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News of the Week (April 18-22)
The Trade Desk; Upstart; Progyny; SoFi Technologies; PayPal Holdings; Match Group; Meta Platforms; Duolingo; The Boeing Company; Cannabis News; My Activity
Today's Piece is Presented by Commonstock:
1. The Trade Desk (TTD) -- Netflix
Since Netflix’s inception and its wildly successful journey as an entertainment disruptor, it had been entirely opposed to selling advertisements. The company thought it would cloud the high quality nature of the platform -- but that no longer seems to be the case.
Perhaps in light of subscription growth challenges, Co-CEO Reed Hastings explicitly said on the company's earnings call this week that Netflix would launch lower-priced and ad-supported products in the next 2 years. Furthermore -- in perhaps the most ideal news possible for The Trade Desk -- Hastings said that Netflix would continue to wholeheartedly focus on being the publisher and have “other people do all the fancy ad-matching.” This means Netflix will readily tap into the expertise of the programmatic advertising world rather than trying to build it all internally on their own.
“Those of you who have followed Netflix know I’ve been against the complexity of advertising and a fan of subscription simplicity. As much as I’m a fan of that, I’m a bigger fan of consumer choice.” — Netflix Co-Founder/Chairman/Co-CEO Reed Hastings
Why does this matter? Connected TV (CTV) supply is more data driven and so generally more accurate and lucrative than other channels of marketing like linear TV. With Netflix’s 6%+ share of streaming hours, this means there will be more of this data-driven supply to be auctioned to advertisers and agencies which work with The Trade Desk at a far more frequent clip than any other player in the open internet category. All of this new supply will find demand and The Trade Desk will play a large role in connected impressions to buyers based on Hastings comments of not wanting Netflix to be responsible for doing so.
Not only will this be a demand tailwind for The Trade Desk, but one that occurs in a targeting environment that cannot be hurt by Apple’s ATT/IDFA changes or by Google’s removal of 3rd party cookies. So with the news, The Trade Desk should enjoy a top line tailwind and even less reliance on walled garden giants.
Fun fact: The Trade Desk’s co-Founder/CEO Jeff Green predicted this would happen 4 years ago.
Click here for my TTD Deep Dive.
2. Upstart (UPST) -- Berkshire Hills Bancorp & Bloomberg Loan Data
a) Berkshire Hills
An analyst downgraded Berkshire Hills Bancorp this week citing the company’s usage of Upstart as a source of loan volume. In response, the bank (thank you to their team) published data on how its Upstart loans were actually performing. Berkshire Hills is collecting an average loan yield of 11.5% with a 5% annual net charge-off rate from Upstart-sourced loans -- meaning there’s plenty of room for adequate cash flowing.
Additionally, it stated that “while the program is relatively new, annual net charge-off rates are well below model expectations.” This is a very positive piece of news. The bank also expects the proportion of its loan book via fintech partners (mainly Upstart) to triple from 1% to 3% this year. This serves as an encouraging hint at the growing willingness of bank partners to retain loans and grow their business with Upstart.
b) Bloomberg Data
Concerns have risen surrounding rising delinquency rates associated with Upstart’s loan pools sold through capital markets. My friend -- Marcelo Lima -- was kind enough to share updated Bloomberg delinquency data with me and it was a positive surprise:
The company had guided to rising delinquencies throughout 2022, so it was encouraging to me to see delinquencies for the problematic ST-7 deal sharply invert down (a good thing) and other deals with concave-up shapes turn concave-down (a good thing). While it was a pleasant surprise to see this playing out, I’d like to remind everyone why I wasn’t panicking over rising delinquencies:
Delinquencies were artificially held down by government intervention in the forms of payment holidays and stimulus checks during the pandemic. The YoY comp here is one of a rapidly normalizing world (today) vs. a uniquely easy environment for delinquency -- so of course delinquencies will rise as the world has dramatically changed over the last 12 months.
The company has assumed normalizing (rising) levels of delinquency and a normalizing of the American consumer overall in its wildly positive 2022 guidance.
Rising delinquency is also a factor of loan pool mix shift to less traditionally-worthy borrowers. The rising default rates that coincide are offset by the higher levels of interest payments that partners and investors receive from the current, higher risk loans.
I’m eager to see Upstart’s first quarter results. Spikes in capital market volume for the company hint at strong sequential demand, but I’ll be more focused on the tone surrounding the updated 2022 guide. This year is when the tailwinds Upstart has enjoyed turn to headwinds and when it will be most important for the company to continue delivering relative outperformance on its loan pools and building partner trust. While the price action has been brutal, the company’s operating results have been fantastic and I continue to accumulate more shares.
Click here for my Upstart Deep Dive.
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3. Progyny (PGNY) -- Infertility Week
Progyny is again partnering with the fertility benefits non-profit RESOLVE to run national infertility awareness week. While this may not sound all that significant, I think it is. Why? Despite infertility impacting more than 12% of American couples, the American Medical Association had not recognized it as an actual disease until 2017. The result is wildly unequal and broadly inadequate infertility coverage that I extensively cover in my deep dive (linked below).
