If you’re new here, 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.
My latest Coffee Can Results:
Still looking to nail down Investment #5.
Personal Investing is Changing.
People are taking much more control over their investments than they used to.
There is a significant emphasis on financial literacy: acquiring the knowledge & skill to effectively manage one’s own money.
It’s not uncommon for teenagers or high school kids to be talking about stocks, crypto, or other investments. By contrast, I don’t think I even considered buying my first stock until I was ~24. I simply wasn’t exposed to them growing up.
Unlike private markets, where the ability to make specific investments is gated by factors such as access, affluence, negotiating skills, personal network etc, public markets provide a much more even playing field.
More and more people are starting to realize this.
Today, trillions of dollars of “Boomer Money” is controlled by financial advisors at large institutions. Long term, I doubt this money will stay there. Why would today’s younger investors allow that to happen? Especially when institutions like these are trying to control what people can invest in.
Take Vanguard for example. They recently decided that they will not offer a Bitcoin ETF to their customers: [No Bitcoin ETFs at Vanguard].
Here is what they had to say:
“While the discussion about bitcoin and cryptocurrencies, in general, has increased recently, we do not currently believe that there is an appropriate role for them to play in long-term portfolios.
Commodities are real assets that meet consumption needs, have inflation-hedging properties, and can play a role in certain portfolios. While crypto has been classified as a commodity, it’s an immature asset class that has little history, no inherent economic value, no cash flow, and can create havoc within a portfolio.”
Huh..what?
Who are they to tell us what we can or can’t invest in?
This behavior of “I know what’s good for you” is one important reason why people want to learn how to invest their own money on their own terms. And I believe this will continue to happen more and more.
Onto Marketwise
Keeping this trend in mind, as I try to land on the last investment in Coffee Can Next, I came across a little known company called Marketwise (MKTW). I’m still learning about the company, but wanted to journal some thoughts below.
What does the company do?
MarketWise sells subscriptions to financial newsletters.
Marketwise is an offshoot of Agora Financial, which seems to be the big behemoth in this market.
F. Porter Stansberry started Marketwise, initially a publication called Stansberry Research. Now, Stansberry Research is just one of many publications under the Marketwise umbrella.
What’s there to like?
Strong Market Tailwinds:
As mentioned above, people want to learn how to invest their own money on their own terms. And I believe this will continue to happen more and more. Marketwise likely benefits from this.
Simple Business:
Marketwise is a straightforward business to understand. They build a large list of free customers who are interested in their financial content (and more recently, software), convert them to paid, retain them, and upsell and cross sell them.
Asset Light:
It’s pretty incredible that the company does $100 million per quarter in sales, and got there with only $36,000.00 of startup capital invested. Clearly, it’s a very low capex business.
“The most valuable and unique aspect of our business is that we have not required additional capital to grow. I started the company in 1999 with $36,000 in venture funding. Until our go-public transaction and its concurrent $150 million private placement, we didn’t require or receive any additional investor capital.”
– Stansberry
The Founder’s Back:
In an attempt to fix what’s gone wrong after the company went public, the founder has returned, and is now running the company.
I believe he also bought > $5 million dollars of stock in the open market.
Profitable High Margin History:
Gross margins are software-like, and before going public, the company grew its revenues and profits by an average of almost 30% per year for 21 years. That’s quite impressive.
Investment Float:
The subscription money received upfront acts as “investment float”. This is analogous to a well-run insurance company, whose excess premiums continually grow into a pool of capital that can be invested.
To date, the company has not attempted to maximize its earnings by investing these accumulated float balances. In fact, they only recently even started putting this money into high yield accounts. This seems like a nascent opportunity.
Other Positives:
Solid Retention:
Renewal Billings are higher margin, and most of that falls straight to the bottom line. It’s interesting that despite a significant decrease in top-line billings (down almost 40%! Since 2020), renewal billings are up 7%+ during the same period.
High Insider Ownership.
Significant Recurring Revenue.
Long Runway for Growth
Retained and Incremental subscribers are very profitable
What are some concerns?
Cyclical Business:
If the stock market is doing well, so is this business. If the market isn’t, the company hemorrhages subscribers. That said, trends in renewal billings seem to indicate strong customer stickiness.
