2/8/2021

None of the following is investment advice.

As we move into another stimulus package, let me provide an update into my businesses’ progresses during 2020. If you’re expecting this to be good news, I’ll nip it in the bud – it isn’t good news. So I’ll admit to the biggest failure I’ve ever had, which is something I think you can learn from. To preface the bad news, my Advisory produced a return of over 50% in 2020 and this year is now over 20% so far. This is going to be the epitome of a “humble brag”, but I still think it’s important to tell you what I’ve learned.

The month was July 2019. I attended an investor’s meeting at the Monarch in Newport Beach and hit it off with one guy there named Anand whom is the investment advisor at the family office of an early Qualcomm investor; he asked to meet with me in August to compare notes. We met on August 21st, 2019.

At the time, I was about 2 years into owning (and operating) an RIA, but I knew he wasn’t interested investing in something like that. He wanted a more defined strategy that could provide the highest risk-adjusted returns on behalf of his client. Since I would have no relationship with Anand’s client directly, I would only be required to have a catch-all investment strategy only considering that the investor was wealthy enough to have a family office. There was no need to diversify for the investor, since Anand’s job is to do that – Anand would only allocate to me if I could fill a niche better than someone else.

Keep in mind that I forced myself to make this presentation, as I had never done anything like it previously – I was going to pitch this guy a long/short hedge fund strategy. The first lesson for you is to always force yourself to make those presentations, because you’ll learn by having pressure exerted upon you, even if self-imposed. So I scoured my portfolios, which are normally no more than 30 positions, for what I believed were the best chances for success. The 4 businesses I selected all turned out to be growth plays. The presentation was exact and plain, thinking that he would be more impressed by research than salesmanship (I was wrong, but that’s another story).

I won’t keep you in suspense. Here is my exact presentation, copied from the follow-up email I sent him, ordered by the conviction I had for each business:

APPS (price $7.47)

  • First Mover advantage in direct application advertising. Historically, users are required to get apps through walled gardens of Apple and Play stores. This company helps developers nearly double conversion rate and will likely lower developer costs.
  • CEO was VP of Qualcomm (local pride)
  • Enables developers to connect directly with users, cut out the middle man.
  • As application usage grows, Digital Turbine will also.
  • No direct competition to be found for business models.
  • Platform engages advertisers, OEMs, and developers simultaneously.
  • Revenue and margins are improving consistently. Gross margin is relatively low to entice developers. 40% margin is okay with the large TAM volume.
  • Checks in industry encouraging.
  • Strategies employed are attached. Probably should be using Alteryx.
  • Downside risks: advertising constituents copying model (FB, GOOG, TTD). Loss of Samsung, Verizon or AT&T as customers (subscription non-renewals).

STMP (price $64.20)

  • Monopoly for eCommerce entry. eTailers on 10+ major platforms subscribe to batch ship in one place. All cloud based with no infrastructure owned by customers. Story hasn’t changed in years.
  • As eCommerce grows, Stamps will also.
  • SGA have increased from M&A, can easily reduce costs if needed.
  • Gross Margin over 70%, net margin over 20% normalized.
  • Approach to M&A extremely accretive and shareholder friendly, not empire building. Ended USPS relations for same rationale.
  • Talented, experienced, efficient leadership.
  • Compare-shop and access to more shippers worldwide than any platform.
  • Low CapEx requirement encourages ROIC for investors (significant buyback program currently).
  • 750,000 paid subscribers, consistent level for almost 3 years and growing slightly. Churn is only 3% and eroding, meaning gaining market share. Averaging about $75 per paid subscriber.
  • Subsidiary Shipping Easy has agency program paying customers for referrals.
  • Provides 11B of packages a year, which is 4% of top 4 total revenues. Means TAM is very high if margins are profitable.
  • Own Endicia, which has breathtaking patents within and without postage, including electronic stamps
  • Q4 is historically best quarter.

BYND (short)

  • Industry relationships will wane when customers understand product, although it tastes great and is better in theory for the environment.
  • Obvious question: long term, why not eat a salad that is healthy than a plant burger that isn’t? Who is the market for this? My research shows people bought the product once for its cachet, liked it, and went back to healthy food.
  • Recent stock offering (at $160) saw many pre-IPO investors cashing out.
  • More long term risks to investment thesis than long term benefits, most significantly the price point at restaurants. If product is long term successful, likely significant competitors (including Tyson and incumbents) will erode pricing power.
  • If product is successful, the pea protein supply will be strained, and/or suppliers will raise prices. Currently only two pea protein suppliers. Difficult to scale without compromising current ingredient composition and taste.
  • No significant chance of introducing new ingredients without losing credibility.
  • Burger king reported same store sales 4% higher in total after adding the burger to menus, though such a performance is not sustainable.

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