market folly

We're posting up notes from the Sohn San Francisco Investment Conference 2017.  First up is the Next Wave Sohn event which features emerging managers sharing their investment ideas to benefit the Excellence In Investing For Children's Causes Foundation.


Next Wave Sohn San Francisco Conference Notes 2017

Vineer Bhansali, LongTail Alpha

- Investing with Multiple Unknown Equilibria

- Volatility indices are at all time lows as are correlations across assets classes, but fear is at an all-time high – 2 potential ways to play this:

Idea/Theme 1: Offensive - Position for rising rates with central bank put still in place

- Sectors: Banks and Financials: XLF

- Outright: Index Call Options (SPX, Nasdaq)

- Structured: Levered Risk Reversals

Idea/Theme 2: Defensive - Position: Geo political volatility that raises risk premiums

Sectors: GLD, OIL

Derivatives (Outright: Put spreads on equity indices, HYG, Structures: Dispersion (Rising Correlations)



Marcelo Desio, Lucha Capital Management

Idea: GoDaddy (GDDY): Misunderstood growth stock, dominant market position, large TAM and low CAC

Business: A lot more than a domain company; domain is an onboarding strategy to sell a range of other services (hosting, business applications); 17mm customers; compete very effectively in the SMB space

Thesis:

1) Incumbency and scale - 80% of SMBs aware of GoDaddy (Share: 19% of the 335mm domains under management)

2)  Efficient customer acquisition at ~$67

3) Very attractive unit economics; top of the range versus other SAAS companies

4) Highly sustainable growth runway: Large $23bn+ TAM and ARPU continuing to grow (International is growing high teens based on secular dynamics of internet penetration.  Demonstrated ability to take share in new markets like India - Entered 5 years ago and now has #1 domain share)

5)  ARPU growth -> incremental margins.  High operating leverage that should drive margin expansion from 64% to 68%.

6)  Incremental margins drive strong FCF

7)  FCF will drive beneficial capital allocation

8)  Strong valuation support: undervalued relative to similar companies in the tech space

Valuation: attractive return profile: $76 stock, +75%, 28% IRR through year end 2019

Risks:  PE overhang, international growth stalls, DIY becomes a viable competitor (mobile web use drives "appification"), larger well capitalized tech players compete more effectively



Gil Simon, SoMa Equity Partners

Idea: Coupa (COUP)

SAAS category killer you've never heard of.  Underfollowed company with significant upside.  IPO'd last October, <$2bn market cap.  Spend management not a sexy category - helps companies manage their business spending; ~600 customers

Business model: Cloud platform for managing spending (procurement, invoicing, expenses) that all companies do.  $159mm in TTM revenue.  Allows businesses to consolidate all spending under one platform.  Helps customers save money -3-4% on average (Coupa provides visibility which enables cost cutting and negotiating leverage with suppliers.  Case Study: Sanofi targeting 10bn euro of annual spend through Copua; replaced patchwork of 22 disparate procurement systems.  Big competitor is SAP Ariba.  Ease of use is the key competitive advantage versus legacy systems; Also flexibility, free to suppliers and ability to integrate with all ERP systems

Thesis:  Partner ecosystem rapidly expanding from 500 two years ago to 2,000 which is a leading bullish indicator.  Spend under management is rapidly expanding and expected to reach $350bn by FY18.  Expect sustained revenue growth well above consensus.  Valuation: Think it's a potential double.  Takeout optionality to boot: SAP and Oracle have been aggressive in this space.



Seth Wunder, black-and-white capital 

Idea: Lending Club (LC)

Business: marketplace for consumer lending that benefits from diversifed sources of capital including banks, insurance, companies, asset managers and retail investors.  Make money from origination fees and servicing fees.  Reduced spread versus banks: lenders get more yield and borrowers pay lower rates.  Can be very scalable but won't take over consumer lending.

Thesis:  Advantages for all market participants including borrowers and lenders (platform investors).

Borrowers: Get lower cost of borrowing, better application experience, NPS score of 78 versus credit card companies in low single digits.

Lenders: Access to short term, unsecured consumer credit, attractive risk adjusted returns, several purchase options (whole loans, fractional loans, securitizations), loan servicing handled by LC

Capital-lite model enables unconstrained growth.  Large TAM $1.1T unsecured consumer credit and $1.2T auto loans.  Harnessing technology and big data to originate loans.  Expect high incremental margins going forward as operational investment needs moderate.  EBITDA margins eventually >35%.  Management team changed out with seasonal veterans from "fin" and "tech" due to some past marketing issues.

Misconceptions:  High leverage - not true; net cash.  High credit risk - risk is borne by platform investors.  Dependent on Credit HFs to buy loans - not true; traditional banks like Citi provided 44% of funding for loans.  Cost of capital disadvantage:  Capital comes from investors, not balance sheet

Valuation:  LC shares are worth $17, 175% upside.  2.8x EV/2018 revenues - significant discount to peers.  15.0x EBITDA on $468mm gets you to $17 implied share price.


We've also posted up notes from the main event, so be sure to check out those pitches as well: notes from the Sohn San Francisco Investment Conference 2017.