What's Your Top Pick for 2020?

Hello All, I asked Saul if we could start a Post around “Your Top Pick for 2020”. We’ve done that here in years past and had good/fun results from it. He’s agreed that we should do that again.

Some rules from Saul ---- if you choose to respond and add your own submission…that you do so in 4 to 5 paragraphs…no one-liners + rapid growth only stocks (following his rules of the Board).

My submission for top pick of 2020 is ROKU. It’s 11.4% of my portfolio and had an amazing year ---- up 348% YTD. $17.2Bn market cap. I think it will run more. Full disclosure, I own more shares of AYX (14.9%) and TTD (13.8%), but I figured there would be plenty of folks commenting on AYX and TTD…and I opted to speak to the less spoken to Roku….

Popular question ---- how does Roku make $$$? Per Scott Rosenberg, their SVP of Platform, here are some of his top ways. Note, I haven’t found a good way to see the actual breakout of platform revenue by the below categories ---- if someone knows how to get that info, please let me know. I added some of my own commentary on some of these as well:
1. Selling publishers’ inventory: When people watch ad-supported publishers on Roku, the Roku platform gets access to sell some of the publisher’s inventory in exchange for the extended audience reach it provides. Roku has found this to be a more reliable strategy than asking publishers for a cut every time an ad runs on the platform.
2. Subscriptions: Roku gets paid when it drives subscriptions to video services. For example, if a viewer subscribes to a paid service like Netflix via Roku, then Roku gets a piece of that revenue.
3. Display ads: When a user starts up their Roku device, display ads and themed overlays show up on the homepage. Roku has partnerships w Netflix, HBO, etc., Roku gets $$$ when they sign up a new customer on Netflix, HBO, Hulu, etc., ---- but they also get $$$ from those content providers advertising on the Display Ads section….
4. Selling ads for its own channel: In September 2017, Roku launched its own ad-supported channel, The Roku Channel, and maintains full control of its inventory. From the most recent earnings report, “Roku monetized video ad impressions more than doubled again on a year-over-year basis. The Roku Channel contributed to this growth as ad impressions within the channel are growing faster than the ad impressions in the overall platform. We continue to be pleased with the growth of The Roku Channel.” “There is, at this point, over 80,000 free and paid movies and TV shows. We’ve added live linear services like ABC News. There’s over 40 live linear services now. Premium subscriptions we added recently, so over 40 million - 40 different premium subscriptions now, like HBO and SHOWTIME. Nearly 30 Kids & Family content partners. So you will see more and more content coming to The Roku Channel, different categories and you will see it integrated into different points in the UI. And so that’s really our approach for - in terms of being a one-stop distribution channel." Super impressive w what is happening w Roku Channel.
5. There are other ways Roku makes $$$, including channel recommendations and remote buttons, but I don’t think those are major sources of revenue. Note, I don’t count the hardware business in the above ---- as frankly, I view that as the razor/blade theory. The growth story at play is the platform biz.

Other things I really like about Roku:

  1. Platform revenue of $179.3 million, up 79% YoY
  2. Active Accounts of 32.3 million, a net addition of 1.7 million over last quarter. Up 36% YoY. Think about that folks ---- 32M already on the platform. Not much in international yet ---- but that’s coming.
  3. Average Revenue Per User (ARPU) of $22.58 (Trailing Twelve Months), up 30% YoY.
  4. Streaming Hours increased 0.9 billion hours over last quarter, to 10.3 billion, up 68% YoY. Wow…
  5. 1/3 of TV’s now have their OS. That drives more engagement. It’s a super simple OS ---- and the search functionality is awesome. The idea around search w it is that you can search across all subscriptions you have (Netflix, Prime, etc.,) for specific shows ---- but now you can do so across genres (or Zones). Show me all popular documentaries across all my varying subscriptions. Slick. Search is a real problem, I think. And Roku solves it well. Related link around Zones ---- https://youtu.be/HhkvEqFIMfI. I still believe that some of the big box boys will eventually throw the towel in and commit to Roku ---- and can likely revenue share w Roku too. The engagement numbers from above are staggering.
  6. Cool comment from earnings report ---- “I’d just like to add to Anthony’s comment that we think our biggest competition is attracting linear TV ad spending out of linear into OTT. That’s the competition. Today, according to Magna, only 3% of TV budgets are spent in OTT, but 29% of audiences are already there. That’s the big opportunity.”
  7. Platform gross margins in the low 60s percent, driven primarily by continued mix shift to video advertising.
  8. From their website. “Roku is the most popular streaming platform today in the U.S., with over 32.3 million active accounts, who streamed 10.3 billion hours in Q3 2019.”. They have more content on their own Roku Channel than ever (including live streaming/linear TV) + more publishers (Disney, Apple, etc.,). It’s a virtuous cycle of winning.
  9. Another interesting comment from the last earnings release re: Roku Channel. “So the way we think about The Roku Channel is - the way I think about the Roku platform overall is its primary purpose is to distribute content to viewers. And there are multiple ways - if you’re a content publisher, there are multiple ways to distribute that content. One way is to write a streaming channel, and companies are still doing that, obviously. Another way is - that’s becoming increasingly popular is to publish your content in The Roku Channel. And so we’re continuing to add more and more content to The Roku Channel and more and more content categories. So for example, we just added Kids & Family, which was a great launch for us.”

