Chit Chat Stocks - Mohawk Group (MWK) | Deep Dive

Episode Date: February 11, 2021

Mohawk Group is a tech-enabled consumer product company. Although this may sound complicated, Mohawk Group effectively owns and operates many different brands and products that they sell online. Their main focus is selling through Amazon, but they do sell some of their more popular brands on their own websites. Enjoy the show! Subscribe to 7 Investing with the code "CCM": https://7investing.com/subscribe/ Follow Ian and check out his work on Twitter: https://twitter.com/IanGrayLive Follow us on Twitter: https://twitter.com/chitchatmoney Subscribe to our Youtube Channel: https://www.youtube.com/channel/UCG5Ni-SI-jyrEsoNUhqftNQ Timestamps Company Background | (2:20) Industry | (6:23) Management & Ownership | (8:35) Valuation | (11:08) Earnings | (13:00) Balance Sheet | (15:28) Our Analysis | (19:17) Disclosure: Chit Chat Money hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Brett Schafer and Ryan Henderson are general partners and portfolio managers at Arch Capital. Arch Capital and its partners may hold securities discussed on this show. Learn more about your ad choices. Visit megaphone.fm/adchoices Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Chit Chat Money. On this show, host Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investing. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Ryan and Brett are also general partners at Arch Capital, and Arch Capital may have positions in the securities discussed in this podcast. Anything discussed on Chit Chat Money by Ryan or Brett or any other podcast guests is not formal advice or a recommendation. Now, please enjoy this episode. Welcome in. This is Chit Chat Money, and this is the Thursday Deep Dive with Ian Gray. Ian is joining us today. How are you doing out? And can I say where you're at? Flagstaff?

Yep. Flagstaff. I was just now out in Flagstaff. Well, whether or not... Well, it's almost all... Yeah, it's almost all melted at this point. We had like three feet um two weeks ago and there's just some little remnants on the ground now so it's kind of crazy dan can't even snowed near us recently yeah it's supposed to snow and see i think like tomorrow so i could have a window find out northwest uh but let's get on with the show we're talking mohawk group small cap name ian you own in your portfolio we don't own it at arch capital uh but seven invest we gotta talk about that yeah so before we get that we're gonna

talk about seven investing they're our partners and if you use the carmel code ccm at checkout you get ten dollars off your first month and seven investing gives you seven stock recommendations for the long term each month so it's a great deal normally it's 17 bucks a month you get seven bucks for your first one um i mean we love the team over there they have an eclectic mix of different types of stocks for higher risk names for you know lower growth names dividend plays stuff like that and their performance has been outstanding so the team over there is great you're monologuing you're monologuing the sales pitch here yeah so you gotta pass it you gotta pass it off but yeah it is a lot of fun uh i look forward to their picks every month uh and they absolutely have killed the

market so uh you get your money back i guess uh perfect for an individual investor that wants to invest in common stocks but now ryan let's talk about mohawk yeah so they're a mini conglomerate really so when you first look at them i think ian and i both had the same impression initially which was it's just like a consumer goods company that's selling across amazon and shopify and stuff like that and it seemed really boring but if you dig deeper it's actually pretty cool so they have uh what they call their ai which and it's called amy which is artificial intelligence mohawk uh e-commerce engine am i getting that right yeah yeah that's right and so uh but this ai basically helps to optimize e-commerce strategies so what it's doing is it's finding it's going

through amazon and say we're looking up uh candles like vanilla scented candles and some of the ratings are poor, but there's a lot of demand for that product, it goes in, it finds opportunities like that. And it says, this is the product that we should go for. Basically, it finds opportunities. And then Mohawk Group as a company will either develop a product or they'll acquire a company that fits that mold. And they will pump, essentially, they'll just pump money into marketing till that becomes the best product on uh amazon so whether it's like promotional or uh marketing elsewhere and once it gets good enough ratings then they can pull back the marketing spend on it and it's basically at cruise and it takes uh it takes way less costs and they can

