News of the Week (April 25-29)

Teladoc Health; The Trade Desk; CrowdStrike; Revolve Group; Upstart; The Boeing Company; SoFi Technologies; Match Group; Duolingo; PayPal Holdings; Olo; Nanox; Cannabis News; Random Notes; My Activity

1. Teladoc Health (TDOC) -- Adios

Teladoc Health reported its quarterly results this week. To be candid, I found them to be putrid to a point where I exited my position entirely. I wanted to briefly explore the results, explain what I saw in the company in the first place that made me want to own it, and what changed so abruptly.

Teladoc reported first quarter revenue that slightly missed expectations but was essentially in line -- this didn’t bother me all that much. On the adjusted EBITDA front, it actually slightly outperformed and the large net loss cited by many was really just fueled by a $6 billion write-down of the value of its Livongo purchase. This wasn’t cash-related and was inevitable considering how far Teladoc's stock had fallen.

From a profitability perspective, all key margin lines surprisingly contracted sequentially and year-over-year (YoY). Adjusted EBITDA margin (which investors are told to focus on) sharply contracted by 430 basis points sequentially and 290 basis points YoY. Nothing improved.

If this profit contraction was merely a blip on the radar, it wouldn’t gravely concern me. That, however, doesn’t seem to be the case. Teladoc’s adjusted EBITDA outlook for 2022 came in at $252 million which was a full 28% below analyst expectations. The guide implies a 10.2% margin for the year vs. previous margin guidance of 14.6% offered by management. Quite the miss.

Furthermore, CEO Jason Gorevic and CFO Mala Murthy both assured investors in February's Q4 2021 earnings call that BetterHelp (its D2C mental health branch) was doing just fine. Analysts were quite worried about competitive challenges cited by BetterHelp's competition, but leadership said these obstacles were not impacting Teladoc in the least. It was seemingly, supposedly immune. Leadership told us that its churn and customer acquisition cost (CAC) were both falling while lifetime value (LTV) rose despite its competition suffering from the opposite. It also told us that BetterHelp revenue would be margin accretive. Here’s a February 22nd quote from Jason:

“Having other virtual mental health vendors out there not performing at our level casts a negative shadow. To be honest, we simply outperform in this market. We are seeing all BetterHelp metrics make a tremendous amount of progress.” — Teladoc Health CEO Jason Gorevic

Fast forward to this week, and leadership blamed poor company results on these same competitive pressures. It used an article in the Wall Street journal with some anecdotal evidence on Adderall prescribing that I honestly found laughable and offensive.

This vastly disappointing segment update came shortly after management told us how confident it was about BetterHelp this year. To be precise, this re-assurance came February 22nd -- just weeks before this past quarter ended. Considering this, you’d think management would have been able to accurately guide Q1 BetterHelp expectations as it should have largely been a function of describing the past. Apparently not. I guess things completely changed in the time from its Q4 2021 call and the end of calendar Q1 2022.

This poor performance prompted the company to lower its revenue outlook by roughly 6% and prompted me to lose trust in management. As a public market investor, candid & trustworthy leadership teams are a must for me -- I no longer see this team as candid or trustworthy 

It’s no secret that Teladoc has struggled to successfully integrate Livongo, and that made me far more reliant on BetterHelp’s success to remain bullish. This surprising and frustrating hiccup made that reliance far too precarious. I am not saying Teladoc can’t figure things out eventually, but I now see that as a lower probability event. I would rather focus my time and capital on other fundamentally thriving holdings.

So what drew me to the company in the first place?

The promise of whole-person virtual care. Telehealth has become widely commoditized from a point-solution perspective, but nobody matched the depth Teladoc offered throughout primary, chronic and mental care in a virtual setting. This allowed Teladoc to bundle and cross-sell solutions to raise its LTV and justify more spend on lucrative, low hanging market share. Adding Livongo’s remote-monitoring capabilities made me even more confident in its ability to stand out. This edge just did not manifest itself in a strong investment; the facts abruptly changed, so I changed my mind.

2. The Trade Desk (TTD)-- Ad Perceptions Survey & a Case Study

a) Ad Perceptions Survey

The Trade Desk shared an interesting survey of 150 advertisers with spend ranging from $20-$100 million on their 2022 up-front advertising plans. Here were the highlights:

• 35% of advertisers plan to raise their Connected TV (CTV) (AKA streaming) spend during up-fronts with 23% planning to keep spend flat.

• 95% of advertisers expect the scatter market (all non-up-front inventory) pricing to be “moderately high or very high.”

• CTV spend industry-wide is poised to grow at a 39% clip in 2022 to reach $29 billion. No slowdown here.

