Coffee Can I: A Recap (Part 2)
Baozun, Etsy, MongoDB, Trade Desk
Two weeks ago, I introduced the idea of a Coffee Can Portfolio. The idea is simple: You try to buy the best stocks you can and let them sit for years. You incur no costs with such a portfolio, and it is simple to manage.
This aligns very well with the investment approach I have spoken most about here: Investing In Mavericks. This is akin to "Venture Capital" investing, but in the Stock Market.
Last week, I shared an update on the best and worst performers in Coffee Can 1, namely Teladoc (TDOC) and Eventbrite (EB).
Today I’ll briefly discuss the remaining stocks.
Overall Performance:
As of April 2019
You can follow along about how these stocks do on my Performance Scorecard here.
Stocks:
In Alphabetical Order:
Baozun (Ticker: BZUN)
Purchased for $44.84 on Aug 21 2019
Baozun is a Chinese company that helps companies with their e-commerce operations in China, handling things like online marketing, customer service, IT services, and warehousing. Baozun is trying to be a one-stop e-shop provider for all businesses, local and foreign. Companies outside China, like Starbucks, see Baozun as a gateway into China.
The thesis here was simple: as China’s leading e-commerce service provider, Baozun should benefit from the growth of China’s eCommerce industry. Baozun is still the leader, so the investment thesis is still intact. Therefore, the stock being down is disappointing. Recently, there has also been talk of delisting Chinese companies or making it harder for them to qualify for trading on US exchanges. This certainly can’t help.
I haven’t listened to Tuesday’s earnings call yet but it is upsetting that the company hasn’t shared more specifics about the Covid impact on their business, or at least this isn’t easily accessible on their investor relations website. This lack of transparency is disappointing.
The CEO’s letter to shareholders on April 28, 2020 just stated the obvious:
“The recent outbreak of Covid-19 is casting a long-lasting shadow over the global economy, and notably online retail. In the near term, the wider industry will be challenged by the pandemic, which is unpredictable both in its scope and duration.”
Really? Duh! As a shareholder, I want to know more!
No plans to sell but so far this investment has been a dud, and may potentially have been a mistake. I was debating whether to buy more of the stock since it had become significantly cheaper, but the lack of transparency coupled with a decrease in my conviction level in the investment thesis has kept me away. The concern is not about whether BZUN can compete effectively, but more so about how big the company can become. As I’ve said before, Mavericks are companies that have the potential to become the greatest companies of our time. I now doubt whether BZUN can be such a company.
But it’s part of the Coffee Can, so I plan to hold the stock. Let’s see how the stock performs from here.
Etsy (Ticker: ETSY)
Purchased for $42.71 on Nov 25 2019
What a volatile past couple of months for Etsy. Etsy went from over $60/share to $30 to now around $80/share. At one point we had a double.
Below is an excerpt from an update the company provided earlier this year:
“Sales between the months of January and February 2020 were up 41% year-over-year, but then the COVID crisis became a major mindshare event. And we've seen that when there are large mindshare events, we see that we experience what we call the ‘CNN effect’ - that could be a hurricane or flood - and in those moments when people's mindshare is elsewhere, we tend to see a significant drop in traffic to Etsy. We experienced that suddenly and strongly beginning on March 8th.
We were averaging 41% growth in January and February, and it went down to negative 2% in the third week of March. [when schools were closing, stay at home orders were taking place, and when people's lives were being disrupted in really massive ways].
The fourth week of March was up 27% year-over-year.
By the end of Q1, it ended up about 32% year-over-year from 2019.”
Etsy has clearly benefited from the acceleration of eCommerce as we emerged from the depths of the pandemic. But most of Etsy’s sellers are small or individual businesses, folks most susceptible to the economic impact of the pandemic. It’s obvious from the above passage how volatile Etsy’s business can be from sudden changes in the macro landscape. In fact, with the current riots, we may be experiencing yet another “CNN effect” described above. This warrants keeping a close eye on the company.
That said, I believe the long-term potential of the company remains intact. We have a growing world of millions of people who enjoy buying arts, crafts, and unique gifts over Etsy. This makes the company’s differentiated eCommerce brand very much Amazon-proof.
I believe there will always be a market for easily accessible, unique and differentiated products. Etsy had almost 48 million active buyers in Q1, which demonstrates Etsy's increasing relevance in the world. Plus there are millions of craftsmen world-wide, and only 2.8 million are on Etsy today.
MongoDB (Ticker: MDB)
Purchased for $164.49 on Aug 20 2019
MongoDB is a cloud-native database provider. Demand for cloud-native databases continues to grow. Unless a new upstart emerges, the primary competition I am concerned about right now is the database offerings of the big cloud providers like AWS, Azure et al. That said, unlike Amazon, Google and Microsoft, MongoDB has only one purpose: to build the best cloud native database. Focus and aligned incentives (at up and coming challengers vs incumbents) go a long way in winning these types of battles, particularly in new markets like this one.
Also, the need for a cloud native database isn’t a secret. MongoDB has been the David to AWS/Azure’s Goliath for a while. Despite this, the company has gained in relevance over time. The longer the company survives, the more likely it is to emerge and thrive as a new leader in this next wave of database disruption. I prefer betting on Mongo’s upside potential, particularly in a market that is likely to have multiple winners. I’m excited to see how this underdog story plays out.
For now, as MongoDB shareholders, we’re in good hands. Year over year 2020 Q1 revenue growth came in just shy of 49%! Very impressive for a 13 year old company. But the story is nowhere near done - there is a long runway ahead. The first wave of SQL Database companies created hundreds of billions of dollars of value. The bet here is that Cloud databases have the potential to do that same, if not more, and that MongoDB will continue to benefit from this realization.
Lastly, databases are a core mission critical service every internet business needs. That translates to a very sticky customer base, and one that will continue looking to MongoDB to help them solve new problems that emerge from operating databases in the cloud.
I haven’t gone into too much detail here, but the high-level thesis remains in tact, and I’m excited to keep going along for the ride.
The Trade Desk (Ticker: TTD)
Purchased for $190.65 on Oct 3 2019
This is a stock I have written about in detail. The company has been a winner so far. It is still the leader in its space and continues to gain market share.
Earlier, I had said that one area of growth for the company will be: Linear TV Transitions to Connected TV: This will likely create significant new ad inventory for TTD.
Well, it’s happening.
I remember as a child seeing my aunt watch hours and hours of The Young & the Restless (is that still on?). Let’s be honest, nobody’s doing that any more. No one wants to sit at home and watch crappy Cable TV content all day. The world has changed.
The world was already moving to online streaming but due to Covid, video streaming usage has ballooned recently. It’s unlikely that all video streaming providers will be able to demand a subscription fee. So advertising will be an important business model. In a difficult recessionary environment like we’re in today, marketers want to be able to point to objective data-driven ROIs only possible with connected TV and not Linear TV. As a result, both the supply and demand side of connected TV advertising are headed in the right direction. This represents a great growth market for the Trade Desk. Here’s a 2-minute clip by Jeff green, TTD’s founder, describing this dynamic: https://www.thetradedesk.com/products/connected-tv
If the recession is a long and deep one, all advertising businesses will be impacted, and TTD’s stock could get hurt. That said, I am still as excited about the opportunity ahead for TTD as I was when I first wrote about the company in December 2019.
I am looking forward to seeing what this company looks like a few years from now.
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Next, I’ll be discussing more Coffee Cans outlined in my Scorecard, including thoughts on a few stocks I purchased over the past couple of months.
Related Upcoming Articles:
Coffee Can 2: Doubling Down
Coffee Can 3: Flywheels
Coffee Can 4: New World Order