still generate the same amount of sales so that's sort of their model it's all built built on this Amy software. But it also includes sort of logistical backend stuff. So fulfillment centers, finding the quickest way to ship. Some products are really, really good, but they ship weird, so they can exploit opportunities like that. But the consumer goods brands that they have are kitchenware, dehumidifiers, that kind of thing. So it's not super sexy items. It's just stuff that the CEO actually talked about this. So 75% of searches on Amazon don't have a brand name. It's like dehumidifiers or ice makers, and they don't put a brand name on them. That's the market they're going after stuff where people don't really care about brand. And so they own

a bunch of brands basically around that. And they sell through Amazon, Shopify, Walmart, I think they go direct to consumer as well online, but most of their sales come from Amazon. And the history is a little muddled. Apparently, there is some drama, I guess, that went on with the founders, but I believe it was started in 2014. One of the co-founders was Yanev Sarig. I might be saying that wrong, but he is also the current CEO. I actually really liked him. He seemed like a bright guy, but that's for another time. He grew up in Israel and he said he was always fascinated with technology ever since he was young. But they started out really with the focus just on technology. They were like, what would an e-commerce company look like in the

future? And they really focused on that AI to start. So trying to exploit opportunities with software insights. And then they had no experience with consumer goods, but they just went tech first and then started to buy those consumer goods brands. Um, and they IPO, I believe in 2019, but like I said, there's not a lot of history that's out there on them. I think the co-founders might've had a falling out because one of them apparently come came back in. You said that one of them is like on Twitter, right? Yeah. There's one on Twitter that you'll see around. I think his name is Asher Delug who owns, I was going to get into this a little bit later, but he owns about, um, I think it's like 12% of the company or something like that. So still a fairly big

stake, but doesn't seem to be involved in the day-to-day operations? Yeah, not a highly covered name whatsoever. And that's true because the market cap for a long time was sub $100 million. But I'll get into the industry landscape competition. I mean, the Amazon third-party marketplace is growing really rapidly and that's their main place where they sell. So third-party sellers are expected to grow at a 16% rate and hit over $500 billion by 2025. So a lot of volume exploring through Amazon for the FBA stuff or whatever, third-party marketplace. There's undeniably a huge tailwind if these estimates are correct, especially over the next few years here. The competition is a little bit strange. So the largest would be something called Thrasio,

which according to Mohawk has a $500 million in estimated sales, so a bit larger than Mohawk, and they've raised almost $1 billion. The popularity for a lot of PE companies, So private equity to roll up these e-commerce brands has gotten, you know, I don't know, they must have seen Mohawk's business model and thought, all right, there's a lot of white space here to just roll up a bunch of small e-commerce companies and do all the back office together. The other competitors, you know, are traditional CPG brands. There's a ton of them out there.

Not a lot of individual competitors to name or not a lot of like, there's not like two or three. There's just, you know, dozens and dozens across all of the different things they sell and the landscape right now there's 2.5 million active sellers on amazon a lot of them are individuals and smaller but it just shows for mohawk's acquisition strategy there's probably a lot of rocks they can turn over yeah and they compete not only with other consumer goods that shoppers are looking for but also there's like other uh software optimization tools for uh amazon sellers so i believe they license uh their amy content and uh i think i mean uh brady i've seen

you you do some amazon selling right do you have you ever used any other softwares that is one i've heard referenced there's like i don't think they can hear what brady's saying but he said some software it's it's uh there's softwares that basically help you exploit the best opportunities so they also compete on that front i think jungle scout is one and then helium might be another one as well yeah but the software stuff's like what a really small part of the business correct yeah yeah all right ian what do you have for management yep so like ryan mentioned uh yaniv sarig is the ceo and founder there's a really good youtube interview with sean emory from avery and company uh that you can check out that was kind of what first got me interested in

mohawk um in the first place was just listening to him talk it's about 45 minutes long and he seems like a really smart guy thinking about the right things um seems to be a visionary and really kind of looking looking years into the future about what he wants to build a mohawk into so like i said i'd really recommend uh checking out that interview he owns about five percent of the company so a healthy stake um as i was just mentioning a second ago there's also this guy named Asher Delug, who you might've seen on Twitter. Uh, he, he's tweets out stuff about this, uh, about Mohawk sometimes saying, uh, like giving his own guidance estimates and, uh, saying stuff about what he thinks of the acquisitions and things like that. He, he,

