Yet Another Value Podcast - Luis Sanchez drives home the Endor thesis (Podcast #107)

Episode Date: May 19, 2022

Luis Sanchez, founder of LVS Advisory, discusses his bull case for Endor AG, including why competitors can't recreate their product and how they benefit from the current boom in motor sports like F1 and NASCAR.My notes on Endor: https://twitter.com/AndrewRangeley/status/1526577674801520642?s=20&t=wqYSVMYKfG3kx8M9qhkB9wLuis's MOI pitch: https://twitter.com/LuisVSanchez777/status/1524707206574321666Chapters0:00 Intro2:20 Endor Overview14:40 Where is Luis most divergent from the market on Endor?24:15 How frequently do people upgrade?27:30 Why isn't Endor the typical COVID beneficiary about to fall off a cliff?36:00 How the current motor sport boom helps Endor42:00 Endor's valuation52:00 Endor's long term margin potential56:00 Endor's move into lower end products1:02:40 Luis's closing thoughts

Today's episode is sponsored by TIGIS. Understanding expert insights is table stakes for investors, and there's no better option than TIGS. I've been using them for almost two years to get up to speed on companies, and they've helped me immensely as an investor. TIGS also recently acquired BAM SEC, which adds a super fast way to access SEC filings and earnings calls and to incorporate financial data into my models. I run a monthly DeepDive series sponsored by TIGS on the blogs. I'll include a link to my cable deep dive in the show notes, and I'd encourage you to follow the link if you're interested in how expert interviews

can help you learn more about a company. Currently, anyone who signs up for Tigis gets free access to BAMSCC as well. So check it out. All right, hello, welcome to yet another value podcast. I'm your host, Andrew Walker. If you like this podcast, I mean a lot if you could follow it and leave a rating wherever you're watching. With me today, I'm happy to have Louis Sanchez.

Lewis is the founder of LVS Advisory. Lewis, how's it going? Great, man. Thank you so much for having me. Hey, thanks for coming on. I've been meaning to have you on for a while because I know you and I share a big interest in Match.com, but we'll be talking about a different stock today. We'll get to that in a second.

But let me start this podcast the way I do every podcast. First, a disclaimer to remind everyone, nothing on this podcast is investing advice. That's always true. But today we're going to be talking about a very small, pretty liquid international stock. So just going to remind everyone, please. do your own work. Please consult a financial advisor, not investing advice. Second, I pitch for you, my guess, you know, you run the exact type of portfolio. I love to have a thoughtful portfolio, about 10 portfolio companies in there. I know a lot of them. I really like them. I know you do

great detailed work. That's going to be really obvious in the name we're talking about today. You pitched it at MOI. M.O.I is, I can't remember what it stands for, but you did a great manual of ideas. Manual of ideas. You did a great pitch there. I've got the deck. I'll be sure to included in the show notes and people can check that out. But that all out the way, let's turn to the company we're going to talk. The company is Endor. It's traded in Germany. And I'll just turn it over to you. What is Endor and why are you so interested in them? Yeah, for sure. And yeah, just to echo, I run a registered investment advisory firm based in New York and we are long sure as an indoor so just want to get that disclosure out of the way you know do your own work

i have i have a deck that i published it's on my website that uh and i posted it on twitter yeah there'll be a link in the show notes yeah so that that'll kind of fill in some of the things we're talking about here but um yeah i mean look let like the the i'll give like the 15 second overview and then we could unpack it. There's a lot to unpack, but effectively, like, this is a riches and niches play. And I really like companies that dominate a niche, right, with very strong unit economics. And I would say Endor, they dominate a niche. The niche is growing at a double digit rate. The niche is going to become more important over time. And the mode is just super deep and it's founder-led and, you know, and it trades at a very reasonable

valuation. In fact, I would say it's even undervalue. So, you know, that's just like at a high level, if you just think about it like that, you know, I kind of, I tend to like those setups. But to kind of dig a bit deeper, they endure, they own a brand called Fanatic or Fanatech, how you want to pronounce it. But they're a dominant hardware provider in a niche called simulation racing. And simulation racing is something that is at the intersection of like a bunch of really interesting trends. So what simulation racing is, it's basically people who are doing virtual races online.

