Search

Week in Review: 11/11/2021

1 John Chapter 2 verses 15-16 state "Do not love the world or anything in the world. If anyone loves the world, love for the Father is not in them. For everything in the world - the lust of the flesh, the lust of the eyes, and the pride of life - comes not from the Father but from the world."


What does this mean? To me it simply means that God is the priority. God created me and His desire is for me to have a relationship with Him. The world has many aspects that place a priority away from God. If I choose a career, my family, a vice, whatever it may be, over God, then I risk losing my relationship with Him. God also created many things that are positive and a blessing, so it isn't wrong to focus on my career, but God should be a part of it.


I see a parallel here for those seeking mid- and long-term returns versus Wallstreet. I've said this before, Wallstreet doesn't pick winners, but rather, they play a never-ending game of musical chairs across the 7,000 or so public companies available. It involves manipulation to varying degrees, notably with information outlets, that is simply an accepted norm. I'm not saying Wallstreet doesn't have some of the brightest people working for them, I'm saying many investors outside of Wallstreet are better suited to be using investment and management strategies not associated with these tactics.


Similar to a couple weeks back, it's been quite hectic with earnings reports, and updating financial models. As such, here's some thoughts on what's been happening. I'll use some charts to help illustrate.


Affirm Holdings (AFRM)

Affirm was trading in a range from low $150s to nearly $170 the past month so why did the SP drop and then pop? The drop was driven by Mastercard Inc.'s (MA) disclosed information (timed interestingly before Affirms' earnings) regarding their BNPL strategies. The market has become highly sensitive to information that has no tangible impact, but rather serves as a perception driver. Mastercard's transition into BNPL is an obvious variable. But, will they be successful, this is no gaurantee.


Regardless, Affirm was punished yesterday as perception trumped reality. Yesterday's earnings announcement couldn't have been better. Affirm stated the following:

Today, the Company announced that it has expanded its relationship with Amazon. Affirm will be generally available to support all eligible purchases of $50 or more on Amazon.com and the Amazon shopping app in the United States. Consumers will have the option to split the total cost of eligible purchases into monthly payments at checkout with no late or hidden fees, ever. As part of an amended agreement, Affirm will serve as Amazon's only third party, non credit card, buy now, pay later ("BNPL") option in the U.S. Until January 2023, Amazon will be subject to certain restrictions on providing other installment products in the U.S. by other BNPL providers. Affirm will also be integrated into Amazon Pay’s digital wallet in the U.S.

Affirm has been a highly misunderstood company with Wallstreet using it as an opportunity to muddy the potential. Most analysts have not given the company credit for its business model and under-represented the potential. The rug was pulled out from some of them with Affirms' partnerships with Apple, Inc. (AAPL) and Amazon, Inc. (AMZN), the two best BNPL companies to be aligned with.


This exclusive deal with Amazon is going to propel Affirms' flywheel further with respect to Active Customers, Transactions per Active Customer, and Transaction Spend per Active Customer, all driving GMV higher. Affirm's take-rate from GMV is the path to Net Revenue growth, and interestingly, Affirm just saw a huge inflection in Cash Flow during its FY 22 Q1 report as well. OCF/FCF margins stand at 18%/30% respectively, and Net Cash stands at $1.7 billion.


I have to admit that I blew it with Affirm initially. Affirm was a top ten holding and I had an average cost basis at $67. I made the mistake of liquidating the position, but jumped in quickly after the initial announcements of Apple and Amazon testing the service. My renewed cost basis sits at $94 so all-in-all I'm still doing well. I will be looking for more perception-based volatility to see if the SP can revisit the $125 level. I'm sure there will be more FUD on the horizon, and I see any retracement to $125 being a good point to initiate and/or accumulate.


Airbnb, Inc. (ABNB)

Look familiar? It should from Affirm's chart above. Airbnb is another company that has continued to be misunderstood. In 2021, every hotel property, OTA, web-based booking company all are doing great. But when the dust settles and things stabilize, Airbnb is going to be the king of Revenue growth, and Cash Flow against these peers.


The numbers for Q3 2021 were excellent. Airbnb's CEO continues to speak to the paradigm shift for travel and work, as they blend together. I agree with this statement, and a big driver is the poor quality of conventional hotels. The outdated and sterile environments are far too common. As the work/travel blend continues, disdain for traditional hotel accommodations just gets much more blatant. Many hotels today find themselves in a comparison to "slum-lord" accommodations that any average Airbnb property can handily beat.