like I said, he doesn't seem to be currently involved with the company. He looks to be a former co-founder. Um, and he owns, uh, 10 or 12% of the company, something around there. um there's also kind of just to go through the ownership structure there's also a company called nine uh 9008 or 9830 macarthur which sold e-commerce assets to mohawk and is the largest shareholder owning about 21 of the company so this is kind of a good example of what mohawk is doing a little bit with these acquisitions as many of these acquisitions that they make the acquired company or generally it's like an individual who owns the company actually want stock in Mohawk rather than just cash. And so then the bigger the company is,

then the larger portion of the common shares outstanding that they own going forward. And so there's quite a few companies if you look through their ownership structure. Like I said, Sean Emery and Avery & Co looks like they actually own about almost 4% of the company. So they have a fairly healthy steak as well um and then all sean nice he's been like the first guy in on this name so yeah he he definitely deserves all the credit here basically he's the one who first got it on my radar so i saw some of his stuff on twitter and got me interested um and then all together insiders own about 37 percent of mohawk which is a really really big chunk so definitely aligned with shareholder interest in that sense um i would expect that percentage to come down as they make

more acquisitions and do some more dilution but uh it's good to see for now yeah a lot of insider ownership all right i'll hit the valuation ticker is mwk there is a mohawk industries so don't get confused with that it's the one that's mwk there's one that looks exactly like it that's carpeted yeah so carpeting carpeting yeah it's a different company uh you'll get confused but it's mwk for those in the united states i don't think it's probably not traded internationally yet uh enterprise value as of reporting is about 661 million dollars so small cap even to sales is about four and they're unprofitable while they're they're right around break even now over the last few quarters no dividend and share crown has grown this year due to a follow-on offering the ipo in

2019 i think it was late 2019 so pretty um you know pretty close follow-on offering but they're doing that to kind of raise money and go after this big market opportunity you should expect share dilution and continuing of this acquisition strategy. They had about 21.8 million shares outstanding on September 30th and about 1.6 million stock options outstanding and about 2.36 million uninvested restricted stock units. So a lot of dilution baked in there. And I'm putting this in there just because, again, you should expect the share count to go up over the next few years. It's not necessarily a bad thing. It's part of their strategy to retain talent and go through their acquisitions and stuff like that but it's just being part of a growth company you

have to price that into whatever model you're using for mohawk group yeah and a lot of those offerings are used like almost on a per need basis so when they're getting ready to acquire a company they'll just bake in some dilution to it or they'll add stock to the uh acquisition costs um and so i mean as long as they're buying quality businesses and able to sort of develop them and scale them better, then I guess it's a good choice for them to sell that stock. But I'll get into the earnings. Last 12-month revenue was $170 million, up 57% year-over-year. They have about 44% gross margins. I think that was a little higher in the most recent quarter, but that's over the last 12 months. They had negative $33 million in EBITDA for the trailing 12 months. They're pretty much

breakeven on a cash flow basis. And in its most recent quarter, contribution margin increased from 8% to 19.1%. So their products kind of go through this three-phase life cycle and they highlight this on the 10K, but they have the launch phase. So this is the phase that I talked about early on, which is they identify the opportunity, they enter the market with a bunch of discounts, they do a bunch of marketing. And in this time, they expect net margins to approximately be about minus 35%. So they are basically selling this thing to hopefully reach scale and then not have to pay as much to get those sales done. And they want to be the top product for each of these categories. And then they hope every one of their products enters the

next phase, which is the sustain phase. And they target a 10% net margin for this phase. That's what they want every product to go to. That's sort of the end. That's the paradise. They hope they reach the sustain phase and they peel back the marketing costs on those. And then the third one is the milk phase. That's what they call it. And this is when the product doesn't enter the sustained phase. So if customer satisfaction is low, ratings are bad, they will just liquidate it and sell the remaining inventory. They, uh, as of their last report, they haven't had any products hit that phase yet. So, uh, they've been perfect so far, but they did just make a bunch of acquisitions. Um, so they launched eight new products in the third quarter versus three last