So it's kind of like video, it kind of crosses with video games. but not exactly because simulation racing actually has a lot more to do with like professional racing, like F1 racing. And so the interesting intersection here is it's simultaneously a video game play and e-sports play. But another thing that I think people misunderstand and it doesn't come across, it's a bit nuanced, but in a lot of ways you can think of F-endor as kind of like, supplier to F1. And it's a very integral and growing part of the F1 ecosystem and not just F1,

but motorsports generally. So what they're providing with their hardware is an ecosystem of steering wheels, pedals, seats, basically everything you need to do to set up a pretend race car in your house. And they sell these for anywhere between, I think the starting price is about $800. And it goes up to like the thousands of dollars. If you really want to splurge, you could, you could spend three or $4,000 on an end-door setup. And let's see. And yeah, so like it's kind of a luxury product in a way because there are competitors. But their competitors are really, like, much lower end equipment. Basically, their competitors are selling toys.

They're selling, like, $200 toys. But Endor is selling, like, branded, you know, carbon fiber material with, like, leather, wrapped wheels. And they have all these partnerships with OEMs that get people excited. So they sell, like, limited edition wheels that people collect. But, you know, I'd say, like, most of, like, the typical, there's basically two types of, there's two primary audiences for their product today. One would be, like, people who are very fanatical about racing esports. So there's a bunch of, like, seasons and leagues, virtual leagues, the most popular ones called iRacing.

And there's hundreds of thousands of people who are competing in these leagues. a lot of them stream on Twitch, a lot of them stream on YouTube. There's people who make a living streaming, like their virtual simulation racing. And it's become a bigger and bigger end market because there's real sponsorship behind it and increased viewership. Like the viewership is astounding, and we could get to that in a minute. And then the other audience for their products is people who actually want to go pro or people who are pro.

So when F1 drivers, I mean, I'm sure a lot of people are familiar with F1, the sport, or have seen Drive to Survive, but the logistics behind F1 are pretty incredible. Like, there's only a handful of races per year. You know, there's dozens of people that need to go to these races to set up all the equipment, sending the equipment over to like Australia or, you know, Monaco or, you know, recently Miami is a huge endeavor. So if you're an F1 driver and you want to have like real world, as real as it gets like practice, like test driving tracks in like the most realistic conditions

or, you know, just trying things out or just staying sharp, you know, this is actually the best way to do it. And pretty much every F1 team has a very very. very integral simulation racing program with, you know, this type of equipment. Some of it is supplied by Endor. Some of it, you know, there's some other higher end, more like specialty niche suppliers. And, you know, and the other aspect, too, is if you want to GoPro, you know, it's not viable to buy your own race car. But, you know, this is an affordable way to kind of get real world experience, go compete on the online tournament to get noticed, and people are actually

coming up through the ranks and getting noticed by teams and getting, you know, given a shot through this activity. I saw this in your deck and stuff, and I kind of didn't believe you until you shared a video with me. And it's a guy who's like, I don't think he's a full out pro, but he's like a semi-pro. He streams. He competes it on tracks and everything. And he was saying, like, look, this is the best way. People are actually getting scouted by going and being elite at simulation racing. And, you know, that's how you're scouting for new F1 drivers now. And he also said, this is how I train.

Like the skills are completely transferable. Sometimes I forget I'm in a simulation versus a car. Like, I was really impressed by how highly someone on the inside spoke of it. Like not you and me, investors sitting at a desk staring a screen, but somebody who actually makes his livelihood from it. And he was saying everything that you're saying. Yeah, absolutely. I mean, this is also a fairly new thing. So, yeah, Endor was founded in the late 90s and, you know, Logitech's been selling playwheels that, I mean, if you remember, like, growing up, I used to go to the arcade and it was like cruising USA and like a wheel. And I guess it helps to talk about like the evolution of this and like where it's come from. And that'll actually help explain the moat here.

