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News of the Week (August 23-27)
Upstart; CuriosityStream; CrowdStrike; Microsoft; Ayr Wellness; Penn National Gaming; Apple's Change; REVOLVE; My Activity; The Week Ahead
1. Upstart’s Win
Upstart announced a new partnership with Patelco Credit Union to add the entity to its quickly growing referral network. The two companies had been exploring a relationship since June and clearly Patelco saw the value of Upstart’s capabilities.
Upstart’s referral network amplifies partner volume by directing Upstart.com traffic to various banks and credit unions willing to fund a loan based on parameters set by each of these partners. Upstart offers annual percentage rate (APR) discounts for consumers that make an account with the specific partner — this ensures incentives are fully aligned. Upstart’s software also enables these partners to build a branded, digitally-native lending platform directly into their website and while utilizing Upstart’s risk algorithms — it’s a true team effort here.
Patelco is a California-based credit union with over $8 billion in assets under management (AUM) making it the 22nd largest credit union in the USA. It has 37 branches across California and 400,000 members. This is Upstart’s 26th credit union/bank partner vs. just 10 at the time of its IPO less than a year ago. Since becoming the preferred AI lending partner for the National Association of Federally Insured Credit Unions (NAFCU) Upstart has demonstrated a seamless ability to attract new credit unions to its network — I think this trend will only accelerate going forward.
2. CuriosityStream’s New Distribution Partner
CuriosityStream’s Curiosity Channel is now available on fuboTV — a streaming service with 681,721 subscribers globally as of its most recent quarterly report. This follows a string of bundling deals with organizations across the globe for CuriosityStream including with Tata Sky Binge, SPIEGEL TV and more.
CuriosityStream’s sole factual niche means its content costs roughly 5%-10% of scripted content. This cost advantage means CuriosityStream can profitably bundle its service for fractions of a dollar while maintaining a roughly 60% gross profit margin. This approach to growth will represent a large chunk of its initiatives going forward.
It does not have the deep pockets or the reach of a Disney+ to immediately rack up millions of direct subscribers — so it grows this way instead. I expect these bundling deals to keep coming for the firm.
3. CrowdStrike’s Graduation
CrowdStrike replaced Maxim Integrated Products in the Nasdaq 100 index this week after Maxim was acquired by Analog Devices.
The new listing has no impact on the fundamentals of this business — it will not bolster the demand for CrowdStrike’s modules or boost its underlying profitability. The news does — however — mean large institutional funds will have to own more CrowdStrike as part of their mandated Nasdaq allocations. That reality will create more demand for the company’s shares.
In other news, CrowdStrike’s competition — Palo Alto Networks — reported a fantastic quarter this past week. The company beat expectations on “robust” macro demand for cybersecurity which should serve as a solid (and positive) hint for CrowdStrike’s earnings report this week.
4. Ayr Wellness’s Bold Move
Ayr Wellness announced a 5% share buyback program this week — the maximum allowed by the Canadian Stock Exchange (CSE) where it trades. The move is not generally something I associate with a company this early on in its growth curve, but I am happy with it as long as the expenditure doesn’t preclude near-future growth — based on Ayr reaffirming its forward guidance it doesn’t seem as though it will. The message seems to be that the company has funded all potential growth and still has excess cash flow to be put to work.
With a $1.52 billion enterprise value ($1.46 billion market cap), the company trades for less than 2X 2022 sales and 5X 2022 EBITDA to coincide with the triple digit sales growth expected. Ayr can always issue more shares to fund growth in the future — perhaps after up-listing comes and its valuation more accurately reflects its fundamental success.
The company currently has $124 million in cash on hand as well as $96 million more in pre-paid expenses and inventory. This buyback will cost roughly $75 million and is expected to take place over the next 12 months.
Ayr also debuted its Origyn Extracts brand in Arizona and opened its 40th Florida dispensary in Boynton Beach. It plans to eclipse 50 stores in Florida by year’s end.
5. Microsoft’s Price Hike
Microsoft announced the first major price hike on its Office 365 productivity subscriptions in over a decade. The changes will take effect starting next year.
The price hikes are as follows:
The Microsoft 365 Business Basic subscription price will rise 20% to $6/month/user
The Microsoft 365 Business Premium subscription price will rise 10% to $22/month/user
The Office 365 E1 subscription price will rise 25% to $10/month/user
The Office 365 E3 subscription price will rise 15% to $23/month/user
The Office 365 E5 subscription price will rise 8.6% to $38/month/user
The Microsoft 365 E3 subscription price will rise 12.5% to $36/month/user
The changes are partially due to Microsoft wanting to transition more consumers to its E3 and E5 plans as the E1 (its older 365 subscription) price hike was the largest of the bunch. It also offers clear evidence of strong pricing power in a macroeconomic environment where inflation remains a concern.
These subscriptions equate to nearly one-fifth of the company’s total sales meaning this tweak is absolutely material to its overall growth even when considering Microsoft’s massive scale. With roughly 300 million subscribers across all of these offerings, the changes could add a minimum of $3.6 billion in annual sales and likely closer to $7.2 billion.
6. Barstool Sportsbook and Penn Expand
Penn’s Barstool Sportsbook debuted in New Jersey this week and also received betting approval from the state of Arizona.
This news pushes the product’s state footprint to 6 with Penn planning to reach 10 states by the start of the NFL season next month. If this ambition is realistic, we should be hearing more announcements like this one very soon.
7. Apple’s Change — Duolingo; Revolve; Lemonade; SoFi; GoodRx; Barstool etc.
Apple announced changes to its app store policies this week. The changes will allow developers to advertise external payment methods and expands the subscription pricing plans a developer can offer.
The move is amid rising anti-trust pressure on the monopolistic practices of the Apple app store. The company did not announce any changes to its fee structure but the move does depict a certain sense of vulnerability for this behemoth in terms of fending off regulators to maintain as much market power as it can.
An eventual lowering of its fees taken from developers would have a wildly positive ripple effect across several positions in my portfolio. For example, the vast majority of Duolingo’s input costs are the fees it pays to app stores like Apple’s. Its roughly 70% gross profit margin could see meaningful upside if these fees come down along with every consumer-facing app out there.
8. REVOLE’s Marketing Comeback
REVOLVE announced plans for its REVOLVE Gallery — “an innovative, multi-room fashion experience” — which will take place during New York’s upcoming fashion week. The gallery will enable purchasing at the event.
REVOLVE’s normalized marketing strategy leans heavily on live events to market its brands and products. The pandemic all but halted these efforts and this news marks a return of this type of spend — this should bode well for REVOLVE’s business.
9. My Activity
I meaningfully added to my stake in Ayr Wellness twice during the week. These adds brought the position from 2.5% of my total holdings to 3.1% of my total holdings and represent more aggressive accumulation than I normally practice. I also added to Teladoc Health, Penn National Gaming and SoFi Technologies.
I trimmed 20% of my position in Microsoft as the valuation is starting to become historically stretched. I have no plans to trim this position again in the near future.
10. The Week Ahead
Tuesday, August 31st
Thursday, September 2nd
I will publish a portfolio update
Thank you for reading!