Annual Nights & Experiences Booked are tracking back towards pre-pandemic highs, but Average GBV Booked has skyrocketed as demand for Airbnb properties has surged and remained robust. This has translated to a record GBV despite lower Annual Nights & Experiences Booked. Net Revenue for Airbnb as a percentage of GBV has improved as a result as normalization occurs.


Airbnb's GM stands near 80% as a result with FCF margin north of 32%. Airbnb's Net Cash position stands at $6 billion. The company's business model is poised to be a Cash Cow as they continue to lead the market.


Bakkt Holdings (BKKT)

By now, everyone who pays attention to the market should be well acquainted with Bakkt. The deals announced with Mastercard and Fiserv, Inc. (FISV) propelled the SP from $8.50 to as high as over $50 recently. I've been watching Bakkt ever since February of this year and owned warrants for a while selling during the pop.


Bakkt will be reporting tomorrow and in the event there is no new news announcements, I think the SP could see further selling pressure. Investors need to understand that Bakkt was initially targeting Net Revenue at $515 million over the mid-term. I don't think there's good enough visibility on how much of an increase in Net Revenue to model - in some ways I'm using this logic similarly as the cop-out from Wallstreet with Affirm. Additionally, if Bakkt redeems warrants, there will likely be further volatility to the downside for the common as warrants continue to trade at a discount based on the exercise price.


I could be wrong, but I'm going to wait and see post-earnings how the SP trades. Depending on how the call goes and how the SP trades, I may begin to build a position in the common. Today's SP action below $25 could have been a pretty good level to initiate, but I still feel that Bakkt has a lot more to prove versus where Affirm was as a comparable. This is why I feel justified in being more patient. I took this approach with SoFi Technologies (SOFI) and it didn't work out well (granted I held a position in SoFi warrants below $2 dollars and cashed out big on it). I still think like SoFi and Bakkt will offer a solid entry opportunity in the short-term on pullbacks.


Coinbase Global (COIN)


Coinbase has had it rough ever since going public back in April. From the first-day peak near $430, all the way down a low of $208. Many on Wallstreet have been unwilling to think about the big picture versus the short-term volatility of Cryptocurrencies. This of course has led to a recent break-out with Coinbase finally getting strong momentum back above the $300 level.

I like how Coinbase has responded since the strong volatility post-earnings. In after-hours, Coinbased dropped by as much as 15%, which translated into a much more muted 6% loss the following day. Today, Coinbase was up over 2% and is up another 2% in after-hours. Robinhood Markets (HOOD) got hammered pretty good as there was a stark miss on Revenue and lower guidance. Coinbase similarly missed on Revenue, but not by as much proportionally.


Coinbase is a force when it comes to the company's fundamental strength. Trading volume now stands at $1.2 trillion, Verified Users at 73 million, MTUs at 7.4 million, and $255 billion Assets on Platform. Coinbase is poised to eclipse $7 billion in Net Revenue, with an LTM FCF margin at nearly 50%. I've said it before, Coinbase is headed towards $20 billion in Net Revenue over the mid-term and is the equivalent of a past Mastercard or Visa, Inc. (V) from a valuation perspective. Yes, I believe Coinbase will command an EV/Revenue north of 20 times and OCF/FCF per share at 50-75 times being fully justified from growth.


Coupang, Inc. (CPNG)

Coupang was slated to report today, but they have deferred to observe the U.S. Veterans Day holiday - good on them! That being said, Coupang has been highly suppressed since the March IPO. This has led to a very dreary downward trend from the first-day peak of $69 to a low of $25.75. I view the key level over the past few weeks being $30. Coupang has really struggled to get north of this level.


As such, I'll be providing additional commentary edits to this section for tomorrow. Coupang has thus far performed well with respect to reporting during its short public life. I am eager to see how well the company has done. The opportunity remains large in South Korea for significant growth. Tomorrow morning, we'll see how things shape up.


11/12/2021 Update: I've updated my financial model with Coupang and the results were mixed in my opinion. The market's reaction with the SP down over 6% is mostly due to a higher expectation for Net Revenue. We'll see how big the Q4 period ends up, Coupang is tracking close to my Net Revenue estimate at $19 billion for all of 2021.


Active Customers have sustained strong performance as evidenced from the 20% growth for 15 consecutive quarters year-over-year. However, this metric has retracted from prior pandemic peaks. Net Revenue per Active Customer has continued to increase, which is highly positive for mid- and long-term potential.