But effectively, you know, if you think back to like the arcade style wheels, like the cruising USA, that technology is very crude. And basically what's controlling the wheel is this bungee cord, right? And that's literally it. And, you know, the wheel, they try to give you like feedback on like how you're turning through like the bungee cord, right? And then in the last 10, 15 years, the hardware suppliers created this thing called like belt-driven technology. So using a belt to control the wheel, it gives a bit firmer feedback. It's a little bit more realistic, but it's still not quite there. And then what Endor pioneered in the last five years, really, is what's called direct drive.

and direct drive is effectively you know you're putting an engine behind the wheel and the engine's giving you very precise movements and it's giving you very realistic as realistic as it could possibly get feedback on the wheel so you're feeling like everything from like how hard you're turning to kind of like the G forces on the car if there's bumps in the road if the track's slippery and you know that's like this this combination between the the wheel the direct drive motor you know all this equipment that you're using and then the software which the software is really good too i was going to that is my next question the software behind this right because what strikes me is i'm on it i'm driving on the track and i'm feeling it differently if it's

slippery or if I'm taking a hard turn at, you know, 400 miles per hour versus a soft turn at 20 miles per hour. Is Endor making the software that's providing all this feedback or it's somebody else who's making the software and it's obviously integrated with the indoor product? Yeah, Endor is not making software today. That is something that the company has called out as like an opportunity in the future. And they've called that out as an opportunity both in the sense of like, yeah, you know, there's software that simulates the race, but they've also called out an opportunity to sell like training software to help people improve their game, like coaching. And I actually have spent a lot of time covering the video game industry

and covering e-sports. And training software is actually a really big business and other types of e-sports, interestingly. And I know you've got Autodesk, so you know all about software and everything, and Evolution Gaming and Flutter. So you've got tons of online. And I, you know, former shareholder of some more, you know, of take two and Activision. And, you know, so I've spent a lot of time. And that's actually one of the reasons I was able to kind of really understand what this is and what it's not, right? There are two other interesting companies that I'd love to do a podcast at some point. But that's in the future.

Let me, let me back up for a second. So the first question I always asked, that was a great overview. And I've got lots of places I want to go in this question. Yeah, actually, like to say one thing about the software. And then, yeah, so the reason why the software is so good, and there's multiple providers of software that, like, very degrees of, like, high end to low end. And I'm not talking about, like, the video games, like Mario Kart or, you know, there's an F1 game. Don't this smirch Mario Kart on this podcast. We stand for Mario Kart.

But the software, you know, first of all, it's primarily done with high-end. gaming PCs, right? And the tracks, for the most part, they're taking real-world tracks, like the actual race tracks, like the Monaco or the Miami. I don't know if I'm assuming they have Miami at this point. And it's not just like, they're not just taking like an architectural blueprint of the track. They're laser scanning the tracks. And they're getting all the bumps, all the turns, and putting real, realistic conditions. So, you know you can you can go and do your own research and and hear what f1 drivers say but when we say like this is like as close to driving a race car as without driving the race car it it really is

it truly is professional grade training equipment so perfect no that's great and i've got some more points i want to dive into there but let me just back up for a second first first question i like to ask every podcast guest. I'm a pro because I'm asking it 20 minutes in. But look, the market is a competitive place, right? When you make an investment, obviously you're making an investment because you think on a risk-adjusted basis, it's going to generate alpha. So first question I asked, what are you seeing here that the market is missing that's kind of presenting this risk-adjusted alpha opportunity? Yeah, absolutely. And, you know, the real, the real point of differentiation. And I apologize

with my internet connection is a little unstable here. But it's, I don't, most people, and I made this mistake when I first started looking at Endor, I was very skeptical of it. Most people view Endor as like a video game hardware supplier. And the business of being a video game hardware supplier is just not a very good business, right? It's very cyclical. It usually tailwinds. with like when there's a hardware console cycle. It's competitive. You know, there's a ton of other video game hardware suppliers,

whether it's Logitech, Endor competes directly with the company called Thrustmaster, you know, Coursair. These are companies that typically, they don't trade for the highest multiples. I mean, hardware itself is known to be, it's not a recurring revenue model, right? So then where I started to get really comfortable with it and really got bullish is understanding two to three things.

The first is that given that their primary end market is more of like it's not it's not it's yeah, it's leisure, but it's it's a serious competitive endeavor. And I'm talking about both the e-sport and I'm talking about also like the folks who want to go pro. So if we just talk about the e-sport for a second, you know, there's hundreds of thousands of people who are competing. And these seasons occur every quarter, there's their seasons, right? So if you think about it, these guys, they want to make sure they have the best hardware every season. Yep. So if, you know, they're constantly upgrading their rigs. And basically, Endor's system is modular.

