Asset Manager Investing in Global Technology Sector

We're an asset management firm allocating our capital into asset classes benefiting from technological innovation and applications globally. We serve as a family office of a tech professional who has spent over a decade as an entrepreneur, operator, and venture investor across Asia and the US.

Our small team is made up of diverse investment professionals who research, identify, and execute relevant opportunities. We occasionally share some of our investment memos, insights, and analysis here.

Friday, June 5, 2020

Q2.2020 - Five9: Strong Focus Comes At A Premium

  • The ~18x P/S valuation is reflective of Five9's strong focus and leadership in the contact center software market. It remains the only pure-play CCaaS today.
  • It is a profitable growth story with a deep moat in the enterprise market, driven by its strong channel partner go-to-market.
  • Despite the COVID-19 outbreak in Q1, the company maintained a +27% growth and signed a major deal with AT&T.

We are bullish on Five9 (FIVN), one of the leading players in the CCaaS (Contact Center as a Service) space. Since its IPO in 2014, the share price has appreciated by ~17x to ~$104 per share, to reflect the business' strong moat, fundamentals, and execution. Furthermore, it also operates in a highly attractive $24 billion market with strong positioning. We expect to see more upsides in the business as it continues to maintain its strong focus and execution in the enterprise CCaaS market.

Q2.2020 - Zalando: Growing Through The Partner Program Strategy

  • With an ambition to reach €20 billion of GMV in 2023/2024, the company will need to more than double its current €8.2 billion GMV.
  • Much of the growth will come from the Partner Program, which is expected to make up 40% of GMV in 2023.
  • Through ZMS and ZFS extensions of the program, the company will onboard more brands into the platform, eventually driving more GMV.
  • The increase in order volume, as a result, will also drive efficiency in fulfillment, which still has room for improvement.

The Berlin-based Zalando (OTCMKTS: OTCPK:ZLNDY) presents an interesting investment opportunity in the fashion eCommerce space. With €8.2 billion GMV (Gross Merchandise Value) as of 2019, it is the current market leader in Europe. The executive team, which still consists of the co-founders, has also executed very well. The company consistently grows its top-line by +20% while maintaining strong unit economics. Going forward, we see various opportunities the company can tap into to achieve its €20 billion GMV target in three years. In particular, we expect the Partner Program strategy to be the key growth driver.

Q2.2020 - Cornerstone OnDemand: Saba Acquisition Should Deepen Its Moat

  • The ~$1.3 billion Saba acquisition will generate FCF of ~$225 million, more than Cornerstone's last two years of FCFs combined.
  • With the goal to be a $1 billion-a-year business, the combined entity will deepen its moat in the enterprise LMS market.
  • The stock is now down ~65% from its YTD-high, potentially factoring in a CEO change in the midst of COVID-19 and two major corporate actions.
  • At ~$38 per share, the price is fair.

Cornerstone (CSOD) is one of the long-time players in the enterprise LMS (Learning Management System) market. The company has been in business for over 20 years. Since its IPO in 2011, growth has decayed from +60% to +7.5% today. Considering the $1.3 billion Saba acquisition that will produce a combined entity with a +$800 million of revenue and steadily expanding double-digit FCF margin, Cornerstone presents an interesting investment opportunity. Furthermore, the added risk factors as a result of recent corporate actions and COVID-19 headwinds have also put pressure on the stock to create a good entry point opportunity. Currently, the stock is down ~65% from YTD-high.

Q2.2020 - Fiverr: Highly Rare Opportunity

  • Amid the COVID-19 pandemic that has forced companies to withdraw their full-year outlook, Fiverr raised both its profitability and revenue guidance for the full year.
  • Growth remains accelerated at +40% while profitability continues improving.
  • As the COVID-19 outbreak has forced many online advertisers to scale back, the situation instead provides a less competitive environment in terms of cost and share of attention.
  • Given its core competence in online marketing, Fiverr will continue capitalizing on the opportunity.

Fiverr (FVRR) continues to show why it is one of the most attractive growth investment opportunities in the market today. The business has proven to be resilient during the COVID-19 situation as growth kept accelerating while efficiency improved.

Given its 44% growth in Q1, the performance exceeded our expectations. Since our most recent coverage on the company's promising move upmarket last November, shares price has appreciated by a staggering 170%. Moreover, the fact that the management has raised its full-year outlook during this time is also a demonstration of Fiverr's rare quality.

Q2.2020 - Nuance: A Tech Compounder With Promising Turnaround

  • Nuance is an enterprise conversational AI company that consistently generates +$250 million of FCF and ~$1.8 billion of revenue every year.
  • While revenue has been flat for years, growth has reaccelerated to ~10% in recent times after the Cerence spin-off.
  • The continuing success of the turnaround will hinge upon the growth in recurring revenue, driven by the adoption of Dragon Medical, its cloud-based healthcare offering.
  • So far, Dragon Medical's traction has been strong. ARR grew by 70% in 2018 and 38% in 2019.
  • The company also has an attractive $500 million share repurchase program, 86% of which remains unexercised.

