In this weeks edition, I look at 3 under the radar stocks. I highly recommend the presentation I link to in the first stock idea. Even if you’re not interested in the stock, the turnaround story is fascinating.
Thesis - The New York Times is perhaps one of the best known brands in the world. For years, it was a leading newspaper in the US. As the internet grew, the New York Times suffered. News moved online and advertising (its primary revenue source) shifted to elsewhere. From 2002 to 2009, the New York Times lost almost 90% of its value. Ouch. Since then, the business has re-invented itself. Over the last few years, NYT has invested in top quality reporting whilst other news outlets focus on high-frequency lower-quality reporting - they pay reporters twice as much on average. They have invested in their tech and focused their business model on paid digital subscriptions, providing them consistent recurring revenues. The NYT of today is more similar to Netflix than a traditional newspaper, investing in content and monetising subscribers.
Financials & Performance - NYT is a business in transition. As the print subscribers decline, their digital subscribers are increasing, giving the impression of a sideways moving company. Looking at the digital business, they have 5.7m paid subscribers, growing 20-30% annually.
Opportunity - NYT is about to emerge from a point of break even, in terms of its cross over from print revenue to digital revenue. As its new business is digital, it benefits from having an almost 0 marginal cost for servicing the next customer. If you believe NYT can continue to grow its subscriber base, they may be about to enter a new era of revenue growth and profitability.
Risks - The company must maintain it’s execution over the coming years, continuing to grow its subscription base and digital revenues. They must do so with a new CEO, as Mark Thompson, the CEO who led the turnaround from 2012 to 2020 stepped down in July. In Meredith Kopit Levien they have a good replacement who has already been an executive with the company for 7 years.
Credit Mine Safety Disclosure’s excellent presentation on the NYT story.
Thesis - Elastic is a software company providing tools for enterprise search. The core product is Elasticsearch, which allows companies to feed in structured or unstructured data and query it for the best result. It powers the search behind Uber (finding the right driver) and Tinder (finding the right match). Outside of enterprise search they have grown more use cases around observability (e.g. logging metrics) and security. The technology is open-source and therefore free for a self-managed basic version, but Elastic monetise paid subscriptions with additional features and support. They’ve also developed a cloud offering (Elastic Cloud) which works on a Saas business model. As digital companies continue to grow, Elastic has become a favourite tool to power their search experiences.
Financials & Performance - Elastic has over 11,300 customers. Since its IPO in Oct 2018, it’s revenue growth has slowed down from 80% to 44% (Q1 2021). It’s gross margin profile is attractive, averaging at around 71%. Other large name customers include Shopify, Twilio, Adobe and Facebook. Importantly, its net dollar-retention is consistently over 130%, so it grows from existing customers, reflecting is ability to increase usage and broaden its use-cases with an existing customer.
Risks - Elastic is still not profitable, although its losses have been shrinking. It’s cost of acquiring customers has also been steadily increasing, which means revenue grows but at a greater cost. Finally, the open source nature of the business provides an interesting dynamic. On the one hand, it allows developers to easily adopt the product, but it also means competitors like Amazon can host a version of their technology on their own platform, AWS.
Credit Howard Chen for his Q1 review.
Thesis - Copart is the largest auctioneer of salvaged vehicles. In short, Copart runs a digital marketplace for repossessed or totalled cars as well as a network of lots in which these cars are stored. Copart makes its money by taking a fee from all transactions. This is an oldschool business, which allows it to go under the radar. Copart is operating at huge scale, now owning over 8,500 acres of land for car lots. This consistent investment in its lot network has given it a durable moat. They benefit from a subtle but critical tailwind - rising total loss frequency. This is to say, the rate at which insurers are writing off cars as totalled is increasing, which means increased supply and transaction volume for Copart.
Financials & Performance - The company was listed in 1994, so we have some history to go back on. Over the last 10 years, the company is up 12x. For the last 5 years, revenue growth has bounced between 5-20%, whilst profits have continued to rise ($699m in 2020). They have members in over 190 countries, highlighting the global nature of the business.
Opportunity - Copart is continuing to internationalise its operations. Started in the US, it expanded to Canada in 2003 and the UK in 2008. Since then, its operations now cover Brazil, Germany, Spain and the middle East. With footprints in each of these markets, it seeks to execute as it has in the US, growing both its lot network and member network.