So two-thirds of their sales are they're selling to existing customers who are making slight modifications. Maybe they want to change the wheel, you know, they remove the wheel, keep the motor, they put on a new wheel, they want to buy a new pedal, they want to do something else. Maybe Endor comes out with a new upgrade that they didn't have before. So there is like this semi-recurring nature that, you know, with their core customer base. And then the other idea is because they're supplying, you know, basically professional users, that's just not a very cyclical end market. Right. These, these, and neither, neither those are cyclical, right? And then the other thing that I think is that that took me a while to understand, but really, which is I understood through just talking to a lot of customers. And I can go through how I did that. But, um this is this is like a this is in addition to being like a professional grade training product it's also a luxury consumer it's also a luxury branded consumer product where they sell things that are very high margin they're using in some cases like luxury um selling tactics

so like scarcity marketing collectibles you know they'll they'll go and um it you know there's a really interesting similarity here with like WWE where like WWE sells like replica belts, right? Your, WWW was one of my largest positions for a long time, so you're really speaking my language and you bring WDOR, Ender will, they have licensing agreements with almost all of the major car brands and they'll go say, oh, do you want to buy the wheel that Mario Andredi use, or replica wheel that Mario Andretti used to win this Grand Prix? And they'll, they'll, they'll make like a thousand of them and then they'll sell out before they'll pre-sell these

and then on eBay these will go for like three X the price right so that's really interesting but let me give one quick push back there because you compared it to WWE and the nice thing about WWE is WWE owns the IP right so when they do these limited releases they get to keep all the margins for themselves even if they did a limited release of the Rock or something like the rock doesn't get the money the WWE I believe they actually own the character so they keep it. Whereas with Endor, if they're going in a typical one, probably be like, Ferrari just won the championship. You're a big Ferrari F1 driver. Here's a limited release 500 Ferrari. We are the champion wheels. Like, they have to license that from Ferrari, right? So yeah, Endor is like the biggest and

the best player here. But in general, you know, Disney, people, I've heard people say, oh, this company has the license to Disney products. That's an edge. It's like, no, Disney is a competitive killer. They're going to suck every bit of economics out from you, it's going to go to them and you just kind of make your cost of capital. So why wouldn't like all the margin for these limited releases go to the person they're licensing, not the not Endor? Yeah. So pretty much every wheel Endor makes is licensed. Okay. They're there every every, every wheel they make is is some kind of license. And the, the, they're selling these wheels for five, six, seven, 800, 900, sometimes a thousand plus dollars.

When you say every wheel is licensed, so I'm just looking at photo, like, every wheel has a brand. So like every wheel is, this is the, oh, now I'm seeing it actually now that I really look at it. If not ever, we'll, almost every wheel. Yeah, it's a huge part of how they get people excited about these. When I zoom in on it, I am seeing like, oh, this one has the Ferrari symbol in the middle. This one has the BMW. Yeah, okay, I see that.

Yeah. Right. So, and, and I mean, it doesn't take long to realize. the unit economics are pretty good just by looking at their financials. Their gross margins are above 60%. Yep. Because they're selling these wheels for like, you know, $800. And yeah, like these are nice.

Like they're leather wrapped and there's good material. But, you know, this is like, this is what I mean when I say. It's a luxury consumer product. And the way that I got comfortable with that is I got on Twitch. I spent like a week watching Twitch streamers. I was subscribing, I was tipping them, and getting, you know, making friends. And I just, I just was asking them a ton of questions. Hey, why do you use this wheel?

