Oversold Long-Term Winners Part 1: Roku, Upstart, Marqeta, and DraftKings
Sharing my updated thoughts on ROKU, UPST, MQ, and DKNG
Welcome back to another sort of “post-earnings update” on some of the companies we’ve been covering over the last several months. It’s important that we reassess our conviction in companies that we’re looking to hold for the long-term.
By doing this, we’re blocking out the short-term noise of stock price volatility with sound fundamental research - enabling us to stay true to our original investment thesis.
If you think someone would appreciate an update like this, feel free to forward them this post.
In this post, I’ll share my updated thoughts on:
Let’s begin this update with a company that I’ve been excited about for nearly 18 months - as I first posted my thoughts on the stock here when it was trading around $150 / share.
What excited me most about Roku in 2020 were the tailwinds they were to experience from people “cutting the cord,” as well as the overall increase in expected global marketing spend.
Since posting this analysis, Roku’s stock has traded from $150 / share to $490 / share before falling from grace - now trading around $225 / share.
All in all, the stock is valued +50% higher than it was in July 2020.
With that in mind, let’s talk about everything this company has accomplished since then (Q1 2020):
Increased active accounts from 39.8 million to 56.4 million (+42%)
Increased streaming hours from 13.2 billion to 18.0 billion (+36%)
Increased average revenue per user from $24.35 to $40.10 (+65%)
Increased quarterly revenue from $321 million to $680 million (+119%)
Increased quarterly gross profits from $141 million to $364 million (+158%)
Increased gross profit margins from 44% to 54%
Decreased sales and marketing expense as a percent (%) of total revenue from 21.2% to 16.1%
Became quarterly-adjusted EBITDA positive (-$16.3 million to $130.1 million)
So if all of these amazing things happened for the business, why is it being valued - from a trailing 12-month enterprise value / revenue perspective - the same as it was before Covid?
Well, I would argue either one of two things is happening.
The market is beginning to value the stock as if all of this unexpected COVID growth was supposed to happen the entire time.
The stock is oversold.
I’d argue the answer is the latter.
Let me try and explain this in a different way.
Let’s say you’re Roku’s stock in July of 2020. The day I posted my analysis, it was 13.6X TTM EV/Revenue, or worth in total about $19 billion.
Right? We take all of the revenue the company had reported on over the last 4 quarters - earned and materialized revenue - multiply that number by roughly 13.6 and we’re now in this $19 billion ball park.
This revenue was on gross profit margins of only 44%.
This revenue was being derived from marketing expenses that made up more than 21%.
Cash flow from operations made up only 14% of this revenue, now it makes up 16%.
What I’m trying to say here is that the market is valuing this business in the exact same way as it did before all of the above-mentioned changes took place.
I get it - their CEO guided to less than stellar Q4 earnings results given the current supply chain and advertising spend landscape, but I think selling the stock more than -40% from its all time highs is an over reaction by the market.
Recent reports from Walmart and Target as well as the Census Bureau are showing us that the US consumer is in fine shape heading into the holiday season.
If anything, this stock should be trading at pre-COVID levels (13-15X) not below them. There’s no reason. There’s simply no reason the market should value this stock as if it will have lower gross margins, FCF, ARPU, and total users in the coming 24 months - but that’s exactly what it’s doing.
Roku is undervalued below $270 / share - at that price it’s aligned well with pre-COVID multiples, in my humble opinion.
Looking ahead, Roku has several growth levers they can pull to propel their business to $10 billion in annualized revenue:
The Roku Channel + original content
ConnectedTV Ad Spending (eMarketer)
International expansion (Brazil, Chile, Peru, etc)
Small business DTC marketing (OneView) alongside Shopify
At the moment, Roku is ~2% of my portfolio. Trading at these prices, I’m comfortable doubling that position to ~4% in the coming months.
I published a summarized analysis on this company after they reported their recent earnings (below). In this highlight, I want to emphasize this company’s future growth trajectory - in relation to how the market is currently valuing them.
To reiterate, this company has 3 main growth levers to pull going forward:
Being the “Shopify” for car dealerships - Upstart Auto Retail (Prodigy)
Becoming a consumer-focused brand through their website - think Credit Karma or Nerd Wallet
AI credit decisioning API for regional banks
In this update, I want to break down the company’s execution on each of these levers and quantify what that means for growth going forward.
