We look in the oddest places for great investments. From Pager Duty to Mohawk (or Aterian) investors look high and low for outsized returns. But sometimes great investments are hiding right in front of us. Yet these stocks are ignored due to assumed “fatal flaws”. Are these flaws really fatal? Or are they really flaws at all?
I’m not sure everyone is right on these stocks. I’m not sure I’m right on these stocks. I am sure that the narrative on these stocks needs to be challenged. Why am I so worried about these incorrect narratives? They can make you rich—just look at Snap.
I keep telling myself I won’t miss the next Snap. In January 2019 Snap was a $7B company, reeling from it’s IPO. In January 2021 Snap was a $107B company. No doubt the business changed during that time, but it didn’t 15x. The narrative changed. Snap should never have been a $7B company and I missed that. They were too entwined with too many people’s lives to be that cheap. The narrative of Snap being a failing company just wasn’t true, the numbers didn’t back it up. Some of the numbers weren’t great with users declining sequentially briefly. The business was evolving, which caused temporary pains. But the false narrative tricked people (myself included). Snap was a great business hiding in plain sight.
I won’t miss the next Snap, so here are my guesses at which companies aren’t being properly valued.
Everything comes down to unit economics. At a first glance DoorDash seems like it should be hemorrhaging cash. For instance, I just ordered groceries on DoorDash. They delivered those groceries in less than an hour, and included a 30% discount plus no delivery fee. Honestly it was a great experience, very smooth and cheap on my end. Yet, how can DoorDash be profitable when they are running promotions like that? On top of profitability concerns, DoorDash IPO also went wild, rising 86% above its IPO price.
But somehow DoorDash is free cash flow positive and growing like gangbusters (226% YoY). The narratives around poor unit economics just don’t jive with the financials. Promotions will slow over time, while network effects only get stronger for DoorDash. The financials are good right now and will only get better.
If you start to zoom out, you can see some crazy possibilities for DoorDash. Instead of viewing it as a food delivery company, could it be the company that brings all local commerce online? DoorDash isn’t just restaurants or groceries, they are florists and every local store in your neighborhood. I almost think of DoorDash as a Shopify type company. Somehow the last mile doesn’t seem crazy anymore.
Alibaba is growing 41% per year yet only trading at PE of 24 with 21% net income margins. Printing cash and growing in every direction. They are the Chinese Amazon but at a third of the valuation. A great company that is being held down by the threat of the Chinese government.
But things around Alibaba are crazy. Jack Ma “disappeared” for months. Eventually it came out he was just “laying low”. All of this happened shortly after Alibaba had to stop their Ant Group IPO. The fear behind Alibaba is real, but is it overly priced into the stock? Should we really be worried? I’m no China expert, but “disappearing” Jack Ma temporarily seems a lot easier than “disappearing” Alibaba. And let’s pretend China legitimately cracks down on Alibaba’s monopolistic tendencies, how much cheaper does Alibaba get? To me, the worst case situation already seems priced in. On top of that, I don’t think that the worst case scenario is likely.
Yet, if you get into Alibaba, I’d expect a bouncy ride. I’d expect the multiple to rise over time, but any China news could send Alibaba spiraling even lower. I already consider Alibaba’s price to be unrealistically low, but that doesn’t mean it can’t go lower. The market isn’t realistic in a panic. But Alibaba is a great business and I think time will treat it well.
People don’t even think about Wish as a company to invest in. They “just” sell cheap items. But is that a fatal flaw? Wish is growing fast and not losing that much money.
The real risk is how long the sales growth will continue. Worrying whether people will keep buying cheap things is silly. The dollar store business is booming and that is all junk. Nobody is wondering whether Dollar Tree will start to struggle, why are we worrying about Wish struggling due to selling cheap items? The real worry is where is the sales growth coming from? Are past users returning or is the new growth driven by the increased advertising? Wish should be advertising heavily right now. If you can gain users early on, you should. Wish has more revenue than Etsy and is growing faster, but only one third the valuation? Back in February, Wish was an $18B stock, what has changed?
I’m not long Wish, but I think it is interesting.
My favorite stock to troll the internet on. I’m long and proud Stitch Fix. I don’t know if I am right on Stitch Fix, but I do know the bros on the internet are wrong. Calling Stitch Fix overvalued when it trades at 2x sales just feels intellectually lazy. Bros hear Stitch Fix’s business model then assume they burn cash. Stitch Fix is a cashflow positive company working on an extremely powerful business model.
The narrative of Stitch Fix being unprofitable just isn’t true. If anything, their sales growth and churn is the problem. While churn rates are declining the cost to acquire customers are rising. The unit economics aren’t improving as fast as they should be. But a few tweaks to their business and powerful things can happen. It takes projection, but Stitch Fix being a $100B company isn’t insane. It will take a ton of growth, but a powerful business model and optionality can take you a long way.
To me at worst Stitch Fix is acquired for a few billion dollars. In many ways it feels similar to Slack. Stitch Fix is a different kind of company that has learned a ton on how to do business in a different way. But maybe I’m off and the floor is zero. Either way, I like the risk vs return.
What Does this All Mean?
Investing is managing risk, while searching for asymmetric return. Buying low multiples that have been driven lower by false narratives provide for the easiest of returns. Snap is the perfect example of this, where a small change in narrative caused massive returns. Investing into deflated assets is scary. But when it hits, it will make up for all the misses. Just think of the Netflix/Qwikster debacle. It was the perfect opportunity to buy the dip, but it had to feel like the floor was falling out below you. Ignore the narrative and buy the company.
The truth always finds its way, it just needs time.