, though I don’t really understand what it means. Can we name our secret stock?

Indeed, the Thinkolator did pretty well with this — just a few swift kicks after I got it out of the garage, and it was chugging away and spat out a pretty quick answer: This is Naked Wines (WINE.L in London, NWINF OTC in the US or MJWNY for the 1:4 OTC ADR), a company that essentially serves as a middleman and venture investor for winemakers who want to sell direct to customers.

And this spurs a little memory on my part. I was actually a customer of Naked Wines for a while, I bought a few cases over a year or two, maybe six or seven years ago — I’d have to look up the details to be sure, but I do particularly remember enjoying their Moulin Champagne, and I think they had some interesting Oregon pinot noirs. It’s an intuitively kind of fun service to use — you “subscribe” for $40 a month to participate, and that money goes into your balance, and you can use that money (and additional funds) to buy particular wines that become available. They spin it as effectively a venture investing deal — they call you an “Angel” for supporting winemakers who want to go out on their own, so they find interesting and usually fairly low-volume producers who have some professional pedigree, often folks who have some experience growing grapes or creating wines for the big brands, and they produce wines that are cheaper than similar wines from well-known labels.

Naked Wines is listed on the London Stock Exchange and reports in Pounds, and was started in the UK, and that UK business is doing well — but the US business is now both their fastest growing and most important segment (they’re also active in Australia). As of their latest investor presentation, they have 886,000 active members (“Angels”) who are buying wine or contributing funds for future wine purchases, with 20% of them on active subscriptions that automatically send them wine. Those Angels give them enough financial strength to attract and fund independent winemakers (now 226 winemakers in their system), who make wines that are exclusively sold to the Angels — the strategy appears to be to invest in both marketing to Angels and recruitment of winemakers, with a payback period of 2-3 years, after which those new Angels become profitable customers. So the key indicators are likely to be the cost to acquire new Angels, and the retention of those Angels as active buyers — at the moment, that looks pretty good, with 88% sales retention and a three year payback of their marketing costs, so the math, at least, indicates that the business can scale to consistent profitability.

Right now, they’re not quite profitable but they do have free cash flow and plenty of cash on the books — though a lot of their cash is also restricted customer funds (that $40 that Angels pay each month sits in their account until they choose a wine to buy with it). They’re offering pretty tepid revenue guidance for their 2022 fiscal year, probably mostly because their huge surge in revenue in 2021 was fueled by a big investment in customer acquisition and some aggressive efforts to help winemakers who faced COVID challenges…. so although the compound annual growth rate has indeed been impressive over the past five years at about 24%, it wasn’t at all steady, the lion’s share of that growth came last year. The last six months have been flat on the revenue line, and they’re anticipating total sales growth of 2-7% for their current fiscal year (which we’re halfway through right now). To some degree, it looks like last year was a big marketing push and that caused a big growth surge in new Angels, and they’re now digesting that and likely to be investing a little less in recruiting new customers this year.

And yes, there is one fairly high-profile hedge fund guy who likes and has invested $60 million to buy 9.9% of Naked Wines — that’s Glen Kacher, who made this his pick at a Sohn Conference about six months ago and made a presentation that called it the “Netflix of Wines” (Kacher’s Light Street Capital is fairly closely followed, he’s one of the “Tiger Cubs” who came out of Julian Robertson’s Tiger Management and are therefore assumed to be investing royalty — Kacher isn’t one of the more famous ones, though he did reportedly get caught by some of the “short squeeze” craziness a year ago and have some big losses, but nor is he infamous like fellow Tiger Cub Bill Hwang). And Kacher’s optimism is where those big estimates for growth come from, the business quadrupling over a few years and growing 10X in a decade. I haven’t seen his actual presentation, but here’s the interview that CNBC did with both Kacher and Naked Wines CEO Nick Devlin following that Sohn pick:

So this isn’t exactly an unknown story on Wall Street, that particular pick drove a lot of attention in October and you’ll see a lot of “Netflix of Wine” stories that came out of his recommendation, and the shares shot up very briefly by about 40% — but that surge was short-lived, and the stock is now down about 50% from last year’s highs, so you’re no longer paying a really rich premium price for that Sohn Conference hype or the 2021 surge in revenue growth.

What it looks like you have now with Naked Wines is a subscription business with pretty good retention numbers, solid gross margins, a pretty good cash business because people pre-deposit for the wines they’ll eventually buy, and it is currently valued at only about 1X sales, partly because the current revenue growth is not particularly impressive. I don’t know if it will take off or not, or if they’ll be able to grow meaningfully in the future to match the big addressable market they see or will be stuck as a niche business, but that’s a pretty reasonable valuation if you want to begin thinking about it.

I enjoyed getting my boxes from Naked Wines a few years back, as I remember I enjoyed most of them, but I also eventually stopped — and I don’t remember why. I still drink plenty of wine, but maybe the backlog got too big, maybe I was just preoccupied with other things, maybe I had a few bottles in a row that I didn’t like, but I hadn’t thought about the company again until doing my research on it just now, and I guess that’s the risk — if they can’t keep customers, the business makes less sense, and for whatever reason they didn’t keep me. I’d be willing to give it another try, and as an investment it has some clear appeal because of the steady cash flow and the pretty strong community of winemakers they seem to have built, along with what looks like a very rational valuation, but it’s also a tough slog to go up against the big brands and famous labels and get the attention of wine drinkers. It’s not going to be the next Netflix, it may well stay a fairly small company, but I find myself reasonably attracted to the stock at first glance today.

What do you think? Worth popping the cork on this one? Think there are better opportunities for the wine-happy investor? Let us know with a comment below. Thanks for reading!

Disclosure: I do not own any of the companies mentioned above, and will not trade in any covered stock for at least three days after publication.