Extensive Marketing Spend:
The company spends ~50% of revenues on marketing. That sure is a lot!
The good news however is they can dial this up or down depending on market conditions to remain profitable.
Company Structure:
The company’s capital structure is split between the publicly traded A-shares (36.4 million outstanding as of December 31, 2023) and the privately held B-shares (roughly 288 million outstanding as of December 31, 2023). I suppose this low A-shares count and low liquidity will keep big institutions away, so the “little guy” has an advantage.
The company came public via SPAC, issued approximately 7 million shares to the SPAC sponsors, paid the full costs of the deal, and awarded the equivalent of about 23 million shares to employees and service providers.
They essentially gave away share equivalents nearly equal to the number of shares that they issued! Ouch.
Stansberry, the founder, now CEO, thinks this is outrageous, but says he didn't have a say in the matter because he was retired, and wasn’t on the board…hmm…
Previous Lawsuits:
According to Wikipedia, in 2002, the SEC brought a case for securities fraud, and a federal judge fined Stansberry $1.5 million in 2007. You can read more about the SEC case here: [Link]
Lets revisit our investment framework and answer the following 4 questions:
Is the company a Leader in a Large Growing Market?
This market seems to be one where multiple winners can co-exist. Marketwise seems to be one of the leaders having now reached a pretty significant scale, across multiple publishing properties.
That said, and I may be wrong about this, but based on early investigation, it seems subscribers pay for the opinion of trusted writers, and not necessarily the publisher brand. Potentially a risk.
Does the company have a Growing Competitive Advantage?
The company has managed to build a loyal paying customer base. They are good at converting free subscribers into paid ones who retain.
That said, I need to further think about whether the company benefits from any positive feedback loops. For example, one is where the average cost to service a subscriber decreases as the company scales, which enables them to spend more on customer acquisition per subscriber, an advantage over smaller players.
Does the company have Visionary Leadership?
The CEO is clearly a good marketer, but is he a visionary? I’m not quite ready to answer yes to this question.
The checkered past of the CEO is concerning.
Could the company 10X in 10 Years?
Today it's trading at a market cap of ~$530 million. Could it be worth $5.3 billion?
Ex-cash, it trades for less than 1 times 2023 Billings. For a company with software like margins, this seems quite low.
If sales, and the sales multiple can each simply double over the next 10 years (not a big ask), that gives us a 4-bagger, a 15% return. Not bad.
For a 10X, we’d need a much bigger sales multiple expansion.
On Valuation
According to the CEO, intrinsic value should be calculated by ascribing a different multiple to each of their 3 sources of billings, namely marketing billings, renewal billings, and other, and then add to this their cash and securities on hand:
Marketing billings are low margin, and warrant a conservative multiple.
Renewal billings are extremely high-margin and sticky, and warrant a high multiple.
Other is a mix of low-margin conference revenue and high-margin advertising.
2023 Renewal Billings were ~$97 million. If we value the business like the CEO says we should, just this component of the valuation is greater than the whole market cap of the company. Margins on Renewal Billings are pretty much +100%, so pick your multiple, 10x, 15x, 20x. This gives us a valuation of ~$1 Billion, ~$1.5 Billion, ~$2 Billion respectively. At a current market cap of $530 million, and an enterprise value of just $375 million, the stock sure looks cheap.
And we haven’t given any value to Marketing Billings, Other Billings, and the company’s Cash/Cash Equivalents (and their growth).
Am I Buying?
At the moment, I don’t consider this company a Maverick. Recall that Mavericks are companies that have the potential to become the greatest companies of our time. Marketwise doesn’t seem to be that. Or at least, I don’t see it.
Second, the checkered history of the CEO is concerning.
That said, at this moment, our incentives may be well-aligned with him. So I may put a small marker down.
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I’d love to speak with you if you have a passion for investing, you invest in individual stocks, or want to do so, you’re looking to build your first Coffee Can or your very own Portfolio of Mavericks
This can be an informal conversation on any topic of your choosing. I’d also love to learn more about what you find to be the most challenging or difficult aspects of investing.