As I take a moment to reflect on the last 12 months it is tempting to let myself believe that my performance was the product of doing all the “right” things.
I mean, my portfolio returned almost 230% compared to the 16.3% generated by the S&P 500. My net worth dropped from $400k at the beginning of the year to $200k in mid-March. Yet I avoided panic selling, added to the positions where I felt there was minimal risk of permanent impairment, and ended the year with $1.3 million to my name.
It’s hard to call that anything but a win right?
While technically true, the reality is that my returns are more likely the result of good fortune, an adequate temperament, and the skill of the management teams I’ve made concentrated investments in.
With that disclaimer out of the way, I wanted to outline my rationale for each of the positions looking ahead to 2021 and beyond.
Zillow - 64% of my portfolio
Here’s what I wrote about Zillow one year ago:
Zillow sits at the most valuable position in the residential real estate value chain since it's the first place most consumers go when buying or selling a home. Its website/mobile app traffic give Zillow bargaining power over the industry profit pool vs competitors and other industry participants. At a cost basis of $35.09/share, my crude DCF model suggests I’m getting close to fair value on Zillow’s core Premier Agent business and what amounts to ~free a call option on the iBuying businesses (Zillow Offers and ancillary services like title and mortgage).
iBuying is the most interesting trend happening in residential real estate. While the unit economics are at best unproven, Zillow is attacking a $1+ trillion annual market that is clearly broken. Including ancillary services, Zillow has the potential to generate 0-2% contribution margin on every home sale at 30%+ ROE. I’m comfortable making this bet even as I acknowledge its largely speculative.
As for the ~54% allocation in my portfolio? Simply put, I’m looking to hit a home run. I believe Zillow represents an asymmetric opportunity. No doubt I could play it safe, buy an index fund, and likely be sitting on a ~$5M portfolio by the time I’m 60 years old. Personally, I’d much rather take a crack at materially changing the trajectory of my personal finances while I’m young enough to enjoy it. My cost basis is $175k and as obnoxious as this sounds, I can afford to lose it all this early in my life. I have well-paying job and no other financial obligations.
The only update I’d make is that Zillow’s core Premier Agent business is probably a bit overvalued at this point. The stock price implies sustained double-digit revenue growth over the next five years. Not impossible but the risk/reward isn’t as attractive compared to where Zillow has traded the previous couple of years.
I try to avoid selling/trimming on valuation alone especially when there is evidence that:
competitive position remains attractive
unpriced optionality still exists
While iBuying is very much an unproven business model, residential housing is a massive market early in its offline-to-online transition.
Here's how I'm handicapping the probability that each company amasses enough market power to defensibly extract from the profit pool:
Zillow - 40%
Redfin - 30%
Opendoor - 10%
CoStar - 10%
Other / none - 10%
I believe Zillow and Redfin sit in the strongest competitive positions thanks to their highly trafficked websites and apps.
Opendoor is the market share leader in the iBuying space with the most operational experience, richest pricing dataset and the best unit economics. Opendoor also has a few near term structural advantages over its competitors but in the long run, I hypothesize the edge isn’t sustainable.
CoStar is interesting because management is attempting to amass leverage from the supply side. CoStar effectively serves as the MLS for commercial real estate and that’s the most likely path to bargaining power in residential —> become the effective national MLS and win consumer traffic by aggregating the supply.
My Base - 12.6% of my portfolio
I wrote about them in a previous post but My Base consists of low cost index funds and real estate. The plan is for these investment to eventually make up the conservative end of a barbell portfolio. As my age, number of dependents, etc. increases I expect my percentage allocation to My Base to increase as well.
Match Group - 7.1% of my portfolio
The under-followed @AutumCapital summed it up nicely in a recent blog post:
Match is an “inevitable” company. It has a monopoly over online dating and online dating will only grow: from 60% to 80/90% in the West and from 0% to 60% in emerging markets. A simple DCF yields little forward returns but does not fully reflect another s-curve-type move in online dating penetration, engagement, and monetization.
This is another situation where I wont sell or trim a multi-bagger position on valuation alone. The competitive dynamics remain attractive and there’s plenty of green field to pursue as more of the dating experience moves online (even if I can’t yet quantify it in a DCF model).
Eventbrite - 6.4% of my portfolio
When I wrote this in July Eventbrite was trading at an enterprise value of $426 million. I invested with the thesis that management would have ample liquidity to make it to the other side of COVID-19. That thesis is proving correct and I’ve been rewarded with a 174% return on my original $30k investment. Six month later and Eventbrite is trading back at $1.4 billion enterprise value, implying a post-pandemic rebound in paid ticket events. Beyond that, the competitive landscape remains unclear. I’ll do nothing for now and re-evaluate when the profit becomes a long-term capital gain in six months time.
IAC - 4.7% of my portfolio
I own IAC shares as the result of a successful trade near the bottom of the pandemic-induced bear market. Besides the lucky timing, my thinking was to swap out my Match stock for IAC stock to accomplish three things:
Recognize a tax loss early in the year
Maintain my exposure to Match
Buy Vimeo, 83% of ANGI’S Homeservices, Dotdash and IAC’s other bets like Care.com plus $2.4B in cash for less than $4B
Thanks again to @JerryCap, who first posed the idea to me.
My Employer & Nextdoor - 1.6% & <1% of my portfolio
I wrote about my employee equity and Nextdoor, which are both illiquid positions, in this post. Nothing new to report.
Redfin - 1.4% of my portfolio
I think Redfin’s highly trafficked website and app will be worth a lot more than $7 billion in 10 years time. If not to Redfin itself then as a M&A target. I’m particularly interested in monitoring Redfin’s iBuying efforts over the 12 months.
Weedmaps - 1% of my portfolio
There’s an interesting business once you get passed the two giants red flags:
weed stock
SPAC-merger
The current TL;DR pitch is Shopify for weed. But there’s also potential for Weedmaps to transition from more of a lead-based business (think Yelp of weed) to a vertically integrated one (think Amazon of weed). I know, I went galaxy brain there but this is a company I’m still fleshing out. I’m early in my diligence process. As I get more info from subsequent financials and management commentary, I’ll refine my thesis. If I don’t like what I see and hear or if I see an opportunity elsewhere, I’ll cut bait quickly.
For those interested in a quick Weedmaps primer, I recommend this piece at IPO Edge.
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Thanks for reading! If you’d like to schedule a call to chat through any of the above companies, industries or anything else the best way to get in contact with me is by email or DM on Twitter.