Nuance (NASDAQ:NUAN) is a cash-flow compounder with strong fundamentals and moat in the healthcare and enterprise segments. At present, Nuance is a ~$2 billion-a-year business with a consistent double-digit FCF (free cash flow) margin. While growth has slowed down to a single digit in recent years, the turnaround that involved a spin-off of its automotive business Cerence (NASDAQ:CRNC) has been successful. In recent times, growth has reaccelerated to a double-digit zone. Moreover, the company also has a $500 million share repurchase program with ~86% of it yet to be exercised.

Tuesday, June 2, 2020

Q2.2020 - Elastic: Attractive Expansion Around Its Core Competencies

  • Elastic is leveraging its core competence in IaaS search technology to expand into the fast-growing cloud security and APM markets.
  • It also continues to maintain a strong reputation within the open-source community, which has helped in landing high-profile clients.
  • The 70% growth and 130% net retention have been solid and best-in-class, while the valuation offers enough margin of safety for investors.

Elastic (ESTC) presents an attractive investment opportunity in the area of software and IaaS (Infrastructure as a Service) spaces. As Venture Capitalists, we first learned of its open-source Elasticsearch offering maybe a year or two before the incorporation of Elastic. Its open-source search technology has been popular among the engineering teams in and outside Silicon Valley and is well known for its reliability. Having been in the search technology business for almost 10 years, Elastic has also acquired a core competence in building SaaS and scalable IaaS-based offerings. As the company scales its business and monetizes around this core competence, we maintain our long-term bullish stance on the stock.

Q2.2020 - SharpSpring: Valid Niche Idea With Limited Upside (short)

  • Despite market validation, the overall growth opportunity seems unattractive.
  • As a $20 million-a-year SaaS CRM business, SharpSpring's 17% recurring revenue growth in 2019 is below par.
  • Growth may not be sustainable. The business burned through ~3 million and 8 million of OCF in the last two years, which were 20% and 36% of revenues consecutively.

In our view, SharpSpring (SHSP) has a valid SaaS offering that fits into its agency niche marketing automation CRM market. However, we see limited upside potential in the business due to the market saturation, competition, and the scalability of its go-to-market. Despite our long-term bullish view on the SaaS CRM market in general, we found it difficult to be bullish on SharpSpring.

Q2.2020 - Upwork: Must Grow Faster

  • After slowing down in the second half of 2019, Upwork reaccelerated its growth in Q1 2020. Marketplace revenue made up 90% of the business and grew by 24% YoY.
  • Part of the growth plan is to invest more in brand awareness to bring in more higher-valued demand. So far, all the relevant metrics have been trending the right way.
  • Currently led by its former CMO, it is likely the right timing to do so. Successful execution here can potentially upgrade Upwork from a 20% to 30% growth story.
There is upside potential on Upwork (UPWK). Since we wrote about the stock the first time last October, growth has accelerated while the take rate has improved. Furthermore, the increased investment in brand marketing will potentially result in higher growth beyond Q1 and 2020. However, shares price has also dropped by over 17% since then, primarily due to the concern on the COVID-19’s impact on the company’s significant SMB client base and the leadership change. Consequently, the current ~$12 price level offers an attractive entry point for investors.

Q2.2020 - HelloFresh: Testament To The Viability Of Meal-Prep Business

  • HelloFresh is an attractive growth story with international exposure in the meal-prep sector
  • The US segment makes up over half of the HelloFresh business, where it grew ~82% in Q1 2020 despite the +€1 billion of annual revenue there last year.
  • It added over 1 million customers globally in Q1, a stark contrast to Blue Apron's accelerated decline in customer base in the US alone.
  • Management's strong profitable growth execution and the global market leadership serve as long-term catalysts for the business.
  • Brand awareness has kicked in. In 2019, marketing expenses were reduced by over 22% while still maintaining a staggering +40% YoY growth in Group Revenue.

HelloFresh (OTC:HLFFF) (FRA: HFG), a Berlin-based meal-prep company, presents an interesting investment opportunity. Since its IPO in Frankfurt Stock Exchange in 2017, its share price has more than tripled to reflect its strong moat and fundamentals. The management's execution has been strong as the business has become a global meal-prep market leader, including the US, in less than 5 years from its founding.

Tuesday, May 26, 2020

Q2.2020 - Delivery Hero: Ambitious Growth Story

  • The business consistently maintains over 60% growth in GMV despite having already reached a €7.4 billion of GMV, which is ~1.5x that of Grubhub in the US.
  • It has a massive international delivery operation network across 44 countries, which is very costly to maintain.
  • In 2019, the cost of sales overgrew the revenue, which already doubled YoY. The business appeared to have a major difficulty in realizing operating leverage.
  • It also consistently burns hundreds of millions of Euro every year to sustain its aggressive growth.
  • Emerging markets will be central to its growth story. Initially started in Berlin, it already sold its German operations for €487 million in 2019.
The Berlin-based Delivery Hero (OTCPK:DLVHF) is an ambitious growth story in the global online delivery space. It operates a massive food delivery business across Europe, MENA, Asia, and the Americas. In 2019, the company recorded a ~€7.4 billion of GMV (Gross Merchandise Value) and 666 million of orders, which represent a staggering 68% and 80% YoY growth respectively. Considering its exposure to fast-growing emerging markets, there are untapped opportunities that will enable the company to grow its market share further. However, the "growth at all cost" approach has its mix of good and bad. The business has been consistently burning hundreds of millions of Euro each year with no visible path to profitability.