Coffee Can Next (Part 4): Nextdoor? (1 of 2)
I am a fan of the Coffee Can Portfolio, an “Active Passive” approach to investing. The idea of a Coffee Can is simple: Buy a basket of 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.
On December 1 2023, I said I would create a new Coffee Can Portfolio (named Coffee Can Next). As a reminder, here are our coffee can rules.
Coffee Can Rules:
We will make 5 purchases in our coffee can.
Any purchases must be held for a minimum 3-5 years.
Our goal is to outperform the SPY during our holding period.
I’m going to try and build this coffee can by mid 2024.
Our first three investments have been:
Here are the results so far:
Investment Candidate: Nextdoor (Ticker: KIND)
“We’re in such a fast-moving world with all the new communications that if I get an idea and I think it’s attractive and for whatever reason that security price will be higher in a year or two, I generally go ahead and buy it and then tell the analyst to look into it.”
–Stanley Druckenmiller
I usually don't do this but I made a “half-bet” for the 4th stock in Coffee Can Next. After doing more research, I will decide whether to make it a full sized bet, leave it as-is, or remove it from the Coffee Can.
Nextdoor is the riskiest of the investments in Coffee Can Next.
Unlike the other three investments, which I consider to be “Stage 3 Mavericks: Leaders”, Nextdoor is a Stage 2 Maverick: A Contender.
Recall that Mavericks are innovative companies that are bringing the world forward, that is, they are companies poised to one day become the greatest companies of our time. Think Starbucks or Netflix in the early days. Companies that, IF they succeed, have the potential to 10X in 10 years.
After a Stage 1 Maverick: A Disruptor has demonstrated initial success, they graduate to Stage 2 to become what I call Contenders.
I believe Stage 2 is the most dangerous of the 3 stages:
Expectations are high.
Valuations are high.
And lastly, if they haven’t already done so, Competition is taking direct aim.
As a result, this is where most Mavericks tend to fizzle out. When it becomes apparent that Contenders are unlikely to move onto Stage 3, the stock market’s response can be lethal.
This is exactly what happened to Nextdoor. Nextdoor has not lived up to its potential. The stock is down ~90% since its all-time high in late 2021. Ouch.
The best companies however are able to defend their turf, continue to innovate and ultimately prove their legitimacy to the world. This can take years, and during this time, there is always doubt.
So why would I invest when this is the case?
One Reason: The Founder is Returning.
On Friday February 23 2024, Nextdoor announced that its cofounder Nirav Tolia will once again become the company’s CEO. That’s interesting…Nirav can do anything with his time…why come back to a struggling Contender? He clearly still believes in the company, and wants to help the company reach its full potential.
I still need to dig into the business…but the setup is intriguing.
Here is what we’re getting if we buy shares today:
A once-again founder-led company.
A CEO who will bring new blood, focus and direction back into this company.
A global well-known brand despite only reaching 330,000 neighborhoods.
A Network Effects based defensible business.
We can buy the company for roughly ~$240 million.
Not impossible, but in my opinion it would be quite difficult for a new startup to rebuild the assets Nextdoor currently has (with $240 million in funding).
The market cap is ~770 million but ~$530 of that is cash, cash equivalents, and marketable securities (as of December 31, 2023).
The board approved an additional $150 million increase to its existing share repurchase program.
The company has strong strategic data assets, which would be valuable to many potential acquirers.
Optionality
The setup in interesting, but there are also many open questions:
Will this company get bogged down by the perils of a turnaround?
I once took a job at Groupon to experience what it would be like working at a turnaround. I’m not a fan.
How is the culture at Nextdoor?
Do people enjoy working there?
Is it high-performance?
Are the employees excited about this recent CEO change?
Will new employees want to work there?
Does Nextdoor have enough liquidity for their ad auctions?
Are there regulatory issues with zip code based ads?
Do advertisers find value in accessing Nextdoor’s audience, and willing to allocate budget to them?
What are current CPMs? What is their growth potential?
etc
If you work at Nextdoor or know much about the culture (or folks who may), or if you are a shareholder, I’d love to chat.
Have a wonderful weekend.