1. Upstart Auto Retail (Prodigy Software)
The company acquired Prodigy Software in March of this year with the intention of “reducing the cost of auto financing.” To quote Upstart’s CEO Dave Girouard..
“While Amazon and Shopify have modernized the online shopping experience, the auto industry has been left behind. Upstart is on a path to reduce the cost of auto financing, and we can accelerate this opportunity with a modern multi-channel purchase experience.”
Upstart has realized that the biggest “BNPL” opportunity to exist is the car purchasing experience - despite the fact that “…purchasing a car consistently ranks among the worst consumer experiences, with less than 1% of buyers satisfied with the current process.”
If Upstart is able to bring their tens of billions of data points surrounding accurate underwriting to the $1 trillion TAM of auto purchasing - it’s game over, and so far they’ve done a great job.
“As a reminder, the auto lending market is at least 6x the size of personal loan market. In our view, it's at least as inefficient. On the auto refinance front, we continue to make fast progress to eliminate the time and effort required to refinance a car loan. We're also making rapid progress on our auto purchase product. In the third quarter, we rebranded the company and the product formerly known as Prodigy to Upstart Auto Retail, but our progress in auto retail went far beyond rebranding. In fact, we've now tripled the number of dealers on our platform compared to a year ago. And in Q3, we added an average of more than one rooftop a day.”
Upstart expects their auto retail business segment to be a “meaningful contributor” to revenue in 2022, which to me means 15% or more. I’ll be surprised if this doesn’t push at least $100 million to their top line in 2022 with +50% growth on that number annually for the next few years.
2. Building a Consumer-Focused Brand:
Go look at their website - Upstart.com, and tell me what you see immediately. That’s right, a consumer-focused brand catering to those in need of credit card debt consolidation, a personal loan, a vehicle refinance, or something else.
“Personal loans continued to drive the growth and profitable economics of Upstart. Post pandemic, the demand for these simple installment products has reaccelerated. I like to refer to personal loans as the duct tape of credit, a fast and simple solution that consumers love for their usefulness, affordability and accessibility. And banks are beginning to realize that offering instant all-digital personal loans makes sense, unless they want their customers to find them elsewhere.”
In the company’s recent quarterly update we were told about their bank partners completely dropping the FICO score as a means of underwriting creditworthiness. Since doing this, their underwriters have been able to underwrite more borrowers from different socioeconomic backgrounds - all in all, creating a larger total addressable market for Upstart.
After capturing loans from Upstart, they state these newly-qualified borrowers see a spike in their credit score - unlocking an entire world of new financial products down the road. Upstart, and myself, believe there’s a play to be made around underwriting more diverse borrowers leveraging AI, not FICO - then continually being the lender of choice throughout the borrower’s lifetime.
This means mortgages and auto lending.
This is the company’s bread and butter, and it’s just getting started. As we begin to think about personal loans, business loans, and eventually mortgages - this “business segment” will see continued +45-60% annualized growth for years to come.
3. AI Credit API for Regional Banks
Pulling a quote directly from their CEO..
“A year ago, we had 10 bank and credit union partners in our platform. Today, we have 31 partners, and we're adding them faster than ever. We're also making progress in how rapidly we can onboard these partners. In fact, our most recent bank partner went live on the platform in less than 50 days.”
This is, in my opinion, where material growth among “existing customers” can be derived from.
There are a lot of people who are “married” to their banks and refuse to venture out into the unknown world of rate shopping.
Now imagine bringing all of the incredible technology and artificial intelligence Upstart has built out over the last decade to hundreds of small and regional banks around the country, and eventually the globe.
By doing this, more consumers will be sold financial products they wouldn’t have been able to qualify for in the past.
This is Upstart’s way of penetrating a consumer that was unlikely to use them in the first place - and honestly, that consumer wouldn’t even know they’re using them (considering the bank partners will be leveraging white-labeled tech).
Upstart is accelerating the number of bank partners using their software as well as their onboarding speed. This will continue to propel Upstart in the right direction at a healthy pace, becoming the company’s slow and steady growth play as they expand this software use globally.
In August, Upstart was trading around $205 / share. Now as we near the end of November and after trading up to nearly $400 / share - Upstart is hovering back around these August valuations.