Bottom line, I feel Roku has a lot of tailwinds behind it has flywheel in the making w platform engagement. I believe that a $17Bn market cap in a massive addressable marketplace is still reasonable ---- and has significant room to run.

What’s your top pick and why? Remember, per Saul’s rules, high growth stocks only that match his board rules and no one-liners on why that stock pls.

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JKB2016 - let me take this challenge. I have a shortlist of 2 - both of which have a growth rate well beyond any we hold amongst the universe of Saul method stocks or the category of SaaS companies. The one I am proposing for this particular challenge is Afterpay. (The other is a US listed China stock which I believe has immense immediate potential - probably more than Afterpay, but is not appropriate for the purposes of our board. If anyone is interested in that please message me off the board. I might post it on NPI)

Afterpay from Australia (APT in Australia or AFTPF in US OTC), is a buy now pay later fintech player that has come to dominate ANZ and is now taking US and UK by storm with designs on further global expansion including: Canada, Europe and Asia. Afterpay provides customers an instalment purchasing offering over 4 equal monthly payments for both online and offline merchants.

Afterpay recently released its BFCM performance update which included both underlying sales and new customer growth metrics of 160% increases YoY and underlying sales for the BFCM period of $160m.

Afterpay’s customer count stands at 6.6m with 42,500 active merchants on its fintech platform and has achieved $3.7bn in underlying sales for the first 5 months of the financial year (2020) equivalent to $8.5bn in annualised spend based on October’s performance.

See: https://www.afterpaytouch.com/images/05122019-–-Media-Releas…

Previously the company provided a business update for the first 4 months of the financial year which included:
110% increase in revenues to $2.7bn (YoY)
137% increase in active customers 6.1m (YoY)
96% increase in active merchants to 39,450

Whilst also announcing deals with:
eBay in Australia
Visa in the USA
Mastercard in Australia & NZ

See: https://www.afterpaytouch.com/images/13112019-2019-AGM-CEO-P… & https://www.afterpaytouch.com/images/13112019-Business-Updat…

In ANZ - Afterpay’s most mature market, purchasing frequency, loss rates and spend are all improving with FY 2020 spend of customer cohorts onboarded in previous years now at:
7x for 2019 FY cohort
14 for 2018 FY cohort
22x for 2015-17 cohort

Additionally - it has repeated its ANZ penetration success in US in less than half the time and is even further ahead of the curve with its UK launch.

Afterpay’s annual results record have delivered consistent meteoric growth:

Underlying Sales:
2016 $37.3m
2017 $561.2m (+1405%)
2018 $2.2bn (+289%)
2019 $5.2bn (+140%)

Total Income:
2016 $1.8m
2017 $29m (+1535%)
2018 $116.8m (+302%)
2019 $251.6m (+115%)

See latest: https://www.afterpaytouch.com/images/28082019-FY2019-Results…

On a valuation basis, Afterpay Market Cap stands at ~1.5x historic underlying sales and ~30x historic total income which for a 100%+ growth company is remarkable whilst enjoying a $6 trillion TAM opportunity in the current ANZ/UK/US geographies alone. If one were to add Canada Europe and developed Asia that would increase further as would the addition of developing Asia where affordability and with it funding is a purchasing barrier to everything. As an example of where this could go - in China where fintech adoption is way ahead of the rest of the world instalment purchasing has reached 40-60% of transactions.