It remains to be seen how seasonality will finish 2021, but Coupang's OCF has turned negative for the LTM basis. I am now modeling an increased Cash Burn and have reduced my EV/Revenue multiple valuation. I am deferring the expectation for Coupang to generate positive OCF to next year as a conservative approach and reducing mid-term OCF margin from10% to 7.5%. at today's SP, I still see compelling potential investment returns towards 30% annualized if Coupang can sustain a 20% Net Revenue growth rate over the next four years. The company has $3.5 billion in Net Cash.


DoorDash, Inc. (DASH)

DoorDash is another one that many investors have gotten wrong for the most part. DoorDash has had many naysayers, some making comparisons with Domino's Pizza, Inc. (DPZ), but most have not focused on the extraordinary performance that the company has achieved.


I think when DoorDash was trading in the $110-$130 range, if you had asked anyone would like to own a company at this price headed to over $10 billion in Net Revenue with the potential for a 20% OCF margin, they would all have said yes enthusiastically. But if I would have told you that this is DoorDash's mid-term potential, most would simply have laughed.


As of Q3 2021, DoorDash's LTM Net Revenue stands at $4.6 billion with a 10% OCF margin. Total Orders have already hit 1.3 billion including GOV per Order at just over $30 remaining fairly constant the past few years. This has translated to a GOV at $39 billion with a take-rate near 12% for Net Revenue.


The Wolt deal is interesting and the market cheered it strongly. I think that DoorDash's execution beating out all competition in the U.S. (without question) is a strong indication of how the company can integrate Wolt's European focus to expand upon its tremendous success.


DoorDash has been expanding its delivery services beyond the food industry. Management has continually stated that their delivery business model has provided them with a successful operation in one of the most challenging industries. The company continues to execute ahead of the competition to diverse markets. While some think it could be unthinkable, I do believe that DoorDash will begin to encroach on certain markets within FedEx Corp. (FDX) and United Parcel Service (UPS) operating areas.


Lucid Group (LCID)

Remember when Lucid was trading over $50 per share and everyone who either bought at this level or didn't sell from prior levels was made fun of? Well, Lucid has momentum back and is nearly back at this level. Is it overvalued, likely, but the EV revolution has a lot at stake and for a company like Lucid, the field to win is wide open for the taking.


Monday is going to be very interesting as Lucid will provide a very anticipated earnings report. Everyone is going to be looking for any updates on delivery estimates. I'm not sure we'll get much on that, unless management is highly confident. I have suspected that Lucid has been highly conservative on their estimated delivery numbers. If I'm right, then the mid-term upside potential is definitely going to increase.


While Lucid Air, including the Dream edition has been very successful with SOP and deliveries, the Gravity is what is going to propel Lucid to market dominance. I view the Gravity as having the potential to become the top selling SUV in the U.S. and other geographic markets potentially.


For those thinking that Ford Motor Company (F) and General Motors Co. (GM) have the scale and cannot be beat, they are a decade or more behind, and in many ways, their transitional risks are much greater than the vertically integrated EV leaders. If anyone doesn't know who those are, it's time to get acquainted with Tesla, Inc. (TSLA), Lucid and Rivian Automotive, Inc. (RIVN).


Opendoor Technologies (OPEN)

Coming in to Opendoor's Q3 2021 earnings report, the market was beyond nervous as the SP dropped from over $24 to as low as nearly $19. Today, the SP rallied nearly 16% as Opendoor hit all the marks it needed to.


I was looking mostly at Opendoor's need to beat Revenue estimates and to perform well on GMs, which they did. They also provided sustained guidance above Wallstreet estimates for Q4, which could be beaten. In fact, I believe that if these estimates are not beaten, that this could lead to a sell-off in the SP, especially if the SP rallies towards $30.

By now, everyone should know that Zillow Group (ZG) has exited the iBuying market for home sales. Opendoor's sustained success is testament that Zillow's execution was the cause for failure. I was highly suspect of Zillow as the company has a suite of digital services, with nearly 50% being outside of iBuying. Additionally, Zillow's iBuying segment was not fully digital, and the company was clearly struggling to keep up with Opendoor.


On an LTM basis, Opendoor's Revenues stand at $4.5 billion. I'm estimating them to achieve $6.6 billion for all of 2021 and over $12 billion in 2022. But the most important area of my focus moving forward is on Adjusted FCF. For the LTM, Opendoor's Adjusted FCF stood at negative $1.1 billion. This has exceeded my initial estimate and I'm now going to assume a higher Cash Burn over the next few years. In fact, Opendoor may not be able to achieve positive Adjusted FCF until 2025.