year. But since the third quarter, I think they made acquisitions of, uh, 43 new products to the portfolio so keep in mind the whole third quarter they added eight new products and then since then they've added 43 new products so they and that was done through acquisitions i think of like almost six different brands um and they're getting these brands at a pretty low multiple which i'll talk about later but um yeah does that kind of cover the earnings their forward guidance is probably the most important part because they're going to have a lot of inorganic growth uh from these acquisitions. And sales was like, way up. At least their guidance was. Yes, they're going to be aggressive, or they are being aggressive with those acquisitions

and trying to grow the portfolio. I think that's, that's clear. Ian, you want to hit balance sheet before we wrap up the first half? Yep. And before I dive into the balance sheet, I just want to touch briefly on what Ryan was saying there about the different phases, because I think he laid that out really well. And it dawned on me that it's a little bit like you can't call this recurring revenue. It's different customers that are buying, um, the products, but in a sense, it kind of has some similarities to some of these recurring revenue models we see because they spend a bunch of money upfront to get the customers and a recurring revenue model, right? You spend a bunch of money, you get the customers, and then they just keep

paying you quarter after quarter after quarter with Mohawk's model, they pay a bunch of money upfront to get the reviews and the reviews attract customers at no cost to the company at that point. And so they kind of spend the money up front to get the reviews, which then creates a somewhat similar stream to recurring revenue in a sense. So, like I said, it's kind of an interesting, it just dawned on me as you were talking about that, Ryan, but I think it's an interesting model. And the CEO mentioned in that interview with Sean Emery, he's like, a lot of the customers now, they're making purchasing decisions based off data that's readily available. So they're not necessarily looking up a brand name, but they're going looking up the item and then just scrolling through reviews, pictures and stuff like that. So they're really trying to optimize for the third party e-commerce platforms. Yep. And I think what they say is if they can get above a 4.3 on the ratings, that really gets them to that sustained phase.

If they can get 4.3 on ratings, then they're in good shape. So anyways. That's what I care about. The good rating on Amazon. yeah it totally it totally makes sense yeah yeah um yeah i can go ahead and dive into the balance sheet so they've got and this is you you'll want to check on this once the next quarter comes out too because like ryan mentioned they've been pretty active on some of these acquisitions and stuff but as of the last quarter they had 37 million dollars in cash about 26 million dollars in debt um which was kind of expensive debt it was about a six percent rate on a term loan they

have that was um around uh i think 14 million left on that and then 10 on the revolver which was the rest of it so there may be an opportunity to get that refinanced um hopefully a lower rate yeah you would hope in this environment but they paid down that revolver early if i'm not mistaken some of it i think some of it they had 25 million out on the revolver i believe they paid like half of it back if i'm correct yes i believe so like i said you're gonna want to check the most updated they've been pretty active in the last three months. And so you're going to want to check the next quarter quarterly report to see how it all shook out, but they have been paying down some of their debt.

Like I said, it's going to, it could change a lot because of these acquisitions. So one, one other piece I'll point out is their inventory, their inventory ratio, inventory turnover ratio is up to 3.8 times, which means basically for every that they only, that they're selling through all their inventory four times in a year, 3.8 times in a year, which is up from 1.9 times in 2019. They actually have less inventory in the balance sheet now than they did back in 2019 when they weren't doing nearly as many sales. And so that's pretty

exciting just that they can get more efficient like that. It helps improve their operating margin, the net margin. So, you know, something to keep watching if they can really bump that inventory turnover ratio even higher. That would be pretty exciting, but definitely moving in the right direction there. So generally happy with the balance sheet. Love to see a little bit of a debt refinance, but looking good. Yeah, that inventory ratio will be interesting to watch to see if they can increase that or sustain this one over time that can really help their cash flow. But we're going to get to the ad break here, and then we're going to move to the second half of the show, talk more analysis on Mohawk Group.

