Small-Cap Recap: 11/30/21
Reassessing our small cap long-term picks - HIMS, SFT, PRCH.
Hi everyone, and welcome back to another deep dive analysis by yours truly.
If you missed my last one, I covered 4 long-term winners (DraftKings, Marqeta, Roku, and Upstart) that I believe are oversold. I’ve linked it below. I also made this short TikTok video about two of them.
This analysis is in-depth, so it likely will be clipped by your email provider - forcing you to read the entire post inside of the native Substack website. To do this, click the Rate of Return banner at the top of this email, or access the full post as directed at the end of this email.
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:
Hims & Hers Healthcare (HIMS)
Shift Technologies (SFT)
Porch Group (PRCH)
Hims & Hers Health (HIMS):
Kicking things off with a recap of a telehealth / healthcare company I’ve been excited about for quite some time - and unfortunately my excitement has yet to pay off.
I first began talking about HIMS on Patreon in February of 2021, right before all of our beloved SPACs took a nose dive. The company’s stock peaked around $25 / share, or about ~14X 2022 revenue expectations. Now, the stock trades at only 3.5X 2022 revenue expectations - and this is with 74% gross profit margins.
Let’s talk through their most recent quarter:
Revenue increased +79% to $74M
94% of this revenue is predictable subscription revenue
88% long-term revenue retention rates
Subscription members increased +95% to over 550K+
Launched their mobile platform - it’s freaking awesome and you should absolutely click this link and visit it for yourself
Generated 968K net orders, an increase of +66%
Gross margins decreased -3% from 77% to 74% due to the lower margin revenue derived from their recent acquisitions of Apostrophe & Honest Health
Apostrophe did ~$5M in topline revenue during Q3
Partnered with Rob Gronkowski (GRONK!) and Miley Cyrus for marketing
Entered into a wholesale agreement with Walgreens (~$2M worth of revenue)
Guided to a revenue increase in 2022 of at least +30%
With a few notable call outs from their earnings call being..
- Mobile Platform
I believe that the launch of our mobile platform is significant not just for our company, but for the industry as a whole. The Hims & Hers mobile platform is a major step in visualizing the radically different vision we have for the future of health and wellness. Our members grew up expecting innovative, digitally native and all-inclusive experiences like Spotify, Netflix and Peloton. Those companies structurally changed the fundamental business models of their traditional industry in favor of everyday consumer experiences.
We believe the health care industry is in need of that structural change as well, and we view today's launch as a major step toward Hims & Hers building that future.
- General Business
Today, our business is stronger than it has ever been. We added more members to our platform in Q3 than any quarter in our company's history. Our products line the shelves at nearly 10,000 physical brick-and-mortar locations nationwide, including most recently a nationwide rollout in Walgreens. From the loyalists of JLO and the irreverent lovers of Miley Cyrus to the Sunday night fans of Rob Gronkowski, Hims & Hers is everywhere in omnichannel strategy to build the first true consumer health care brand.
Our strong growth this quarter continues to demonstrate the deep underserved demand of a new generation of experience-driven and brand savvy health care consumers.
Our ability to identify these audiences and deeply connect with them through our brands, and drive engagement and conversion to our unique digital experiences, resulted in Q3 subscriptions growing +95% year-over-year to approximately 551,000. We generated nearly 1 million net orders in the quarter, 968,000 to be precise, which accelerated to +66% growth year-over-year. Year-over-year growth in net orders has accelerated for the last 4 consecutive quarters, which we believe, further demonstrates the deep consumer demand that exists in the market, and our unique ability to capture it.
Q3 marketing expenses were $38 million, right in line with the guidance we provided last quarter. Q3 marketing expenses included the marketing budgets we inherited from Apostrophe and Honest Health, and the upfront investments we made for our celebrity partnerships with Miley Cyrus and Rob Gronkowski.
We are exceptionally pleased with the continued performance and scalability of our marketing. From Q1 to Q3, the variance between our highest CAC quarter and lowest CAC quarter has been less than 3%. Another way of saying this is that CAC has essentially been flat all year. Keeping CAC flat in an environment of increasing rates would be impressive by itself. However, we've done this while also scaling subscriptions and exceeding our revenue targets.
