Greenhaven Road Capital 3Q18: Box, Inc., FCAU, ETSY, SHSP, TRIP, YELP, EVI

Smart Money
  • Had positive net returns of 3% for the quarter, bringing YTD returns in excess of 12%

Box, Inc (BOX)

  • Online file storage is a “bad” business as there is little value add and it is effectively a commodity
  • Founders of Box began to focus on the enterprise customers and particularly companies in regulated industries
  • Large companies need to control who can access files, and with whom the files can be shared both externally and internally
  • While Google Drive may work for a small business, the compliance needs of an enterprise quickly strain the functionality of Google
  • Over the last decade, Box has built a customer base of over 87,000 companies with over 10M users that store their data on Box servers, including 69% of the Fortune 500. Box has integrated with 1,400+ applications so far, including Google Suite, DocuSign, and Slack. These integrations make it less likely a customer will leave Box, and diminish the chances that a direct or adjacent competitor could create a copycat product
  • Robustness of Box’s current product suite and the lack of credible alternatives has led to very low churn rates: retention is 95%. Box’s net dollar retention is running at approximately 108%, so even if no new customers were added, and with some attrition, we would still expect revenue to increase at least 8% before factoring in sales to new customers
  • Company is spending over $100M a year on R&D. Box is aggressively building a robust pipeline of new products for release over the next two years, designed to improve how people work with and share information, the security of information, as well as applying automation and machine learning
  • Box was presented by venture capitalist Chamath Palihapitiya at Ira Sohn conference. He argues that Box is a way for individuals and companies to benefit from the improvements in AI. Over time, Box customers inevitably will want to apply AI to their data. Box is application agnostic and will be able to integrate with all of the major AI players including Google, IBM, and Amazon. Ability to apply the best AI offerings to data stored on box represents a free call option that could be another barrier to exit that generates revenue and is buzzworthy enough to generate multiple expansion
  • Box operates in a massive market that they refer to as “Cloud Content Management” and size at $45B per year
  • Last year, Box generated OCF while spending roughly 2/3 of revenue on sales and marketing and product development (54% and 20% respectively)
  • Over time, company’s value should approximate the rates of return that they can get when they reinvest capital
  • Companies like this are rarely optically cheap. We are currently buying shares at just north of 4x next year’s sales, which one could argue is cheap relative to many SaaS peers (Dropbox and DocuSign) but certainly is not on an absolute basis
  • One of the greatest risk factors here is multiple compression, particularly if growth slows. However, given the product pipeline and sales pipeline, I don’t think the slowdown is imminent
  • In the long run, Box has the opportunity to continuously improve their business through a virtuous cycle of retaining customers and improving monetization. Revenue growth and margin expansion are highly probable, with multiple expansion a possibility. No additional capital is required to grow. There is a long runway for growth, and multiple opportunities for additional products to be sold into a large and attractive customer base
  • Continued revenue growth of 20%+ for the foreseeable future, coupled with operating leverage and a very valuable customer base, create an interesting set-up

Fiat

  • Company has transformed itself from a company suffering under the burden of enormous debts that could only think about debt repayment to a very well capitalized company
  • Currently generating over $100M per week in cash. At year-end, their net industrial cash should exceed $2.50 per share
  • Company finally announced the impending sale of their parts business, Magneti Marelli, which will add another $4+ of net cash when it closes early next year
  • FCAU trades (ex cash) for less than 3x forward earnings. If we assume that they can achieve their 5-year plan, shares ex cash are trading for less than 1x 2022 earnings
  • Typically, these valuations only show up for sick and dying businesses. In contrast, FCAU’s US sales were up 15% y-o-y in September and are up 6% YTD
  • FCAU is a cyclical and capital intensive business, but it has been structured to allow for variability in revenue
  • Management provided guidance that the company could remain profitable even if US auto sales dropped as low as 10M cars. US new car sales dipped to 9M in the depths of the 2008 GFC, so it is reasonable to expect the company to remain profitable in nearly all but the most draconian scenarios
  • There are all indications that the company would like to restore their dividend. It would be interesting to see how FCAU was valued based on a dividend yield. They could easily cover a $1.14/year dividend – apply a 5% yield to that and you have a $22+ stock
  • Given the company’s valuation, known catalysts, and orientation of the Chairman, I continue to like the set-up

Etsy

  • Has announced a significant price increase to a commission rate of 5%; when combined with the payment processing fee of 3%, the net result is a take rate of approximately 8%
  • This pales in comparison to the current Amazon Made rate of 15%
  • The value proposition to sellers of being able to reach 20M+ buyers for a listing fee of 20 cents and only paying the 8% upon a sale of an item remains very compelling

SharpSpring

  • SaaS business that provides marketing automation software primarily for digital marketing agencies who utilize their technology to run sophisticated digital campaigns that include web pages customized based on a visitor’s historical activity
  • Has an attractive LTV/CAC ratio typically greater than 6
  • Recently executed a convertible debt offering to access additional resources for marketing
  • Operates in an oligopolistic market with three primary competitors: HubSpot, Act-On, and Pardot
  • SharpSpring’s revenue grew 40% in their last reported quarter
  • There is very long runway for growth. Company will benefit from secular tailwinds in an industry growing over 20% per year

TripAdvisor

  • Remains the dominant travel research company and maintains the largest installed base for travel apps
  • Continues to make progress on their in-destination business for local tours and activities and has been optimizing ad spending on the hotel business to improve profitability

Yelp

  • Initial indications are that the transition away from one-year contracts and toward more flexible, “cancelable at any time” commitments has gone well
  • “We are pleased with how the transition has gone. Clients have responded well to the increased flexibility and our saleforce has closed more new deals than ever before. We added a record number of advertisers in the quarter, and trial conversation and client retention were consistent with our expectations”
  • There remains the possibility of increased traction of new offerings, improved monetization, operating leverage, and multiple expansion

EnviroStar

  • Company has announced five acquisitions so far this year as they continue to execute their buy and build strategy
  • EVI will not screen cheaply for several reasons, including deal costs, which depress current year earnings, and a larger infrastructure, which depresses short-term margin
  • As EVI scales, we should see operating leverage and margin expansion as this infrastructure is spread over a larger base of business
  • While short term earnings will be understated, the long-term potential of EVI remains compelling as they create value with the ability to acquire assets at 5x EBITDA using a stock currency that is in excess of 15x EBITDA

Greenhaven Road Capital 3Q18, October 2018

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