Ride the digital marketing tailwind & revisiting 2 recent winners

January 03, 2021

Happy new year! 2020 was a year like no other from an investing perspective. We saw both the fastest crash and a large recovery in the space of just a few months. Who knows what 2021 looks like, but it’s unlikely to look the same as 2020.

A few changes to discuss:

  1. As well as new companies, I’m also going to make more space in this newsletter for revisiting companies mentioned in previous editions. As an investor, it’s paramount to revisit existing winners, monitor how the story develops and double down on companies with strong execution. With that in mind, you’ll see two updates on companies below.
  2. I’m also working on building out the full site for stockideas.club. I’ve always planned for the website to be a searchable directory of stock ideas mentioned in this newsletter, so it’s fun to start making that a reality. See the bottom of this email for how you can help me make it great.

Gravity

Update - Gravity, the South Korean game publisher, has increased its market cap by 70% since first mentioned in edition #8 (13/09/20). The core thesis was that it’s primary game, Ragnarok, represented sustainable and profit-generating IP, rather than a one-off hit. Plus the stay-at-home economy made gaming an attractive space to look at. In their latest quarterly report they announced revenue growth of 70% YoY and profit growth of 200% YoY.

Watch out for - Gravity has continued to build on its Ragnarok franchise, launching two new mobile games. Ragnarok Next Generation has become the #1 game in Taiwan and Hong Kong as well as number #2 in Macau after a month of launching. Ragnarok Origin (currently just in Korea) is #1 in Korea’s homegrown app store One Store and #4 on Google and Apple’s app store. These are strong signs, with player popularity usually preceding commercial success. Gravity has also been working with Tencent on a game to be released in China. Historically, Gravity has been unable to release games to Chinese users due to political reasons. Whilst it is not guaranteed, if the game is approved this could represent a huge new user base for Gravity and working with Tencent, China’s largest game developer, surely gives them the best possible chance.

gravity stock chart

Magnite

Thesis - Magnite provides a sell-side platform for digital publishers to sell ad inventory. It is no secret that over the last 10 years advertising has shifted from traditional channels (TV, magazines, newspapers, billboards, radio) to digital channels. Digital marketing benefits from large and growing inventories, as well as better attribution (tracking) and transparency of data. Magnite helps publishers i.e. companies that own the digital properties, to optimise how they sell their ad inventory. Think of Magnite as a revenue maximisation tool for them, which calculates the right price to sell at and customer to sell to. Magnite has had a turbulent history. It is the result of a merger between two companies, Rubicon Project (focused on programmatic ads) and Telaria (focused on connected TV), but the story has recently caught investors attention. By bringing together these two companies, they have created a unified sell-side experience and with connected TV increasing in popularity, they have unlocked an additional growth engine. The stock has tripled in the last 3 months, helped by buoyant analyst price targets. However, it is still only a $3.4b company, so could yet have room to grow.

Financials & Performance - In their last quarterly report, Magnite announced revenue growth of 12% YoY ($61m total). The connected TV business line, which represents just 18% of revenues, grew 51% YoY, providing the bright spark. Operationally, Magnite has an exclusive deal with Disney to serve the Hulu connected TV ads programmatically. Given Disney have recently restructured their business around streaming efforts, this bodes well. Magnite is still not profitable - making a $10.5m loss. But losses were smaller than analysts were expecting and predicted to shrink further.

Risks - The story of unified sell-side platform has a lot of potential. But Magnite is still a small company and much of the execution is ahead of it. In particular, many investors are excited by Magnite because of its comparisons to The Trade Desk. The Trade Desk creates a software platform that allows brands to manage their ad buying programatically. They don’t own any inventory themselves, but are an optimisation platform on top of inventory providers helping brands work out which ads are most effective (display vs mobile? Audio vs video?) In some ways, Magnite and The Trade Desk are two sides of the same coin. Given that The Trade Desk has been one of the best performers on the stock market since going public (up > 25x), naturally investors are excited. However, two business rarely follow the same path and it’s not prudent to assume TTDs success will guarantee Magnite’s performance.

magnite stock chart

Etsy

Update - I first mentioned Etsy in edition #3 of this newsletter as a stock with strong momentum. Since then its continued to deliver excellent numbers, announcing revenue growth of 128% in October. Behind the headline number: an increase in sales per seller (+18%), active listings (+20%), active sellers (+43%) and active buyers (+56%). This is a company with the wind in its sails.

Watch out for - It’s an interesting time to revisit Etsy for a few key factors. First, we’ve just gone through the holiday season. Etsy differentiates on providing unique goods from unique sellers, so naturally many of the products on offer make for interesting gifts. Anecdotally, I noticed more gifts being purchased from Etsy this year than ever before. Second, sales of fabric face masks have started to decrease as a proportion of sales. Whilst expected, this will likely continue this year as vaccines are rolled out. Finally, CEO Josh Silverman has highlighted the significant jump in Etsy’s brand awareness over the last few months. He has followed this up with marketing dollars - increasing spend to $127m in the last quarter (up 153% YoY). For these reasons, I’m expecting Etsy’s next quarterly report to be of particular interest. It should be released in January or February.

etsy revenue per employee


Written by Stevan Popovic, growth investor, web developer and founder of this site.