- My Favorite Quote
Our current adjusted EBITDA guidance for the year means we are losing, on average, only about $3 million per month, which seems very reasonable given our exceptional growth, impressive scale and the fact that we have over $250 million in cash and investments on the balance sheet.
And that quote is what I want to bring some more awareness and understanding toward for a moment here. This company is trading on the market as if they’re hemorrhaging money every quarter and on the brink of insolvency, despite having a quarter billion in the bank with virtually zero debt.
Simply put, this stock’s price action is completely unrelated to their underlying performance.
Here’s what I see - coming from someone who previously worked in healthcare, as well as someone who is down some -70% on his first purchase of this stock..
Hims & Hers gets it.
They get it.
Their CEO Andrew Dudum completely understands that the next generation of healthcare delivery will not be at a doctor’s office. It will not be this in person, formal, expensive process that it has been for the last 20 years.
It will not be inaccessible to those without employer benefits, or even those with low income.
Andrew is building a company that will have millions of subscribers - paying for these healthcare products both out of pocket and with their insurance. Andrew is building a healthcare company around culture, something Teladoc can’t begin to imagine.
I mean seriously.. Gronk, Miley Cyrus AND JLo?
Andrew has made is abundantly clear with his specific product offerings and rollout that he’s leaning heavily into this “land and expand” strategy - wedging his business into underpenetrated markets by selling commoditized products like the above-pictured ED and hair loss treatments.
They’re capturing consumers who would never have been offered these medical products in the first place - then “upselling” / “expanding” across other products while keeping these customers on a sticky subscription model.
This land and expand strategy is successfully used by tech companies all the time, and I think it’s the key to HIMS long-term growth.
I finally wanted to share my thoughts on their sort of “operating thesis” mentioned on the call..
Our members grew up expecting innovative, digitally native and all-inclusive experiences like Spotify, Netflix and Peloton. Those companies structurally changed the fundamental business models of their traditional industry in favor of everyday consumer experiences.
We believe the health care industry is in need of that structural change as well, and we view today's launch as a major step toward Hims & Hers building that future.
Andrew is building a category-defining healthcare business - similar to how Spotify, Netflix, and Peloton all built tech-first category-defining businesses. These businesses aren’t built overnight, and they don’t come without challenge. Honestly, I have no idea how long it will take before the market recognizes Andrew’s efforts and vision - then assigns the proper valuation multiple to his stock.
But, I do know he’s doing everything right - including bringing the former Netflix CFO of 15 years and current The Trade Desk (TTD) board member, David Wells, on to his board of directors to help him execute on his category-defining strategy.
The same way David Wells helped Netflix do exactly that from 2004 through 2019.
To round off this piece, I’ll be dropping in recent commentary from Wall Street analysts..
Piper Sandler - Sean Wieland:
“Hims & Hers is dominating the market for direct-to-consumer sexual health, dermatology, and hair loss treatments. The stock is currently undervalued, as that their 30% baseline growth rate for FY22 is twice what we had modeled. We do not think HIMS has the clinical expertise, payor support, or human capital / technological infrastructure to completely transform US healthcare at scale. But, at current levels however that is ok.”
Price Target: $12 / share
Bank of America - Michael Cherny:
“Going forward, we will be looking for any updates around the integration of the two recent acquisitions and as well as any further momentum in the mental health category given management cited this area as a key pillar for the company's growth going forward.
Following 3Q results we are increasing our revenue estimates for FY21 from $254.3MM to $264.9MM and our FY22 revenue estimate from $317.2MM to $352.4MM. The estimate increase is driven by increased net orders.”
Price Target: $10 / share
HIMS makes up ~0.1% of my portfolio, but at one point that number was much closer to 1% - continual share price volatility paired with investing new capital elsewhere caused it’s weighting to slip. Before the end of 1Q22, I hope to have this company’s weighting between 1-2%.
Shift Technologies (SFT):
Moving along now to the other small-cap company I’ve introduced to you all recently, Shift Technologies.