In August, analysts were assuming Upstart would do ~$1 billion in revenue next year - marking the stock to trade around 17X 2022 revenue. Now, the company is showing signs of a ~$1.3 billion in revenue~ year. Despite this clear bump in revenue and expansion in EBITDA margins, the stock is trading at only 13X 2022 revenue, less than it was in August.
In other words, with all of the information we had about Upstart’s expected financials in 2022 we placed a 17X multiple on the stock. Now, we see the company has accelerated their bank partner growth, maintained healthy gross margins, expanded their adj. EBITDA margins, crushed their auto lending onboarding, guided toward mortgage lending in 2022 + countless other incredible things.. and we’re going to cut their stock’s multiple from 17X to now only 13X?
Sure - maybe multiple compression is warranted, but to me 13X forward revenue for a stock with an unlimited TAM, 85% gross profit margins, and +60% annual growth is cheap.
I’m already overweight Upstart (6% of my portfolio), or I would buy more. I’m super comfortable with this weighting for the coming 12-18 months.
When I began writing this analysis Monday evening, Marqeta’s stock was trading around $20 / share - now, announced Wednesday, they’ve officially partnered with Paycast and Mastercard to facilitate instant payouts for Paycast marketplace sellers.
This news has pushed Marqeta’s stock up +15% since Monday’s close - which is good, but I feel bad I wasn’t able to get this analysis out to you all in time to build a larger position beforehand.
Either way, the stock is still undervalued at $22.50 / share, in my humble opinion.
Let’s begin by talking through the company’s most recent quarterly results:
$28 billion in total processing volume (+60%)
$132 million in revenue (+56%)
Partnered with Coinbase, Bakkt, Fold, Bill.com, Figure Pay, Zip, Payfare, M1 Finance, Synctera, and Shakepay
Named as a “launch partner” for Mastercard’s BNPL offering
Decreased top customer revenue concentration from 72% to now only 68% - a good thing
Grew non-top 5 customer total processing volume by +226%
Transaction volume in Europe increased +340%
Increased gross profit margin to 45%, compared to 38% experienced during the previous quarter
After seeing some positive stock price momentum upon the earnings release, the stock hit nearly $38 / share in early-November. Throughout the last few weeks, the stock has traded down -47% from this recent all time high to $20 / share. They’re now hovering around $22.50 / share, or down -41% from their recent all time high.
Right now, Marqeta’s stock is trading at about ~17X 2022’s revenue expectations.
Throughout Q2 and Q3 of this year and before the Bill.com, Uber Freight, Figure Pay, Zip, Payfare, M1 Finance, Bakkt, and Synctera partnership announcements - among other material events like gross margin expansion and revenue diversification - Marqeta’s stock was trading around ~22X 2022’s revenue expectations.
So let me get this straight, the company reported stellar earnings, ample new partnerships, increased revenue diversification, reiterated gross margin guidance for 2022 and it’s now trading cheaper?
Sure - maybe it was over-valued when it was 22X forward revenue. I could see that argument.
But, considering Adyen (ADYEN) is trading at nearly 2X MQ’s valuation (albeit with positive EBITDA margins) I think ~17X forward revenue is a discount. This company hasn’t even touched 1% of global processing volume. Their TAM is infinite.
From a gross profit multiple perspective, we’re looking at about ~39X 2022 expectations for MQ. Compared to Adyen’s ~195X 2022 expectations.
I truly believe throughout the coming years as Marqeta continues to expand internationally their valuation multiples will begin to climb much closer toward Adyen’s.
At the moment, I’m incredibly underweight Marqeta stock (less than 0.2% weighting). I’m going to increase this to 2-3% in the coming months - and happily at these prices.
Rounding this “oversold” analysis off with a stock that recently hit 52-week low prices.
Before we talk about DraftKings, however, I want to set the stage in relation to the Online Sports Betting and iGaming markets as a whole.
Online Sports Betting & iGaming:
Starting with the overall industries of online sports betting (OSB) and iGaming, it's easy to understand a company’s desire to operate in a growing space like this. Everywhere you turn you see new events for people to wager money - for example, Jake Paul fighting Tyron Woodley was a single event that had $780 million worth of bets placed upon it.
And who makes the most money from these wagers? The betting platforms, of course.
In 2020, the combined OSB and iGaming total addressable market (TAM) in North America was north of $67 billion - and is set to grow larger as legalization trends move in the right direction.