• 53% of CTV advertisers now expect live sports to be part of their CTV campaigns.

  • (Netflix really could use some live sports content)

• 73% of publishers enjoy cross-selling other impressions to CTV advertisers that purchase live sports impressions.

The continued growth after a historically strong 2021 is an encouraging sign reiterating what we already knew: CTV is a rapidly growing freight train -- don’t stand in the tracks when the train is coming. CTV, which is encouragingly The Trade Desk’s largest revenue segment, should also get another large boost over the next 2 years as a result of Netflix finally deciding to embrace an Ad Video on Demand (AVoD) strategy. As a reminder, Google 3rd party cookie and Apple tracking policies do not impact the CTV signaling environment. At this vertical grows, so does The Trade Desk’s competitive moat vs. mega-caps.

b) Colgate-Palmolive CTV Case Study

Within a CTV campaign run through The Trade Desk’s platform, Colgate’s incremental reach grew by 19%. For a company doing north of $17 billion in annual sales, 19% incremental marketing reach is a massively lucrative driver not only of sales, but also profitability as Colgate gets more out of each marketing dollar within CTV vs. other channels. It’s amazing how much better granular, data driven targeting is vs. purchasing large blocks of linear impressions within up-fronts. The Trade Desk’s measurement tools freed Colgate to control ad-load frequency within CTV which had been a key barrier to its entrance up until this point. Its consumers had been getting annoyed with the sheer frequency of some ads within streaming. The Trade Desk fixed this.

The company -- according to Colgate’s head of programmatic media Jim Giacchetti -- was so pleasantly surprised by the success that it decided to make CTV a permanent piece of its marketing strategy. Colgate has now moved to purchasing both CTV and linear impressions through The Trade Desk’s platform. Another large, happy customer.

Click here for my TTD Deep Dive.

3. CrowdStrike (CRWD) -- Case Study

CrowdStrike released a case study on how its platform was working for the Illinois State Treasurer. The Treasury department had been struggling with bloated server needs, false positives and high costs. It re-vamped its tech-stack including on-boarding CrowdStrike’s Falcon platform.

The Falcon platform solved these issues from the previous vendor and delivered a sub 1-year payback period thanks to asset-lightening agent consolidation CrowdStrike facilitates. This is important. CrowdStrike’s offering is generally more expensive than its competitors. The only way it can get away with charging more is by providing incrementally more value. This is one sign (of many) of that being the case.

4. Revolve Group (RVLV) -- Proxy

Revolve Group’s executives continue to be very modestly paid. Co-CEOs Mike Karanikolas and Michael Mente both made around $450,000 in total compensation (including stock and option compensation) which actually fell slightly YoY.

This company has always been extremely disciplined with stock based compensation and options packages, and this is just another sign of that continuing. CFO Jesse Timmermans did make about $1 million in options during 2021 but there’s nothing of note aside from that. Board members barely made six figures in total consideration -- what a pleasant change from other public company compensation practices.

In terms of ownership, the Co-CEOs continue to hold the vast majority of the company’s voting power. Specifically, they own 89% of it vs. 91% YoY. Neither have significant class A stakes as they normally sell class A shares as they’re exchanged for class B shares.

In terms of 5% or larger holders of the company’s class A shares, William Blair and BlackRock both were listed for the first time. William Blair owns 9.8% of the class A shares or 1.1% of the company’s voting power. BlackRock owns 6.3% of the class A shares or roughly 0.6% of the company’s voting power.

5. Upstart (UPST) -- Auto VP Interview

Upstart Auto Retail’s VP and GM Michia Rohrssen participated in a very interesting interview this week. Rohrssen reiterated that its indirect auto loan product would fully roll-out over 2022 to complement Upstart Auto Retail and called this the “future of Upstart.”

Of note, Rohrssen was quoted saying dealership demand was “eight times the rate it expected” with dealers “surprised at how fundamentally different Upstart’s underwriting is vs the norm.” Upstart doesn’t always offer the lowest rate, but it often does and also approves borrowers at a higher rate than traditional methods.

I don’t think this means it now expects to exceed its $1.5 billion auto volume guide for 2022 by 8X (which would make the segment bigger than its entire 2021 unsecured business) but I do think this means there could be some significant upside to its forecasts. We’ll see.

Click here for my Upstart Deep Dive.

6. The Boeing Company (BA) -- Adios

Boeing posted another clunker of a quarter. Results underwhelmed across the board and we got what is now seemingly a massive quarterly charge taken from operational blunders -- this time connected to Air Force 1. I exited my position.