cox panoramic wi-fi includes advanced security to help protect all your connected devices you'll get real-time alerts oh like this one so you don't have to worry about malware or when your kid downloads a song from a shady link and now all your computer can play is red color red color where are you all blocked thanks to advanced security included with cox panoramic wi-fi advanced security must be enabled in the panoramic Wi-Fi app. Restrictions apply. All right, welcome back. Next up is competitive advantages for Mohawk Group. So Ian, kick things off. What do you have? Yep. So I think the major competitive advantage as I see it is their expertise. They've done this

for long enough that they understand how to roll up brands and really make them as profitable as can be. They get them at attractive multiples, fast integrations. They say that it takes them less than 48 hours to get the new brands that they buy integrated into their systems and producing through Mohawk and also enhanced logistics networks and even manufacturing relationships. Many of their products you'll notice are kind of big, bulky things like dehumidifiers. There's like a space heater thing. There's some stuff like that that's traditionally kind of harder for people to manufacture. And they've built relationships ships that really, they can manufacture those with high quality and at a reasonable price.

So it's really, I think their expertise just in this area is really a competitive advantage. And they also don't really need to take on additional staff when they make these acquisitions. They're able to just bring the products over. Right. They just basically outsource a lot of logistics to Amazon, who's the best at that. Seems like that makes sense. And it keeps them asset-like. But Brian, what do you have for competitive advantages? So I guess their acquisition targets are like consumer goods businesses that are selling stuff through e-commerce strategies, whether it's Amazon or Shopify, stuff like that. And that can make some good money for individuals or small businesses, but it's really, really hard to scale those. And so as they reach sort of a threshold, then they look for, all right, can I sell my business at a premium? And their premiums are really cheap. I mean, Mohawk Group is getting most of these companies for three or four times EBITDA multiples, which is super, super cheap. I mean, three or four times sales multiples in this world seems cheap.

I mean, Mohawk trades at four times sales. So they're basically acquiring them and devaluation technically has, you know, just kind of inflates because they're a part of Mohawk then. Right. And so for example, they just bought Healing Solutions LLC. And so this just sells essential oils. And the Healing Solutions had $12.7 million in operating income for the last 12 months. Mohawk Group bought them at 3.8 times their operating income. And I believe their operating margin was somewhere around 15% or 20%. So they can buy these businesses for really, really cheap because they're so niche and not that many, they have the ability to really scale these niche operations. Most, uh, most acquirers don't want to buy this company because then they have to do the work to make it better. Mohawk thrives on that. And that's a really, I mean,

it feels like a big advantage for them. Yeah. Yeah. And I was just going to say one thing that was interesting. They, they did a call about the transaction a few days ago, and I'd really recommend looking at looking at it, it was about 40 minutes or something. But one of the things that the CEO mentioned on there is, hey, these seem like really low multiples to us, and they are and then they, you know, get incorporated into us and immediately get a re rating. But to the people that are buying them from us, they seem like higher multiples, because those people are taking the operating income they're getting, and then they're having to pay expenses out of it. And so they're really thinking about what their take home pay is as the owner, right. And so

they're looking at it and going if i can get and sometimes it's only a quarter of what operating income is so if i can get four times the operating income that's 16 times or 10 times you know somewhere in that range my take-home pay which really makes sense for a lot of these because it's a lot of small companies right it's small kind of owner-operated companies and so they look at it and they get they say i can cash out for 10 to 15 times my take-home pay that works for me but it works great for mohawk to immediately buy it at three to four times ebitda and get it valued it four times sales right because they get the x out that all that overhead it's a it's a shark tank conglomerate i mean these are like the shark tank businesses you know all those businesses that

you see being pitched on shark tank mohawks just buying them yeah hopefully it's not actually those really bad ones that are on shark tank yeah all right i'll have mine i'll have mine uh you know theoretically the machine learning stuff uh can help identify products and there should be an economies of scale there where they have the data advantage or however you want to call that i would be interested to see if they could do some work where like stitch fix publishes how they do all their stuff for identifying you know products for clients and how it all works because i'm a little skeptical that it goes beyond like all right this product category doesn't have anything above four stars let's go do something there that doesn't seem like something that