I believe Afterpay has the momentum, performance and valuation that will allow it to progress substantially in 2020 with the list of announcements (already released) all to be executed in the near term and more together with geographic roll out as well as a potential US listing.

Ant

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Hi Ant,

Thanks for bringing Afterpay (OC: AFTPF) to the table. Two thoughts: the company currently has a market cap of $5B based on revenue in 2019 of $251M. Does that not give you pause? Also, what would stop a well established (unlike Afterpay) fintech company like Paypal or Venmo from moving into this market if it proves profitable?

Like I said, I was not aware of this company before you posted about it, so I have no per-conceived notions about it as an investment or a business.

Best, Swift…

Swift,

20x sales for a 50% grower seems to be fair-ish value. Here are recent comps:

STNE 19.7x TTM revenue, 58% growth
AYX 18.7x TTM revenue, 65% growth
ZS 18.3x TTM revenue, 48% growth
COUP 26.4x TTM revenue, 51% growth
ROKU 16.8x TTM revenue, 50% growth
MDB 19.8x TTM revenue, 60% growth

Average: 19.9x TTM revenue

Thanks,

Rob

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Hi Swift - wrt your question. No I’m not concerned about valuation. Its multiple compares well with other high growth stocks. This point came up on HotCopper discussion boards too.

Not only does it compare well on a total income basis but given it is so early on in its life and hasn’t yet added additional services or begun monetising its extensive data on millenial purchasing or the ability to drive customer traffic and spending to merchant members via its platform then actually thinking about comparing its value to underlying sales starts to make some sense - which is ~1x. The take rate could go up considerably from 4% with future additional bolt ons.

Cheers
Ant

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Hi Ant,

Can you explain to me what they/you mean by Pro Forma Total Income?

tks,

Afterpay from Australia (APT in Australia or AFTPF in US OTC), is a buy now pay later fintech player that has come to dominate ANZ and is now taking US and UK by storm with designs on further global expansion including: Canada, Europe and Asia. Afterpay provides customers an instalment purchasing offering over 4 equal monthly payments for both online and offline merchants.

I had a very brief look at Afterpay and when I saw that the daily trading volume (average is only 2500 shares or $50,000) is small, I stopped looking into AFTPF further. The shares don’t have liquidity in the US OTC market.

Chris

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Quillnpenn, your post will be deleted. We don’t do day trading here and we don’t do graphs. Your post would be welcome on another board, but not here!
Saul

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Hi Ant, Can you explain to me what they/you mean by Pro Forma Total Income?

Hi Naj, I’m not Ant, but I read Pro Forma as adjusted, and they seem to be using Income for what we would call revenue. So I translate Pro Forma Total Income as Adjusted Total Revenue

Saul

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I had a very brief look at Afterpay and when I saw that the daily trading volume (average is only 2500 shares or $50,000) is small, I stopped looking into AFTPF further. The shares don’t have liquidity in the US OTC market.

Chris

It is not meaningful to look at the volume on the OTC market. As CMF Swift pointed out Afterpay has a market cap of US $5B and its primary market is the ASX. On the ASX it traded between 900,000 and 2,400,000 shares each day in December to date other than the 24th December which was a half day.I suggest it is a stock to consider if you are registered to trade on the ASX.

There is a lot of controversy surrounding the stock both to do with competitors and financial regulation.
Nevertheless I believe it could sustain strong market appreciation in 2020 as consumers continue to embrace its offering.

Gary.

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It is not meaningful to look at the volume on the OTC market. As CMF Swift pointed out Afterpay has a market cap of US $5B and its primary market is the ASX. On the ASX it traded between 900,000 and 2,400,000 shares each day in December to date other than the 24th December which was a half day.I suggest it is a stock to consider if you are registered to trade on the ASX.

Yes, I understand but in my accounts I trade in US based accounts.

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One might note that the same remarks might have been made about Arcam and the US traded AMAVF which had some peculiar features. Nevertheless, some of us did very nicely with it and wish that GE had not taken over … particularly considering what GE is like these days.

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True Tamhas.

Gaucho Chris - if trading in Australia is prohibited and you rather not trade OTC then you could keep a watch out for a US listing. They are building up their US office and have issued share option plans to US staff. Most feel a US listing is a matter of time and expect it sooner rather than later. Technically this would be a secondary offering so could happen any time although the IPO season is Q2 and Q4.