I was deeply compelled by the supply constrained, global duopoly that Boeing should be thriving in. Our world does not have enough planes and has no choice but to buy from Boeing or Air Bus. With commercial air travel poised to grow slightly ahead of GDP for the next 2 decades, I took comfort in the combination of a dominant market share position and highly visible growth.

Looking back, the internal hiring of Dave Calhoun as Boeing’s new CEO should have been more of a red flag. That was a sign of real arrogance from the company and an indication that this coveted duopoly participation would promote complacency and negligence rather than success. After the tragic 737 MAX crashes, the new leader of the company should not have come from its existing board of directors.

I look across my portfolio at CrowdStrike, Revolve Group, Duolingo, Green Thumb etc. and simply cannot justify owning this name over creating more liquidity to add to my holdings that are fundamentally succeeding.

PS -- If there is an overhaul of the leadership team and new, external talent brought in, I would strongly consider re-entering. I have no faith in Calhoun.

7. SoFi Technologies (SoFi) -- Student Loans

Joe Biden is again floating the idea to forgive a certain amount of student loan debt. He’s not considering $50,000 in borrower forgiveness like some of his more progressive colleagues are asking for, but is considering some form of relief.

Biden has indicated that he will not seek to do this via executive order but through Congress and it’s hard to believe Congress has the votes to get this done. As a reminder, SoFi’s updated 2022 guidance now assumes the federal student loan pause and the coinciding financial hit will last through December. It still expects to grow sales over 40% YoY with more than tripling EBITDA. It’s exciting to think where this company will be whenever the student loan channel (its largest revenue and EBITDA contributor) turns back on. It's doing everything in its power to foster long term shareholder success, and this artificial barrier will go away eventually. Patience -- like it always is -- will be key.

8. Match Group (MTCH) -- Takeover?

An article was published this week on Match Group being a potential buy-out candidate for Meta Platforms and also an activist target. A few notes on this:

• There’s no proof that this is actually the case. None at all.

• Meta would likely never be allowed by anti-trust regulators to purchase Match Group.

• Match Group is doing just fine. Its macroeconomic environment is holding it back, not leadership. The company does not need activist investors to come in and overhaul the path. And again, there’s no evidence that, that’s actually happening.

9. Duolingo (DUOL)-- Social Media Juggernaut

Have you ever noticed how much engagement Duolingo’s Twitter account receives every time it sends out a message? I have, and this doesn’t seem to be unique to Twitter.

Duolingo’s TikTok account (which grew from 50,000 followers in September to 4.1 million now) was named Social Marketer of the Year by Ad Age. Zaria Parvez -- an employee on the social media team at Duolingo -- was promoted to be the firm’s global social media manager for her role in this wildly successful endeavor. Duolingo is also finding that a material cohort of new applicants are citing its social media activity as a hint at possessing a culture these people want to be part of. Talk about a key edge amid our currently tight labor market.

Furthermore, this translates into a wonderfully powerful and cost effective word-of-mouth marketing channel to attract new users (which the TikTok account has done for Duolingo). Specifically, 90% of Duolingo’s growth in 2021 came from word-of-mouth and this was surely a key contributor. The efficient growth channel frees the company to more heavily invest in people and products to strengthen its long term fundamental prospects rather than having to spend on awareness.

Click here for my Duolingo Deep Dive.

10. PayPal Holdings (PYPL) -- 10Q Wrap-up

Most of the important information from PayPal’s quarterly reports are published in its presentation or mentioned in the transcript. My summary of the event this past week can be found here. Still, the company does wait to disclose interesting metrics pertaining to its credit issuance business as part of the 10K. That was published later in the week.

PayPal’s banking subsidiary in Luxembourg frees them to invest up to 35% of its customer balances throughout Europe. In the United States, it partners with entities like WebBank and Synchrony to originate, but it’s actually the bank in Europe. The company had been using about 31% of this capacity pre-pandemic and abruptly pulled back to 21% amid the pandemic. This staying stable at 27% vs. 27% QoQ is a sign to me that PayPal’s worsening macro environment is holding up well enough for them to continue issuing new credit to merchants and consumers in Europe. This is an important driver of its operational success.

Click here for my broad PayPal Deep Dive.

11. Olo (OLO) -- Proxy

Olo’s key leadership received nearly $19 million in total 2021 compensation and bonuses vs. $3.2 million YoY mainly in connection with options and other incentives via going public.

Similarly to other newly public companies, the executive/founding team owns the vast majority of its shares in class B stock:

• Founder/CEO Noah Glass owns 19% of class B stock for 16.8% of the company’s voting power.

• Raine Group and advisor Brandon Gardner own 46% of class B shares and 41% of the company’s voting power.

• Raqtinda and advisor/investor David Frankel own 19% of class B shares and 16.6% of the company’s voting power.