For the sake of brevity, I wanted to offer the effect of this unfortunate situation: Just 2% of babies in the U.S. are from Assisted Reproductive Treatment (ART) cycles vs 5X that rate in the most comparable, Western nations. This is a bi-product of misaligned incentives, restrictive coverage and absurdly high out of pocket costs for prospective parents. The key to solving all of this is motivating and incentivizing insurance carriers to adopt a more effective, fair and wholesome approach which will only happen if large, powerful employers force their hands. That’s what Progyny has been able to do so well with huge clients like Microsoft and Amazon for the last 7 years -- high-profile events like this could help. As part of the launch, Progyny and RESOLVE will ring the Nasdaq opening bell and light up the Empire State Building in orange (the symbolic color of infertility).
“We are calling on every employer and legislator to acknowledge infertility for the inequitable crisis that it is and to take action.” — RESOLVE CEO/President Barbara Collura
Click here for my Progyny Deep Dive.
4. SoFi Technologies (SOFI) -- Cash Back
SoFi announced that its new direct deposit customers will earn a $300 sign-up bonus and 3% cash back on all SoFi credit card purchases for their first 12 months. The rewards cap was set at $36,000. Cash rewards can be easily moved to investing or savings accounts and are structured to motivate responsible financial behavior.
For competition like PayPal Holdings, direct deposit customers yield roughly 8X the average lifetime value (LTV) for the firm vs. all other users and SoFi enjoys a similar force multiplier. This is merely another way for SoFi to attract those lucrative dollars to fuel the rest of its business and is why it is so important for SoFi to be a digitally native, one-stop shop: The coincidingly low input costs give it a competitive consumer acquisition cost (CAC) while the cross-selling gives it a competitive LTV when looking across the industry. This is how it will afford hefty rewards programs and win.
“In the current rate environment, we’re leading the charge among institutions to put money back in our members’ pockets.” — SoFi CEO Anthony Noto
5. PayPal Holdings (PYPL) -- Proxy Highlights, a Commerce Campaign, Pricing Power & Finals Week
a) Proxy Highlights
As is common with companies that have undergone several leadership changes, PayPal executives don’t directly own a great deal of company stock. CEO Dan Schulman owns around 0.25% of the company outright and has seen his stake slightly grow YoY which is the case for other executives as well. Vanguard owns 8.01% of the company vs. 7.94% YoY while BlackRock now owns 6.5% of the company vs. 7.0% YoY. Schulman made $1.25 million in annual 2021 salary but also got around $600,000 in restricted shares.
PayPal and IMG are revitalizing “MADE” -- a fashion platform for up and coming artists. MADE began during the Great Financial Crisis (GFC) to offer growing entrepreneurs with a stage to sell and promote their brand. In the wake of the pandemic, that need has been renewed for countless small businesses.
For the last several years, PayPal has been hard at work building out a merchant-facing commerce platform to complement its consumer-facing payments platform. This commerce platform is now equipped with things like granular, personalized wish-lists (AKA demand curves) for every PayPal customer to concretely indicate their interests and unique marketing campaigns to do things like re-target “almost buyers.” Now, with IMG, MADE’s renewed marketplace will be laced with all of the uplifting utility that PayPal can uniquely provide.
c) Pricing Power
PayPal made the following changes to its PayPal and Venmo instant transfer fees:
Personal PayPal accounts will pay 1.75% of an instant transfer with a minimum charge of $0.25 and a maximum charge of $25. Previous fees were 1.5% with a $15 max.
Personal Venmo accounts will pay 1.75% of an instant transfer with a minimum charge of $0.25 and a maximum charge of $25. Previous fees were 1.5% with a $15 max.
PayPal Merchant Accounts will still pay 1.5% but with a $0.50 minimum now vs. $0.25 previously and no maximum vs. a $15 maximum previously.
Standard P2P transfers are still free.
To put it plainly, pricing power matters more in an inflationary world and this is a clear sign of PayPal having it.
d) College Campaign
Venmo will be visiting college campuses (where the product originally thrived) through the end of finals week to promote the brand and to give away cash prizes. Venmo users will be able to scan giant Venmo QR codes on campus to enter for a chance to win. Venmo caters to affluent customers with a mean age of 32 years old. College students are the next generation of that demographic, which is partially why Venmo continues to focus marketing efforts on this area.
Click here for my PayPal Deep Dive.
6. Match Group (MTCH) -- Stir
Match Group may have its hands on yet another successful dating app. Stir -- which the company launched last year -- is an app designed for single parents to find their special someone. According to extensive surveying and market research, Match Group found that 1/5 of its overall users are ghosted after the counter-party learns about them having children. With Stir, parents can feel far more comfortable sharing that information knowing the rest of the user base is open to children or in the exact same boat.