Ant

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I liked Afterpay after my initial review and initiated a starter position. I live in the US and had no problem buying the shares on the ASX (once the market opened at 10am Sydney time) through Interactive Brokers.

Rob

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Hi Rob - You fortunately have a US brokerage with global trading functionality. I know many Americans both in the US who don’t have international trading functions and Americans abroad who are not permitted to have local non US equity brokerage accounts limiting their international equity opportunities. I appreciate it isn’t straight forward but as you have found there usually is a way particularly with global platforms like IB.

Ant

Hi Ant,
That looks very interesting. Could you just clarify for me what is meant by „underlying sales„ and „total income“. My understanding is that underlying sales would be something like Gross Payment Volume, ie purchases through the platform, not revenue. Total income should not be understood in accounting terms like net income, right? It’s more like revenue or take rate? 30x PE for a 100% grower seems too low to be true, doesn’t it?

Best
Niki

Sorry, I didn’t update the thread, my question has already been answered. :slight_smile:

Not sure which of these is now the official “top pick” thread.

I like ROKU a lot. Streaming is getting close to reaching full stride I think.

For monetizing the platform, the best streamers are the cord cutters. These are the viewers who will do the most streaming and the most exploring on the platform. That’s why this survey by cord cutters magazine has me thinking that ROKU has a long long way to go.

Roku is the preferred streaming device of cord cutters by a 3 to 1 margin over #2 Fire. 60% of cord cutters are going with Roku. That’s a pretty cool stat to me.

https://www.cordcuttersnews.com/roku-is-the-most-popular-cor…

Darth

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For my top pick, I bucketed several of our companies into different growth ranges:

Highest-Growth List
Zoom (Seq growth 57%, Y/o/Y growth 85%)
Crowdstrike (Seq 77%, Y/o/Y 88%)
Guardant Health (Seq 51%, Y/o/Y 181%)

High-Growth
StoneCo (Seq 58%, Y/o/Y 62%)
Alteryx (Seq 104%, Y/o/Y 65%)

Mid-Growth
MongoDB (Seq 18%, Y/o/Y 60%)
Roku (Seq 17%, Y/o/Y 50%)
Coupa (Seq 28%, Y/o/Y 51%)

Bottom-Growth
Okta (Seq 36%, Y/o/Y 45%)
Zscaler (Seq 35%, Y/o/Y 48%)
The Trade Desk (Seq 11%, Y/o/Y 38%)

Then I ordered them by valuation in each bucket – (PSQ-most recent quarter revenue annualized):

Highest-Growth
Crowdstrike (PSQ 19.9, PS TTM 24.3)
Zoom 29.3 (PSQ 29.3, PS TTM 36.2)
Guardant Health (PSQ 30.2, PS TTM 39.9)

High-Growth
Alteryx (PSQ 15.9, PS TTM 18.8)
StoneCo (PSQ 16.8, PS TTM 19.4)

Mid-Growth
Roku (PSQ 16, PS TTM 16.1)
MongoDB (PSQ 18.2, PS TTM 20.0)
Coupa (PSQ 23.4, PS TTM 26.9)

Bottom-Growth
Zscaler (PSQ 16.2, PS TTM 18.2)
The Trade Desk (PSQ 19.9, PS TTM 21.6)
Okta (PSQ 23.3, PS TTM 26.7)

I believe the greatest opportunity therefore lies in Crowdstrike and Alteryx. In their most recent quarters they have grown the fastest in their growth cohorts yet they have the lowest valuations.

I am hard pressed to pick one of the two. However, since I must, I pick Crowdstrike. Its valuation is completely illogical in the context of its growth rate. Indeed, its recent growth is 4x Roku, MongoDB, Okta, Zscaler, The Trade Desk, yet its valuation is in-line with those companies. Clearly the market is much more bearish on Crowdstrike, probably due to the highly competitive nature of its market segment, and maybe due to fear of potential for political noise too.

Best of luck to you all in 2020!!

Rob

64 Likes

I have been working on this for about a week and simply find it easier to write in a google doc.

My feeling is that the stock with the least downside risk with potential upside reward at its current price going into 2020 is Arista Networks.

Here is why.

https://docs.google.com/document/d/1_eq7U2D1JClQsw7WlKwrlGpP…

Had a great time reading the posts and investing along with the board this year - have a great holiday season and a most profitable New Year.

Frank - long GOOG, long ANET, see profile for all holdings

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