• Benevides (CFO) and Hahnfeld (Chief Commercial Officer) own about 3% of the company’s voting power together.

• Daniel Meyer (Shake Shack king) sold half of his stake during the year and now owns less than 1% of the company.

Together, all institutional holders and directors own 80% of the company’s voting power vs. 73% right after the company’s IPO.

Click here for my Olo Deep Dive.

12. Nanox (NNOX) -- Nanox.AI

Nanox.AI (formerly Zebra Imaging) received FDA clearance on a new piece of software this week. The AI-powered software -- called “HealthOST” -- measures bone density and some fractures common with Osteoporosis and helps with spinal analysis. This is its 10th clearance. With 75% of compression fractures missed by physicians (per World Congress of Osteoporosis), this is quite the relevant use case in enhancing identification. For hip fractures specifically, there’s a 25% mortality rate 12 months post injury with no diagnosis.

13. Cannabis News

• The America Bankers Association in conjunction with members and related parties in all 50 states wrote to Congress asking for cannabis banking to be passed with the America Competes Act.

• Kansas is working towards medical cannabis with Texas collecting signatures for decriminalization.

• New Hampshire struck down a bill to legalize cannabis possession and home grows.

• New Jersey sold cannabis to 12,000 people in its first day of legal cannabis.

• SSRS (a research firm) surveyed 1000 American adults and found that 92% of Americans support medical cannabis with 69% supporting legal cannabis. 54% of republicans approve of recreational cannabis. This is bi-partisan.

• Jushi Holdings (another cannabis grower) released data finding that 61% of adults would be more supportive of politicians approving of cannabis reform.

• Attorney General Merrick Garland stated this week that prosecuting marijuana possession is an inefficient use of resources.

• Biden is pardoning some people in prison for cannabis related-offenses.

• Arizona is now collecting more cannabis tax dollars than tax dollars from alcohol & tobacco... combined.

Click here for my broad overview of American cannabis regulation.

14. Random notes:

• Meta Platforms enjoyed 56 million Facebook downloads and 53 million Instagram downloads over the last 30 days vs. TikTok's 52 million. This was an encouraging overtaking. WhatsApp (including WhatsApp Business accounts) collected 70 million downloads over the period as well. That you to Sean Emory for publishing this data on Twitter. Click here for my review of the company's recent earnings report.

• Meta Platforms is opening its first physical store for headset and smart-glasses demos.

• Google hired roughly double Netflix’s entire employee base in the last 12 months.

• Cloud computing results among Microsoft, Amazon, ServiceNow and Google hint at durable growth ahead. This is good news for software overall.

• GDP contracted at a rate of 1.4% this last quarter vs. expectations of 1.6% growth. This was driven by things like inventory levels and not a matter of contracting consumption which drives the economy.

• Lending Club reported upbeat quarterly results. While this isn’t close to a perfect read-through to Upstart or SoFi, it’s a small piece of positive evidence.

• Carvana was struggling to place 11% notes in capital markets after trying to offer them at 10%. This is a sign of credit markets tightening which is what the Federal Reserve would actually react to in terms of a dovish pivot. It really doesn’t care about growth stock prices. Apollo ended up purchasing $1.6 billion in debt from the company.

• Robinhood is cutting 9% of its staff because it hired people to “redundant roles.”

• Inventory levels are beginning to show signs of normalization with companies like Sherwin Williams citing supply chain issues resolving in their earnings report.

• The U.S Dollar continues to move higher despite high levels of backward-looking inflation.

• Bill Hwang (Archegos) was arrested for financial crimes with bail set at $100 million. He pled not guilty.

15. My Activity

The was the first time in my long term investing journey that I exited two positions -- Teladoc and Boeing -- within the span of 24 hours. These markets are quickly sorting the durable compounders vs. those reliant on a certain environment to succeed. I will not hesitate to cut ties when it becomes clear to me that there are better places to focus my time and capital. During the week, I also added to Upstart and Meta Platforms, PayPal Holdings and JFrog.

My cash position after the transactions sat right at 14.0% of holdings but (as I’ve been frequently stating) I am expecting a cash infusion worth 5.5% of my portfolio to hit my account next week. Considering this, I am operating based on a 19.5% cash position, not 14.0%. I’m expecting a few more of these cash infusions throughout the year but this one will be the largest.

I’ll continue to allocate the vast majority of my disposable income to my brokerage account going forward. I'll also continue to accumulate more shares of fundamentally healthy companies at a very, very slow pace out of respect for wildly intimidating macroeconomic factors. These macro-headwinds holding back markets could take a while to play out, but they will play out. I'm comfortable with holding a slightly elevated cash position while they do.