I remain bullish on Opendoor for the simple fact that if the company can successfully scale, they will pivot further to integrating more real estate services. Being vertically integrated will serve as a large opportunity to pull in all the services that home sellers using the platform will need. This the ultimate mid- and long-term potential that I believe may have been the greatest misstep by Zillow, if Opendoor succeeds, Zillow's digital suite of services may one day become obsolete.


Rivian Automotive, Inc. (RIVN)

What a couple of days it has been for Rivian. The company raised nearly $12 billion during its IPO, as it was unsurprisingly oversubscribed. This places the company flush with Cash at $17 billion (no debt) including Q3 information. So where do we go from here?


Modeling Rivian is going to be tough, but I've made my initial attempt assuming that they will possibly deliver 40,000 vehicles between R1s and EDVs. The EDV opportunity has gotten interesting as Rivian updated their website to include fleets beyond Amazon with orders taking place in 2022 and deliveries in 2023. For those familiar, Amazon has an exclusive agreement, disclosed in the S-1 filing where Rivian is solely meant to produce EDVs to Amazon (100,000 order pending) over four years, and the next two thereafter, based on Amazon's first right of refusal.


If Rivian is able to begin delivering EDVs beyond Amazon sooner than later, this is a big positive for a faster ramp up in production and growth, likely a key focus on the $12 billion in IPO proceeds. Rivian will also be offering R1s as fleet options.


I was fortunate to get Rivian at $78 per share via SoFi. I missed an opportunity to double the position in the $90s, and I will likely be looking to see if the SP can drop back below $105. I view Rivian as a compelling investment below or close to $100 per share.


Roblox Corp. (RBLX)

Roblox is another company that investors have really struggled with since going public. The market often is a product of Wallstreet's control over the short-term, but over time, winners can never be held back. So what's the deal with Roblox?


Roblox is in a very strong position as it dominates the metaverse world for younger age groups. However, the company clearly understands that it will need to pivot to older age groups over time. This trend is modestly taking shape and I expect it to continue to accelerate over time. At the same time, Roblox is poised to see accelerated growth globally.


Roblox's DAUs have grown substantially, as have Hours Engaged, while Average Bookings per DAU have also trekked higher. Fundamentally, Roblox is in a very strong position with $1.9 billion in Cash and a 40% or more OCF/FCF margin.


Facebook, Inc.'s (FB), or I guess now Meta's interest in the metaverse is a good indication that Roblox is on the right track. While Unity Software (U) has seen a positive result as well post-earnings, Roblox is the clear leader when it comes to financial/fundamental performance. For those not aware, upon going public, Roblox's Revenue was below Unity, today, the tables have turned substantially, and I expect the mid- and long-term to continue to portray this trend.


Vroom, Inc. (VRM)

Vroom has had an extremely rough go of it since going public. In fact, on the surface while most of Wallstreet remains bullish, PTs have been dropping as many statements revolve around the company's potential, contrasted with the current tough growth headwinds. I see this as a typical reaction of Wallstreet to focus on perceptions versus the reality of how the company may be valued as it continues to execute.


One read between the lines is that Wallstreet wants to see Vroom's growth accelerate. This is clear as Vroom's fundamentals are superior to that of Carvana, Inc. (CVNA), and yet Carvana is yielded a premium on valuation as it has scaled successfully. Vroom has taken more of an asset-light model and is looking to ramp up more facilities which may end up leading to the need for more capital. Regardless, the key aspect here is similar to Airbnb. All used car dealerships, and platforms are seeing very robust growth in demand and corresponding growth in Revenue. Like Airbnb's competitors, over the next few years, both Carvana and Vroom will exponentially outperform and continue to take market.


The rally post-earnings this week was short-lived as today's downgrades continued to weigh on any break-out. I wasn't shocked, and I did accumulate more shares for the existing position. The most interesting dynamic between Carvana and Vroom is that despite Carvana having higher GMs, both have similar OCF/FCF/Adjusted FCF margins, with Vroom outperforming on an adjusted basis. Of course, everyone is fixated on unit metrics and economics, which are important, but it's all about connecting the dots from Revenue to Cash Flow.


The real question is what will the catalyst be? I believe that next year will be a better year for Vroom. As the market is able to more clearly see that Carvana and Vroom will continue to exponentially grow while legacy peers moderate, the focus will immediately shift to opportunities. When I look at the competitive landscape, Vroom is without a doubt the most undervalued play available.






17 views2 comments