As you might remember from this detailed Patreon post, Shift Technologies is leaning into the secular growth trend of “online.” Shift Technologies is tapping into the “last frontier” of this massive online migration - car purchasing.
Let’s begin, as always, by recapping how the company has done this quarter - and how they’ve done since introducing them to you all.
Revenue: $180 million, an increase of +200% YoY
Gross Profit: $13 million, an increase of +251% YoY
Sold a total of 8,111 units, an increase of +100%
Sold 6,487 e-commerce vehicles, an increase of +120% YoY
Achieved adj. Gross Profit per Unit sold of $2,021
Launched an acquisition market in Houston, TX
Adj. EBITDA margin of -18.5%, an improvement from -32.4% during the same period last year
Decreased customer acquisition cost -12% as a result to $1,659
Wow, what incredible results - and very clear guidance by the management team going forward into Q4 with revenue topping $185 million.
Which begs the question - if this company is increasing revenue by triple digits, increasing gross profit per unit sold steadily, lowering their customer acquisition costs, expanding their footprint into new markets (Houston, TX), and announcing deeper investments into their business to continue this trend - why is the stock trading at 52-week lows?
Why is the stock trading at 1.6X the amount of cash they hold in their bank account.
Think about that for a moment. This business’ price tag on the market right now is $400 million - with $250 million in cash in the bank, $90 million in used car inventory, and $100 million in current liabilities.
If the company paid off their current liabilities leaving $150 million in cash and $90 million in inventory, the market is valuing their underlying business at only $140 million (the premium to the value of their tangible assets).
Does that not blow anyone else’s mind?
A company selling 25K+ cars per year, on ~10% gross profit margins, is trading at only 4X its assumed gross profit figures for 2022.
$100 million in gross profit in 2022 - SFT is a $400 million company.
Let’s rewind to Carvana in 2018..
$200 million in gross profit in 2018 - CVNA was a $7.3 billion company.
What am I missing here?
Carvana had 10% gross profit margins at the time, they were growing revenue around +100% annually, and had 3X the amount of current liabilities as Shift Technologies has right now.
If we used this same logic for Shift Technologies, they’d be $3.7 billion company with a stock price of $44 / share. Obviously you can’t compare two companies apples to apples like this - but holy shit this seems insanely undervalued to me.
Especially considering Shift’s desire to move into multiple value-adding services for customers such as financing, insurance, servicing, etc. - all of these will expand their gross profit margins tremendously.
If you read to the end of the post I made about Shift, you’ll see I have a long-term investment thesis on the stock (24 months / end of 2023) before the market truly recognizes their business as worth owning - so we have some time on our hands.
But, if we’re correct, maybe we’ll see a 3-6X in stock price in the next 24 months.
If we really want to zoom out, we can begin to think of what this company turns into throughout the coming decade - as they expand their ~4% market share in San Francisco to a ~4% market share around the country.
$800 billion in e-commerce driven used auto sales happen annually around the country - the runway Shift has to grab market share in this environment seems endless.
But this “long-term” play comes with plenty of risks. They’re burning cash like crazy flipping these used cars, and even the more-established Carvana is not yet profitable. The company will likely need to raise more money within the next 2 years to continue this scaling - which weakens their balance sheet and / or causes shareholder dilution.
Let’s round this off with some commentary from our friends on Wall Street..
Benchmark - Michael Ward:
Until there is a clear path to profitability, we believe a multiple on revenue is probably the best way to determine valuation for the company. Growth in 2021 and 2022 for SFT will likely be the highest among their Peer Group. Despite this growth, their current valuation multiple is only 1/3 the Peer Group’s average. On average, the used vehicle retailers are valued at 2X expected 2021 revenue.
Price Target: $10 / share
Oppenheimer - Brian Nagel, CFA
We look upon Outperform-rated Shift Technologies (SFT) as a means for small cap, much more risk tolerant and longer-term oriented investors to play the still developing market for online, pre-owned auto sales. In our view, Q3 (Sep.) results and updated 2021 guidance outlined by SFT last night suggest a strengthening underlying business model, navigating well meaningful nearer-term sector challenges.
