Research Notes: Quarterly Update (Part II) And Fun New Stocks
Some long-awaited positivity
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Admittedly, it’s been a bit gloomy around here of late. But, to be fair, that gloom has contributed to a decent track record through our first fourteen weeks. At Wednesday’s close, our average idea has provided almost exactly zero return (-0.04%, to be exact), not a bad performance during a stretch in which the S&P 500 has declined 15% and the NASDAQ 100 20%.
Performance has improved since we focused more on a strategy of being long defensives and short cyclicals. Our last eleven ideas on average have gained almost 6% — with the last seven long theses up (again, on average) nearly 2%.
Will that strategy hold? Given our macro thesis, and the prospect we outlined last month of a multi-year bear market (again, it’s been gloomy around here), the answer is…probably not? That kind of market would require nimble trading and a willingness to take profits quickly when they’re generated. It’s also a market in which (admittedly, I’m guessing here, since like nearly every current equity investor I’ve never dealt with a true multi-year bear) suggests that any strategy is not necessarily going to have a long shelf life.
Still, with some stability in major indices and some occasional signs of a bottom/bear market rally, we’ll maintain our cautious yet invested posture.
In the meantime, here is some additional commentary on more recent coverage (you can find Part I of our updates here). After that, in the interest of lightening the mood, a look at some of the more entertaining stocks in the market at the moment.
Literally the first sentence of our deep dive into Farfetch was, “It may be too early to buy Farfetch (FTCH) stock just yet.” That was mostly correct: FTCH stock was already down 88% from its highs at the time, and it’s fallen another 12% since.
The stock did see a big bounce after Q1 earnings, though the 27% gain still left FTCH below where it had traded only 22 days earlier. That gain has reversed; another 10% decline and the stock is at an all-time low.
The weak trading seems to make some sense. This is precisely the kind of stock investors bid up too far in 2020-2021 and have sold off sharply here in 2022, with the latter decision seeming more reasonable. Farfetch does trade at 1.3x revenue or so, but 15 years after its founding, EBITDA this year is guided to essentially breakeven, with margins in the negative 6% to 7% range adding back share-based comp.
But there’s still a qualitative case here that is at least intriguing. Luxury spending in theory should hold up (and Farfetch has less exposure to China than most players in that category). The category should move online to some extent, even though ‘monobrand’ sites will maintain significant share, as producers (wisely) focus on quality and scarcity over distribution. There’s even the common question with so many tech players: just how much fat Farfetch has to cut given the market’s sudden focus on near-term profitability.
The argument we made for FTCH in May was that there was probably a niche for the company to find in an extremely valuable category. That argument still holds, and it’s still not unreasonable to imagine FTCH trading at $15 or $20 in, say, August 2027 against a current $7-plus. But with results likely to look rather unimpressive (the company is only guiding for ~10% total GMV growth this year), and the market probably not ready to jump in to an unprofitable tech stock, the question is whether that long-term case requires a buy right now.
In May, we weren’t quite sold that the answer to that question was ‘yes’ (though looming earnings provided a potential catalyst); at this point, that sentiment still holds. It’s also probably bad news short-term that FTCH hasn’t caught a bid during the past few weeks, when many speculative names have seen sharp bounces.
Still, for investors looking to get more aggressive, this does seem like an intriguing idea, and one we plan to keep an eye on.
Short Boating Stocks
An equal-weight basket of the six publicly-traded boating stocks1 is down 3.7% since we called for a short of the sector on May 22. That said, two of the more minor catalysts for a bearish thesis have moderated: commodities have pulled back, as have fuel prices.
But the core of the thesis still seems to hold. The massive amount of demand pulled forward by the novel coronavirus pandemic, combined with secular concerns, on its own suggests some downside risk. Add in any macro pressure and the ‘cheap’ group (almost entirely trading at single-digit multiples to trailing twelve-month earnings) can fall pretty significantly from here despite attractive headline fundamentals.
I’m personally short dealer OneWater Marine (ONEW); I may poke around Malibu Boats (MBUU) and MasterCraft (MCFT) depending on how summer data looks (neither manufacturer reports until August). We’re not alone in the trade: on average, short interest in the six stocks has risen about 7% in the six-plus weeks since publication. Those traders no doubt believe these stocks are value traps — and we agree.
We gave a brief mention to Joby Aviation (JOBY) in late May, highlighting a 6.7% move — some $200 million in added market cap — driven by the receipt of an FAA certification that management had already tipped was on the way. It was precisely the type of move we saw so often in Q4 2020/Q1 2021, when the achievement of meaningless and/or unsurprising milestones led speculative stocks to gap up.
