Research Notes: Our Performance So Far
Research Notes: Our Performance So Far
Plus updates on NGMS, APP, MAX and COHR
With earnings season past its peak, we thought we’d take the opportunity to provide updates on some of our picks and our performance in general.
Our Performance So Far
13-plus months into this project, our performance is good, but not quite as good as we would like. At Wednesday’s close, our average idea has returned 5.2%. Meanwhile the S&P 500 has dropped 8.1%. Our average alpha against the S&P 500 Total Return is just shy of 150 basis points.
On an annualized basis, performance looks better. On average, alpha has been a healthy 15 percentage points. That figure is skewed by more recent articles but looking just to the 2022 cohort, annualized alpha is just shy of 20 percentage points.
We can say with some confidence that, to this point, we’ve done a solid job of providing better-than-average ideas. That’s even more true given that a better comparison for our universe might be the Russell 2000, which has underperformed sharply in recent months.1
That said, it’s been our short ideas that have carried most of the water. Long performance is basically flat to the S&P, and we’ve unfortunately stumbled into a few value traps. Our shorts, however, have been excellent. Average alpha of five percentage points, 13 points against the inverse of the S&P 500, and 49 points on an annualized basis.
Overall, given that we provide ideas on a weekly basis we do take pride in how our ideas have performed to this point. We hope, and plan, to do even better.
[Note: You can view our performance spreadsheet for a full breakdown of our results]
NeoGames: A Nice Win
Our second article ever, a long pitch for iGaming play NeoGames NGMS 0.00, is now our best-performing idea so far. On Sunday, the company disclosed that it was being acquired by Australia’s Aristocrat Leisure for a $29.50/share all-cash offer. The stock closed Wednesday at $27.32, up 106% from where we recommended it.
source: Finviz.com
We see the offer from Aristocrat as validating our thesis. We believed that, owing to revenue recognition around a joint venture, the market didn’t fully understand how quickly the company was growing. The 104% premium over the 3-month volume weighted average price for NGMS shows that Aristocrat (one of the best-managed and best-performing companies in the slot manufacturing industry) does understand.
Wednesday’s close suggests an 8% return for investors willing to hold until completion. That premium seems directionally correct. Majority shareholders in NeoGames have already committed to approve the sale. Regulatory intervention seems unlikely.
But those regulators will take time: NeoGames expects the deal to close “within 12 months”. With the 12-month Treasury yielding almost 5%, this is a trade for merger arbs rather than value investors. I’ve exited my position, and we’ll take the opportunity to close the position in our spreadsheet. We still see the potential for success for NeoGames under Aristocrat’s ownership. As we noted on Twitter, we think Aristocrat stock looks intriguing going forward as well.
AppLovin: Grinding Back Up
Our second idea ever is our best-performing idea. And our first idea is no longer our worst-performing idea.
It’s hardly cause for celebration but AppLovin APP 0.00 is showing signs of life. Thanks in part to successive earnings beats, APP has gained 131% year-to-date. The only larger company (of more than 800) with better YTD performance is warehouse automation play Symbotic SYM 0.00.
I personally rode APP all the way down (as we say, we do eat our own cooking). The aborted effort to acquire rival Unity Software U 0.00 was a concern (and a major misstep), but even with disappointing 2022 results, there still seemed to be a case for upside at each successively lower price.
We’re starting to see that case play out. AppLovin has successfully restructured its Apps business (ie, its owned game portfolio) to improve margins, bringing in some cash through asset sales in the process. Meanwhile, the Software Platform segment, is performing well, with growth of 16% q/q and 8% y/y in Q1. It seems like both AppLovin and its customers are adjusting to the privacy changes enacted by Apple AAPL 0.00.
If that’s the case, there’s still a pretty solid bull case here. AppLovin is clearly outperforming Unity, and clearly is a huge part of the mobile gaming ecosystem. Valuation is not that prohibitive: APP trades at about 11x trailing twelve-month Adjusted EBITDA. That multiple admittedly is deflated by two factors: stock-based comp (~19% of the total) and the contribution from the less-valuable Apps segment (~25%), where revenue is declining.
But even accounting for both those factors, APP is trading for 18-19x EBITDA, and thus ~30x free cash flow. That’s despite strong success in the gaming ecosystem, room for expansion beyond, and continued benefits as the advertising industry adapts to the ‘new normal’. Meanwhile, the Apps business has *some* value, easily 10% of enterprise value even at 4x EBITDA.
It’s still a long way to breakeven, and at this point I’m personally not looking to average down. Still, there’s a reason why APP has been a big winner so far this year. The bull case we made last year has merit, even if the price I paid did not.