We look optimistically toward the potential for SFT to continue to expand successfully beyond the company’s core, legacy markets across the west coast.
Price Target: $12 / share
Maybe I’m not crazy.
Currently, SFT represents around 0.15% weighting in my portfolio. Over the coming months I’ll begin to increase that to 0.5%, then toward 1% when the market begins to better value this company. Given the upside and potential downside, I don’t see this stock tying up more than 1-1.5% weighting in my portfolio.
Porch Group (PRCH):
Wrapping up our small-cap recap with updated numbers and thoughts on a company that my friend Chris Sommers and I covered in depth both on his website here, and in a YouTube video (below).
Feel free to read my original pitch on the stock published to Patreon back in April linked here.
To keep things concise - let’s move quickly into their recent earnings results, guidance, and commentary regarding 2022.
Revenue of $63 million, an increase of +192% YoY and +22% QoQ
$42 million of that revenue was derived from their high margin (66%) software segment - 18% adj. EBITDA margins
Contribution margin of 45%, a sequential increase of +12%
Adj. EBITDA margin of 1%, up from -20% in Q2
Increased FY21 guidance from $187 million to $195 million, representing year-over-year FY revenue growth of +170%
Reaffirmed their 40% contribution margin target for FY22, up from only 34% during FY21
Added +3,352 companies to their ecosystem, a sequential increase of +20%
Added +26,897 monetized services to their ecosystem, a sequential increase of +9%, with the avg. revenue per monetizable service increasing +12%
Highlighting some notable quotes from their earnings call here for a moment..
- Strategic Priorities
Let me first revisit our previously articulated company strategy and 2021 priorities. We've been executing on our unique strategy in the home services industry to provide software and services to home inspection companies, mortgage companies and loan officers, title companies, moving companies, and roofing contractors to help them grow. By doing so, we generate B2B recurring software revenues as well as gain early access to homebuyers who we then help save time, stress, and money during a move. From this we generate consistent and recurring B2B2C transaction revenues by helping these home buyers facilitate the purchase of important services such as insurance.
Our priorities for 2021 for Porch are:
Sell software and additional modules to more companies or become deeply embedded with these organizations
Have more of these companies provide access to their consumers
Providing more services to these consumers. As we help with more services, the consumer is happier with our experience, helping companies like home inspectors to look good
We focus on insurance as a managing general agent, full-stack carrier, and agency where we can leverage our unique customer acquisition and property data advantages
We're bringing in brands and advertisers to connect with homebuyers earlier
We use strategic and accretive M&A to continue to expand our platform. Our business is performing well against each of these areas, and the results are strong
- Acquisition Momentum
Typically, we only break out acquisitions as we announce them and do not separate them out ongoing, namely because our platform has consistently created significant incremental organic growth once target companies join Porch. Case in point, acquisitions from this last year accelerated from, approximately, 7% annual growth for the year prior to being acquired by Porch to, approximately, 32% growth in the year following the acquisition.
- FY2021 Guidance
We are raising our previously stated revenue guidance from $187.5 million to $195 million for the full year. This would be 170% year-over-year growth. This is our fifth consecutive raise of guidance in our 11 months as a public company, from $120 million at our IPO to now $195 million. If you were to pro forma the closed 2021 acquisitions we had discussed throughout the year, as if they had been acquired on January 1, 2021, we would anticipate our full year 2021 pro forma revenue to be $226 million. This is our baseline to grow from as we look ahead to 2022.
- Insurance Segment
During Q3, the Insurance segment had strong financial performance. Gross written premiums were $108 million, representing more than a $400 million annualized run rate. Segment revenue was $20.5 million. So approximately, 19% of gross written premium and now over an $80 million annualized run rate. As you see, we had a strong 77% revenue less cost of revenue in Q3, which we use instead of gross margin. Contribution margins were 54% and adjusted EBITDA margins were 27% in the quarter.
At the end of Q3, we had, approximately, 292,000 policyholders and we're generating an average of $281 of revenue per customer per year. On a rolling 12-month basis, as of September 2021, we had an 88% customer retention. We are now in 10 states with our own insurance products and continue to be on track to meet our expansion targets within a year after the completion of the HOA acquisition.