machine learning you really need it for or maybe i mean the strategy is working right but they might overhyping it there now with marketing you know automating marketing logistics stuff getting that you know with the data advantage could work uh but again you know i'm a little skeptical in parts of it but it seems like the machine learning stuff could get them some sort of you know competitive advantage or mode around the business yeah i mean theoretically that's supposed to be their big competitive advantage right yeah it makes it doesn't make sense to me why they're outsourcing a Amy, you know, right. I mean, that's always, that's always kind of confused me a little bit too. Like if it's that valuable of a tool. Yeah. And I just, I, I assume maybe what it is,

is that it's just, there's enough supply out there. You know, how many, how many third-party sellers did you say there were? Um, yeah, 2.5 million. There's enough to apply out there and there's enough places to do good deals that they can't take them all on. And so, um, you know, Maybe they outsource the software a little bit, but. And I think it's, I guess I could be wrong on this, but I think they're only licensing sort of a limited part of Amy because it is called man. They label it as managed SAS. And this is my future growth opportunity because I think being a seller on

Amazon that can make some income for people, but it's really hard to make a ton of money being a seller on Amazon. And so hopefully, Amy can help a lot of people do that. Obviously, the TAM there, the addressable market, like Brett just said, two and a half million sellers, that's a lot of people. It's a lot of potential customers. And for reference, the more sellers that Amazon has on the platform, the higher customer acquisition costs grow. and so the more that you can optimize uh your uh strategies marketing strategies logistics stuff like that uh the better you can be as a seller and amy really lets people do that and i would like i hope that it is sort of a limited offering i hope they're not giving them like the uh market identifier part because there's obviously the logistics part when you're actually selling the product they're still using amy but then there's the opportunity identifier which gives them which

markets to go into if they're giving them that part that's a little concerning for me because you're just inviting competition whereas instead of just helping other people yeah i mean i don't know this that part of the business doesn't i don't know i'm not an expert on them but that part of the business doesn't make that much sense to me if you have the you know mohawk group on that's not too okay all right uh ian what do you have yep so i've got kind of the obvious one for future growth opportunities i'm looking at acquisitions uh they just make too much sense right now you capital's cheap you can go grab a big chunk of the market uh while you can roll up as many of these little businesses bring them in get the multiple re-rate um they say the space is

getting more heated and i think brett you may have mentioned this too just about the pe firms that are diving into this space yeah um thrasio uh it's getting more heated yeah and it's getting more heated people are looking at this going hey we can like this the economics on this really work which is a good sign in one sense but um you know it also is uh you know these multiples that they're having to pay may start going up on some of these businesses uh one other thing one other note on acquisitions the essential oils acquisition that ryan mentioned was their first move into consumables most of their products have been durables and so um you know things that people buy one you know the humidifier space heater um you know things like exercise equipment things

like that um but now with the essential oils there's actually the potential for some repeat customers um so they're and i think on the call they said they're thinking about moving into more consumables they'll see how this goes but um they see that as another growth of avenue Okay. I'll hit mine then. It's another simple one, but it's international right now. They do none of their stuff outside of North America. Uh, it's, I think 98 or 99% of the revenue was in North America. Um, I mean, you know, I mean, the model scales, everyone needs these types of products or maybe everyone likes to, you know, every country has people that use products like this. So that is simple, but it seems like there's a lot of room to run there. Amazon

is pretty global. So once that scales out to there, or they could go to some of the local names like, you know, MercadoLibre in Latin America, you got what is it in India, it's called Flipkart in India, China, you obviously have Alibaba and JD.com. And maybe Tencent, I don't know, Tencent does everything. But then another thing would be like Ian mentioned, the long term shareholders, I mean, I think they would love an equity race at these prices, or just using a ton of stock to buy to buy companies because i mean if you're trading at four times sales or whatever we're at right now the stock is up what 5x over the last few months yeah you would love to see management take advantage of that they're also i mean they're not generating and maybe they did

