My goal for 2020 (and hopefully beyond) is to keep an on-going investing journal, which I’m sharing with you as part of my commitment to open-source investing.
I’ll begin with a dose of reality to set expectations. In my ~3 years of investing I have exhibited all the classic behavioral mistakes made by individual investors.
Despite telling myself that I’m long-term oriented, I have over-traded (as evidence by my trade history).
Despite being an avid reader and priding myself on getting the details right, I have jumped in and out of positions without doing the required leg work.
I suspect this is because I’m human and humans are prone to behavioral mistakes.
I gotta admit to myself that every trade I make is likely to have a negative expected alpha, which is a finance-y way of saying that when I make an investment I’m likely to underperform vs. the market.
Here’s the truth. I’m a 28 year-old self-taught amateur attempting to do the work of a professional investor. That isn’t a recipe for success. I’m effectively making a series of bets against more informed and more experienced people. I should expect to lose more of those bets than I win over time.
With that foundation, I’ll begin 2020, and this investing journal, with an overview of three bets: Zillow ($ZG), Disney ($DIS) and equity in the B2B SaaS startup that I work for. I also have starter positions in Match ($MTCH) and Pinterest ($PINS). I have included my rationale for each below but as always, you can see my portfolio, cash flow and trade history on kidkapital.com.
Zillow - $222k - 54% of my portfolio
I have previously written about Zillow here, here, and here. I also regularly tweet about the company, most recently after its Q2 2019 earnings that saw the stock drop by almost 45%. I’m not going to get into my full thesis now but I’ll run through the elevator pitch.
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 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. As obnoxious as this sounds, I can afford to lose it all this early in my life. I have high-paying job and no other financial obligations.
Disney - $26k - 6% of my portfolio
Any analysis of Disney should begin with Matthew Ball. He’s written more eloquently on the company and its strategic position than I ever could:
Disney’s flywheel of 1) a movie studio that produced 80% of the top box office hits in 2019 2) theme parks (its most unique and defensible assets), and 3) a streaming service linked directly to the end customer gives the company an opportunity to grab (maintain?) an unprecedented share of the consumer wallet. The right way to think about Disney going forward will be similar the Average Revenue Per User (ARPU) metric used to benchmark other Internet companies. I don’t anticipate it being something management will disclose in the near future (nor will it be easy to estimate) but it is the correct mental model in my view.
B2B SaaS Startup - $21k - 5%
For the last 4.5 years I have been working at a small adtech startup in NYC. The team is about 25 people today and I am the longest tenured employee not counting our two co-founders. We are unique in that we didn’t raise any VC money outside of a small ~$500k seed round in 2013 but all our growth has been organic. We have been profitable each of the last three years and I have an ~1.5% equity stake in the business. The strike price on my options is ~$0.25 and shares were recently marked at ~$0.75 in our latest 409a valuation. To date I have executed ~80% of my options.
Still, I assign a rather low probability (~15%-20%) that my equity is ever worth anything. My decision to execute the options was driven by the following:
A belief in my team’s ability to adapt in an every changing adtech market
Career optionality
On the second point, I can’t see myself working at the company forever so executing the options removes some of the mental friction required in making the decision to one day leave. It would be hard enough to tell the co-founders. These are people I have worked with every day for the last half decade. The thought of doing that AND cobbling together $25k makes leaving feel impossible. I realize this might not be the most sensible decision from a personal finance perspective but it was logical to me. The weight lifted off my back knowing that I can walk away at any time has been an immense relief of stress.
Match Group - $6k - 1.5% of my portfolio
Any reasonably conservative DCF suggests Match’s current valuation is full. Then again, the same could have been said about Match at $10B and $15B yet management continues to find new monetization levers to pull. ARPU sits at $0.59 on ~7.8M subs through Q3, 2019 up from $0.54 on ~5.4M subs in 2016. Most investors, including me, didn’t think was possible.
I bought Match at $62.36 in early November because I think it’s reasonably safe to say dating apps will have a greater impact on the lives’ of single people in 10 year than they do today. It’s also clear that there are strong networks effects in this business. Any challenger to Match’s portfolio is going to need adept execution, something Bumble and other rival apps have severely lacked in recent years. I’ll be opportunistically adding to this position going forward.
Pinterest - $5k - 1.2% of my portfolio
Finally, I begrudgingly own some Pinterest. This one is frustrating because management has continually squandered opportunities to capitalize on its 87M female-skewed monthly active US users. The company’s glaring weakness is its ARPU ($0.93 in Q3, 2019 compared to $7.26 for Facebook, ~$5.50 for Twitter, and $2.12 for Snap during the same period). The market seems to interpret the weak ARPU as Pinterest being structurally ill-suited for advertising. I disagree. My read on the situation is that management has been negligent in building out a basic ad tech stack. Management admitted as much directly in its S-1 this year:
We are still in the early stages of building an advertising product suite that fully taps the value of this alignment between Pinners and advertisers, but we believe it will be a competitive advantage over the long term.”
CFO Todd Morgenfeld alluded to the problem again in Pinterest’s most recent Q3, 2019 earnings call (emphasis mine):
Ben had referenced some of the product introductions that we've made, but it's still very early days around things like age targeting, region targeting, dynamic retargeting around our products, product ads and then shopping ads, and that stuff is just table stakes for us to be successful.
Smh. Don’t even get me started about Pinterest’s pathetic attribution offering. There’s no logical reason why a company founded in 2010, that boasted 65M active US users in Q1 of 2016, and with a long list of impressive alumni could be in the “very early days” of building out the basic advertising infrastructure that is “table stakes” for the company to be successful.
Pinterest’s prior and current failures gives pubic equity investors like myself a window of opportunity. No, the opportunity isn’t as large. And yes, Instagram is a competitive (and superior) visual product whose team is already working on shopping functionality, but I’m betting two things:
The digital advertising market is big enough for Instagram and Pinterest to co-exist.
Pinterest can succeed in spite of management’s less than stellar track record.
There’s also some likelihood that Pinterest discovers a killer monetization lever in the future but I’d place a low probability on this happening (<15%), thus my thesis is not reliant on it. It’s free upside.
Please let me know if you have any questions, feedback or would like to chat about any of the above companies. If you are located in NYC, always happy to grab coffee. Best way to get in touch is on Twitter.