According to DraftKings themselves, they think their TAM is the US is just over $22 billion. Wall Street agrees with them, suggesting figures closer to $24 billion in recent initiation coverage reports. Their TAM is projected to continue growing at a jaw-dropping +37% CAGR through 2025 catalyzed by additional states legalizing OSB & iGaming.
The bad news?
It's hard to differentiate yourself as a platform. If you're new to the space and looking to wager on a few football games, the determining factor here is cheapest price per wager - possibly making this a race to zero for betting platforms.
Looking at the UK and Australia, two places where OSB and iGaming have been legal for quite some time now, their markets are highly fragmented (a lot of competitors). The early US results for OSB and iGaming are beginning to show similar trends, although only to an extent.
Introducing the Market Leader - DraftKings:
DraftKings is primarily focused on 3 initiatives: daily fantasy sports (DFS), online sports betting (OSB), and online casino gaming (iGaming).
Let’s break down their most recent earnings:
$213 million in revenue (+60%)
Would have been +$40 million higher if it wasn’t for a weird first few months of “hit rates” for NFL games (89% of bets “hit” in Q3)
Launched OSB in 3 new states (29% US population penetration)
Announced their intention to enter Louisiana, Maryland, New York markets in the coming months
Launched iGaming in 1 new state (11% US population penetration)
Announced their intention to enter Ontario in the coming months
Launched DraftKings Marketplace - $20M in GMV w/ 120K transactions
1/3 of Marketplace users are new to the DraftKings platform as a whole
Monthly unique players increased +31% to 1.3 million
Peaking in September at 2.1 million (NFL season kickoff)
Average revenue per monthly unique payer increased +38% to $47
Guided toward $1.8 billion in revenue for FY 2022
So let’s break down good news and bad news.
Bad news - the company suffered from lower gross margins during the quarter because of their launches in new states, which accounted for 75% of the gross margin decrease. Their CFO reiterated their gross margin expansion plans in 2022 primarily driven by their migration to the in-house betting engine they’ve built.
Their gross margin saw compression from their increased marketing expense targeting new states launches in efforts to capture new users upon the NFL season kick-off. It obviously worked as they hit a record 2.1 million MUPs at their peak. Remember, lifetime value in relation to customer acquisition cost is what’s important here (LTV / CAC).
Good news - everything is moving in the right direction. Revenue is growing rapidly, users are growing rapidly, average revenue per user is growing rapidly, and DraftKings raised their FY2021 revenue guidance to now reflect a +96% increase over 2020.
For 2022, DraftKings guided to a +50% increase in revenue, or about $1.8 billion.
I understand why a selloff would occur - just not one to this magnitude. The company has shed -40% of its value in only 2-months time.
This drop in enterprise value happened despite a record number of MUPs on platform, migration to their own (more profitable) in-house betting engine, the launch of their Marketplace, and 3 new states to their geographical coverage - with “first 30-day engagement” being through the roof.
Now to be honest, I had no intention of including this company in my Part 1 analysis until a Founding Member brought their sell-off to my attention during our livestream on Tuesday.
After looking at their earnings report and the bullish comments published by Wall Street analysts..
We expect more product roll-outs in parlays, live-betting, and iGaming to provide favorable tailwinds over the next 12 months and see upside to management's initial ’22E revenue guidance. DKNG’s reported 2.1M MUPs in September, with 3Q MUPs +19% q/q, outpacing FanDuel’s +2%, indicating DKNG’s ability to drive stronger engagement, and representing a similar strategy to its DFS playbook. Expecting an aggressive CAC environment to continue, but DKNG's marketing competencies make it best positioned, in our view. PT $70. Maintain Outperform.
… it was hard for me not to include them.
Right now, Wall Street thinks the stock should be trading much closer to $65 / share, or about ~14X 2022 revenue, compared to their current ~8X 2022 revenue multiple at only $35 / share.
I mean c’mon people - this stock is trading at the same price it was 52 weeks ago. Before the record new users, increased revenue per user, new state rollouts, Marketplace, etc.
You’d think the market would put value on these positive events.
I’m currently very underweight DraftKings at only ~0.4% - at this $35 / share I’m very happy to add to my position and bring it closer to 2% weighting.
I’m increasingly my weight in Roku, happily maintaining my overweight in Upstart, increasing my weight in Marqeta, and increasing my weight in DraftKings.
I have more analysis to share this week, so stay tuned.
Disclaimer: This is not financial advice or recommendation for any investment. The content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.