last quarter but they're not really generating cash flow so they need to find that cash somewhere i mean why don't yeah they're paying 10 on their debt let's do a raise and just x that out right I mean, come on, the market wants to do it. Yeah. All right. What about highlights and lowlights, Ian? What do you got? Yep. So my highlights, simple model, you know, you go get you find a product or a market inefficiency, you go build a product that's a little better than the other one, get a 4.3 star rating, it turns into 10 to 20% contribution margin, and they have an 80% success rate with that. That's just those economics work. And if they can continue to do that, whether it's through acquisitions or through launching their own products, that's just a that's a model for success.

I'm also encouraged, like I said, by being more efficient with inventory and they're being aggressive right now. They've made a lot of acquisitions in the last few months. And I like to see that, that they're really trying to take the bull by the horns, I guess, and just really take advantage of kind of the momentum they have and really try and get as big as they can right now. a couple little low lights we've mentioned it already but the higher cost debt um dilution to like share count has doubled since 2018 and i don't think this is like a red flag or anything it's just it's a reality of this company is like brett said earlier you have to bake this into your models if you're looking at it that dilution will occur both from um you know employee options but also majority of that's going to come from these acquisitions that they make which if the

one that they made uh recently as an indication i think the draw the stock jumped like 20 25 on the news of the acquisition so the market likes these acquisitions the company becomes more valuable with them but there is going to be some dilution and then the last low light i have is just some competition um these the multiples they're getting on some of these businesses right now may not still be there um in the next few months it may it may rise and it may be more like six or seven times but we'll see all right ryan what do you got uh i like yaniv sarik uh i thought that interview with him and sean uh was really really good uh it does feel like a really interesting it's a simple business it's super like it's analyzable i guess uh it's easy enough

to understand it's not too complex my only problems are it kind of feels like he's throwing money at an algorithm without knowing what's all behind it um i mean the ai is only as smart as the people that built it um and i it also as far as the business goes um it seems very unorganized and so there was a lot of uh there are some interviews with ex-employees and some of the employees only were there for like a year a year and a half so looked like there was some employee turnover. But from what they said, it seemed very unorganized. Yannis Sarik seemed like really, everyone had high praise for him, but organizationally, it seems like they're a little distraught right now. Maybe a COO or a good one. Yeah. I mean, yeah, it might just be they're young

and they're moving fast. And maybe that's the life of a startup, but it feels just the business itself operationally needs to be sort of streamlined yeah i think yeah i agree with that the lola you have there about the algorithm thing i i kind of have a concern with that as well because i think it's maybe there's more to it than meci but i think it's copyable right i mean you kind of okay you can kind of think i mean as long as you can code it out or people said i read some interviews about this and no uh like it is doable if you figure it out but apparently it took a lot of trial and error and time to get to that so if you had sort of the rules and principles to code out yeah anyone can build it but to find those rules and principles it takes

a lot of trial and error and sort of sweat equity i guess is okay so it's copyable it might take a year at least or longer yeah okay all right i'll hit my highlights you know we're seeing a lot of gross margin expansion right now which is strong you can apply the business model to any product on amazon and to any country amazon sells them they're just going to ride that amazon tailwind which is just impressive especially for that third-party marketplace um one low light that i had some of the other ones that are similar to you guys but one low light that you guys didn't talk about was the ppe so ppe not property equipment but uh the medical sales so last year they had i believe you'd probably say it's an artificial pump so they said we saw an increase

in wholesale revenue last quarter of 9.8 million versus the prior year primarily from the sale of PPE during the current period. So the last three months, a lot of their growth was from this, you know, healthcare equipment and stuff like that for medical workers. I'm not sure that can repeat because that basically came out of nowhere. And it was a great idea to do it during the pandemic. But is that an artificial bump? I don't know. You know, revenue growth might not be as impressive when you take that into account. I do think it's sort of minute in comparison to their actual sales especially the sales that they've forecasted for uh this next year are you sure though because 9.8 million of what they're i think they forecasted 300 to 500 million i know