Indeed, JOBY seems particularly emblematic of the de-SPAC bubble we’ve highlighted a few times. The eVTOL (electric vertical take-off and landing) manufacturer plans to develop an “air taxi” service in major cities, a futuristic idea with a number of significant roadblocks. Incredibly, it’s one of six — six! — eVTOL companies to go public, with a seventh calling off its efforts in November. The sector seems the epitome of the excess in SPACs specifically and the markets more broadly.
And yet JOBY has held up of late: the stock actually has bounced ~25% from February lows. Archer Aviation (ACHR) was up ~50% over the same period until it fell off the table over the past few weeks. Eve Holding (EVEX) still is at $6.20 after its merger closed in May.
For JOBY in particular, and the space more broadly, there seems to be another bite at the ‘short de-SPAC’ apple. Unless, of course, the market is pricing in some potential that the industry’s pie-in-the-sky (no pun intended) projections might actually pan out, for at least a couple of these companies.
The Fun New Stocks
For the rest of our deep dives, there’s been essentially no news and thus little to add. We remain constructive on our original theses.
And so we move on to a group of three newly public stocks that are, for lack of a better term, fun:
One of the dumber de-SPACs (and that’s a high bar to clear) was scooter rental company Bird Global (BRDS). Bird closed its merger in late October; as of this writing its stock trades at 48 cents.
On its face, Gogoro seems likely to follow a similar path. The Taiwanese company’s major product offering is battery swapping for e-bikes, which seems like a de-SPAC (Gogoro’s merger closed at the end of March) fever dream, a cross between Bird, an EV charging company, and a “revolutionary” battery developer.
Indeed, GGR stock already has dipped to $7 from its $10 merger price. Yet its market cap still sits at $1.65 billion. This sounds like a 2020 story at a 2021 valuation.
But there actually might be something here. At the least, there are reasons to believe that GGR isn’t one of the last sh—-y companies puked onto the public markets by the SPAC bubble.
In Asia, two-wheeled vehicles are crucial. In November, Gogoro’s chief executive officer pointed out that, globally, more urban commute miles are driven on those vehicles than any other. In India (a market Gogoro is entering), 80% of commute miles are done on two-wheelers.
Gogoro sees revenue of $460 million to $500 million this year, up 30%-plus at the midpoint. 90%-plus of that figure is coming from Taiwan.
To be sure, a nearly 3x EV/revenue multiple doesn’t look great. EV/EBITDA this year is probably in the 40x range, perhaps a bit higher. There at least is a real business here, even if GGR stock doesn’t look like a buy just yet.
SQL Technologies (SQL)
Most of us are trying to learn lessons from the roller-coaster of the last two-plus years. A good one I’ve seen highlighted elsewhere is that sometimes the market simply does dumb things; believing that ideas have to be hidden or catalysts unknown perhaps makes investing a little too complicated. When Peloton (PTON) and Carvana (CVNA) and, yes, Farfetch were at peak valuations, their respective short cases were obvious, even if the proper timing of executing those cases wasn’t.
I looked at the SQL IPO in February. It looked ridiculous. SQL had essentially zero revenue as it pivoted to developing its portfolio of “highly disruptive advanced-safe-smart [sic] platform technologies,” as the company put it in the February prospectus.
To be sure, the products — including a “plug-and-play” receptacle for ceiling fans and light fixtures — seemed attractive. As I spent hours this weekend trying to line up screws in a poorly machined fan, I wished for such an option.
But it’s hugely difficult to get the entire building industry to make these kind of changes, and there wasn’t much evidence to suggest SQL had the expertise or the capital (the IPO raised ~$22 million, net; SQL burned almost $5 million last year and presumably had higher losses on the way) to get to that point.
Yet, the IPO was upsized, and in early trading SQL held up. I assumed the market recognized and/or knew something I didn’t, and with borrow rates high I moved on.
But the simple thesis was the right one:
It turns out there isn’t much here after all.
Can I interest you in the Spotify Technologies (SPOT) of the Middle East? Anghami is a streaming service targeting that region; like Spotify, it’s moving into podcasts as well.
To be fair, this perhaps isn’t a bad business. 2021 revenue was a bit over $36 million, increasing 16% year-over-year. Q1 saw top-line growth of 23%, along with 18.5 million active users (defined as once per quarter).
The problem is that Anghami has the same questionable economics as other music streaming providers. Gross margins in 2021 were just 25.5%; operating margins excluding professional fees were negative 21%.
Anghami also has a potential capital problem. 97.6% of shareholders in the pre-merger SPAC redeemed their shares. The PIPE raised $40 million; the merger cost $13 million. Anghami maybe has two years’ worth of cash on the balance sheet, probably less.
ANGH has followed the typical de-SPAC path, with shares dropping 57% to a current $4.29. There’s probably more downside ahead.
As of this writing, Vince Martin is short ONEW. He may initiate a position in other securities mentioned without prior notice.
Tickers mentioned: FTCH GGR SQL ANGH
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