This is the power of having not one, but several successful dating apps from which to mine data. The company has a plethora of consumer insights to use to fill the void for consumer cohorts that Match Group isn’t adequately servicing. This empowers it to take a more data-driven, not hope and pray, approach to product launches and Stir is the latest example. With over 10 million single parents in the United States alone, there is a big community that the new product could meet a very real need for.
Click here for my broad overview of Match Group.
7. Meta Platforms (FB)-- Brazil & Small Green Shoots
Meta Platforms is dealing with payment partner delays as it tries to launch payments through WhatsApp in Brazil. WhatsApp’s massive user base remains almost entirely un-monetized and -- if launched -- this could provide a great read-through into how the app could impact financial performance in the years to come. It’s hard to believe this firm won’t try to extract more revenue out of the historically successful app.
b) Green Shoots
Sean Emory shared some awesome quotes on Twitter from a Principal at a large, U.S-based media agency. I wanted to thank him for sharing and offer what I saw as the highlights:
"Facebook performance, even post IDFA, is unmatched vs. the rest of social and we're seeing the same spread in terms of performance across the social media platforms throughout the iOS changes."
"Facebook's newsfeed and Instagram are powerful and effective... I can't get anywhere near the kind of click through rate (CTR) or response with the open web when it comes to bottom of the funnel."
"I think the Facebook hysteria is overdone."
This is anecdotal and from an anonymous source, but still encouraging and hints at Facebook's issues with Apple being eventually fixable. I continue to think the headwind has been vastly amplified by it coinciding with Facebook's content monetization shift to reels as well as a slowdown in e-commerce due to tough, pandemic-related YoY comps. All of these factors are occurring simultaneously and fostering the narrative of Apple killing Facebook -- which I believe to be entirely inaccurate.
8. Duolingo -- Proxy Statement
a) Compensation highlights:
CEO Luis von Ahn and CTO Severin Hacker (both founders) earned $73.8 million and $36.9 million respectively via stock awards in connection with the company's IPO and meeting performance benchmarks.
Ahn and Hacker also got 1.2 million and 600,000 restricted shares as founder awards in connection with the IPO to "align compensation with the long term interest of stockholders by requiring the achievement of sustained stock price targets."
b) Ownership highlights:
The largest Class B shareholders include (top 4 combine for 94.1% of the company's voting power):
Ahn owns 30.5% of the company's post IPO voting power entirely through class B shares.
Hacker owns 30.0% of the company's post IPO voting power entirely through class B shares.
CapitalG (AKA Google) owns 19.3% of the company's post IPO voting power almost entirely through class B shares (small class A common equity stake).
General Atlantic owns 14.3% of the company's post IPO voting power entirely through class B shares.
Largest class A shareholders include:
NewView Capital at 13.6% (1.4% of the voting power).
KPCB Holdings at 9.4% (1.0% of the voting power).
Baillie Gifford at 7.5%.
Union Square at 6.7%.
Durable Capital Partners at 6.2%.
9. The Boeing Company (BA) -- Various News
The black box from the crash in China last month is “badly damaged leaving no publicly available clues to explain the crash.” The regulator was able to conclude that the “jet was properly maintained.” It’s extremely rare to not be able to recover black box data.
China has resumed flights for the model that crashed.
Boeing is telling airlines that 787 deliveries will resume by 2023.
10. Cannabis News -- Mainly Per Marijuana Moment
In unsurprising news, research out of the Journal of Health Economics concluded that cannabis legalization limits opioid usage.
A prominent left-winged Senator -- Patty Murray -- explicitly expressed urgent support for passing cannabis banking reform via the COMPETES Act.
D.C’s City Council approved legislation to ban employers for firing employees for cannabis consumption.
Missouri’s House will vote on cannabis legalization in the near future.
Recreational cannabis is now live in New Jersey. Green Thumb’s CEO Ben Kovler greeted early customers with donuts for the special occasion. Lines were long across the state.
Click here for my broad overview of American Cannabis regulation.
11. My activity
I added to names more aggressively than I have since March 2020 this week. My cash position -- with the purchases -- fell from slightly over 10% to 8%. I see thriving companies like Upstart and Revolve Group trading at earnings multiples below firms growing in line with GDP with no margin expansion. Price discovery could always lead to lower long duration asset prices in a rising rate environment, but these companies continue to excel and I see a lot of deals I’m eager to take advantage of. I will continue to do so SLOWLY out of respect for the extreme uncertainty in markets. Also note that I plan to make a deposit into my brokerage account in the coming weeks which would raise my cash position from 8.0% to 13.5% -- that was part of the decision-making process. I added to the following names during the week:
While I could always be wrong, I personally see my financial technology holdings as the closest to capitulation and a potential bottom. I continue to focus wholeheartedly on fundamental quality and my holdings’ abilities to capitalize on tailwinds while relatively outperforming amid headwinds. Sentiment follows price action and this latest round of volatility is certainly no exception -- in my view, the businesses that I own are perfectly healthy.