that was per quarter 9.8 million of the revenue they had last quarter well i'm sorry 9.8 of the 58 million in revenue that last quarter was from ppe that's material to me yeah but i mean going forward uh i think their guidance uh probably uh takes that into account i would assume right their guidance was still uh pretty strong yeah right there's still healthy guidance for sure and they also have said they've gotten some pushback that is this guidance a little bit light um and they've kind of said yeah you know kind of tongue-in-cheek like yeah you know it's it's a little we like to be conservative or something yeah yeah more or less interested and you want to go first i think i know your question because you do uh yeah i do own it i was just telling you

guys it was it's up to i think my third biggest position now um and i like the stock i think it i think um like we've talked about i think the ceo is really smart um they seem to be moving in the right direction and it seems like it's just a really solid solid model that would be hard to screw up at this point unless they really overextended themselves they seem like they're just kind of clicking on all cylinders and uh i'm looking forward to seeing what happens over this next year okay ryan yeah it does seem it seems like they were sort of like move fast and break things model uh over the last five years but i think they've figured it out uh and they've sort of they like ian said they're moving a lot better now uh and they're more consistent uh and

sort of firing on all cylinders if you will uh i do like the business i don't typically like stocks that move 40 in a day um if unless you want them yeah even but i just i don't like maybe i'm slow moving but i don't like sporadic movements because then you feel like you have to capitalize on them and it's just it sometimes becomes harder to own uh like i want something that i can own and just look away uh something that moves that fast sometimes concerns me but that's what you get with small caps and uh yeah the business all in all i i do like it a lot what about you uh yeah i mean the business i like the business definitely more interested um if you're potentially a new investor this obviously isn't a recommendation to buy or sell anything but don't

anchor to what the price was this summer the valuation at an eb to sell before which should be probably go down to about three or something next year. It doesn't seem crazy. Now, they guide for long-term adjusted EBITDA margins of about 13% to 50%, which throws out the window, but that probably indicates that free cash flow margins will be at 8% to 10%. So if you think that free cash flow margins at scale will be about 10%, you're probably getting it at, what, 40 times terminal free cash flow right now. Add in some share dilution, you might be at about 50 to 60 times so you're pricing in if you think of maturity it'll trade to like 20 to 25 times free cash flow you're pricing in a few years of growth but it's not realistic right now yeah it

seems pretty fair i mean the summer is obviously a lot better hindsight's 20 40 but i don't yeah i don't think the i don't think the valuation is too crazy but it's definitely higher than it will be if unless they can get free cash flow margins to higher than whatever they're just either the margins it is higher than what their terminal multiple will be but it's not that much higher it's not like they're trading at 200 times yeah okay great all right that's gonna do it for this episode i know we got i'm gonna say my pick for next week it's my turn we're doing avalara avalara you ever heard of that one it's a software company for tax automation i know brady's been doing taxes here so we might actually uh need some anecdotal evidence for that was the

CEO, the guy who was just on Invest Like the Best? I don't know, but if he was, we will make sure to listen. I don't know, he might have, but either way, interesting company. I don't know much about it right now, but I like the business model. It seems like something that everyone needs. All right, hold on. I'm pulling it up right now. Ian, you ever heard of Appalera? I've heard of it. I haven't ever looked deep into it,

so excited to take a look at it this week. oh no it was asana asana that was dustin moskovitz actually the forgotten facebook founder i don't forget shame shame all right avalara maybe you guys can get them on the podcast yeah definitely we'll get the ceo of a 10 billion dollar company on no problem that'll be very easy but that's going to do it for this episode guys as always make sure you use our promo code ccm at checkout to get 10 off your first month at seven investing remember ryan and i are partners at Arch Capital. We run an investment fund called Arch Capital and clients may hold securities discussed on this podcast. We are not financial advisors. Anything we say on the show is not

formal advice or recommendation. Thank you all for listening. We'll see you on our next episode.