Overall, today, with our carrier business, we see, approximately, 90% of the premium via our quota share, which means our system is capital light and with lower volatility within expected risk levels. In addition, we have excess of loss reinsurance to limit expected losses. This model allows us to have more control over the insurance product, while still generating distribution revenues in a capital-light approach via our strong reinsurance partnerships. Having control of their product generates higher performance, higher commissions, and faster growth over time.
What an incredible in-depth walkthrough by their management team - allowing us to better understand where they are, where they’re headed, and how they plan to get there.
Porch’s stock price ran up +50% heading into their earnings release - clearly showing strong confidence from investors in this company’s odds of printing an incredible quarter on the books, and I’d argue they did!
Growing revenue at nearly +200%, moving to a positive adjusted EBITDA margin, expanding their contribution margin, blowing insurance revenue expectations out of the water, showing clear revenue acceleration for their acquired tuck-ins (or “bolt-on” acquisitions) - incredible. Oh! And they raised their FY21 revenue expectations again - literally insane.
Sure, the +200% revenue increase isn’t all organic - that’s obvious with these tuck-ins. But I’d argue north of ~90% of that revenue growth is organic on a TTM basis.
I also love how the company is now breaking out revenue by software and insurance - with software making up 67% and insurance making up the 33% difference. This is giving investors better visibility. The company shared 88% TTM retention on their insurance customer retention, which only aids their insane 25X LTV/CAC ratio.
Continued adoption and retention of software customers remains critical for this company to continue growing with fat margins into 2022 and beyond - but I believe Porch showing a +20% sequential growth in this initiative during Q3 dispels all worries.
At time of publishing this, the market has put a 6X FY22 revenue multiple on the stock - and about an 8X FY22 gross profit multiple. I think this is laughable. This is a company growing revenue organically at almost triple digits, bolting on new acquisitions left and right (while accelerating their revenue growth), moving toward a positive EBITDA margin sooner than anticipated, adding businesses to their ecosystem at lightning pace, and monetizing against this at a rate faster than anticipated.
Generally speaking, consumer-orientated lead generation and home services names trade around 5X forward revenue - hinting toward the fact Porch Group is properly valued. But, true SaaS and software plays trade anywhere between 8-20X forward revenue, especially as they pioneer new markets.
I believe Porch Group will continue to carve out a meaningful chunk of their respective markets - with a growth rate north of +30% annually for the coming 3-5 years. In my humble opinion, I believe Porch Group should be valued much closer to the lower-end of true SaaS company anywhere between 8-10X forward revenue.
This would pin the stock around $28 - $32 / share in the near term.
This company is in their early innings of building a data moat around everything learned from the businesses its lending software to - data they use to better underwrite for insurance and eventually pivot toward DTC in 2023.
Wrapping things off with notes from our friends on Wall Street..
Benchmark - Daniel Kurnos:
“Porch reported another sterling quarter, beating consensus revenue by over +$5M, raising full-year guidance by +$7.5M and, as the exclamatory proof point, posting positive EBITDA. This shows us confirmation that management indeed has control over the level of investment, and that the business would be profitable today at current scale otherwise.”
Price Target: $32 / share
Stephens - John Campbell:
“Heading into Q3 results, Porch Group stock was nearing all-time highs. It was crucial that the Company not only deliver quality results, but also clear signs that it was running ahead of schedule beyond this quarter. In our view, Porch Group did just that with a large Q3 beat, a preview of its ability to pul the profit lever, 2021 guidance raised above the beat, momentum across numerous forward-looking KPIs, and clear progress made across a handful of high priority initiatives.
We continue to believe that Porch Group is in the early stages of considerable market penetration (over $300 billion total addressable market and a “right to win” across several areas) with a attractive valuation at $24 / share.”
Price Target: $38 / share
As I said on Patreon in May - Porch Group will make up 4-5% of my portfolio in the coming quarters. Now, their weighting is around 2.7% - I plan to continue adding to my position throughout 2022.
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.