I was also asking people who weren't using the indoor wheels. Like, hey, why are you using the Thrustmaster wheel? Don't you know about Endor? And it's really clear that anyone who's serious about this activity will eventually use an endor wheel. there's um it's aspirational when you would ask someone why they were using a thrust master wheel which i'm assuming is their their big competitor why were they using thrust master instead of endor yeah so it's just because someone like someone's streaming on twitch who's just they're just trying

to have fun playing the game they're not they're not serious about it or like oh my friend bought me this wheel or oh yeah like i'm not i'm not i'm not good enough to buy that wheel I don't I don't spend enough time on this where I want to, you know, spend $1,000 on a wheel. If you're a casual streamer or like you're ninja and you're a super serious streamer, but streaming racing simulations isn't your best game, maybe you go with a Thrustmaster. But if your life is simulation, if you're trying to be pro or you're trying to build a real Twitch following, all you do is you're going to go with the indoor brand product. Yeah, absolutely.

And if you look at, so all, there's like a bunch of, I mean, most, people who stream on Twitch who are like esports, they will like post their equipment in their profile. And you could look, it's the vast majority of what people are using are the fanatic products. If you look, a lot of F1, a lot of celebrity drivers have like YouTube channels and are live streaming on Twitch now too. It's pretty much all indoor, like almost without exception, especially the pros. The other area that it really stood out is just by going on social media. There's a, you know, going on Reddit, uh, subredits and, you know, subreddit for Sim racing, subreddit for Fanatic. And you just really, you really quickly get,

understand like people, there's a massive cult following for this brand. And people are posting like their wheel collections and, you know, usually they're posting like walls of wheels and like, you know, all their different, um, types of sim racing equipment. And, There's a real fanatical brand following that, you know, I do, I have studied some of the luxury companies, and it really reminds me a lot of like that kind of behavior. Let me ask, you mentioned, I don't want to say, not quite razor, razor blade, but a little bit like that where Endor comes out with a new, new model, new mod, new better pedals or whatever, and people are going to upgrade, right?

And it does make sense to me that if you are an F1 driver, you know, hundreds of of millions of dollars on the line, you are always going to be paying for the absolute top-end simulation equipment because anything that saves a fraction of a second off your time is a huge competitive bench. But if you are a serious Twitch streamer or something like, how necessary is it to make upgrades? Because I do wonder, like, you know, I have a Xbox in my house. I don't need to upgrade to the new Xbox. I don't play games that much or something like, how necessary is it really to upgrade your end or could you just buy one rig once and then kind of use it for five years so it's fully depreciated yeah um i think it's it's it like the industry has developed pretty

quickly so like five years ago compared to today like the technology has just been refined so much and i think there will continue to be innovations that just you know maybe the the direct the accuracy of the direct drives get a little bit better, and, you know, okay, fine. And maybe if you're not, like, super serious about competing, you don't care that much. But a lot of it just has to do with being, it's just an aspirational product, right? And when you're streaming and you post your equipment on your Twitch channel and everyone sees it, and maybe Endo is really, really good about partnering with popular streamers and YouTubers and getting their products well reviewed and well followed, most of their marketing that they do,

is either, you know, they sponsor, like, leagues. They actually sponsor a real-world racing tournament, which we could get to in a minute. But a lot of it is just like, you know, viral marketing, sponsoring, social media influencers, and, you know, just creating this viral buzz around their product. And they're very, very savvy at it. The other thing, and this kind of gets into, like,

where I believe there's actually like a really nice catalyst list is Endor, they really started in that more high-end hardcore segment of the market where their average unit, their average cost was like really pushing $2,000 per rig. And over time, they've been working on getting into, they've created, they basically have three tiers of product. They have a podium league, a CSL, and I believe it's called Sport. And now they've been able to kind of get into lower price points without sacrificing too much quality. And they recently launched a line that's actually specifically optimized for specific popular games on Xbox and PlayStation.

So, and with like, you know, they're the official wheel of the new Grand Turismo game, which came out in March, which. You know, we think that's a huge growth catalyst in the next 12 months. Let's come back to that because I do want to talk about the move into casual game because it strikes me as both risk and opportunity. But I just want to right now, as we're speaking, Endor trades for about 15 euros per share. That's 17 times price to earnings if I'm looking at this correctly, which sounds nice. But I know, I think the first thing anyone's going to ask when they look at this, they're going to say, all right, endor was a mammoth COVID benefit. Fisher. I remember we were talking about this before. My buddy Jeremy Raper, when Ender was at 5, he was at the height of COVID, he was like, sales are exploding for this thing. You need to look at it

because the market's not picking up how big it is. And, you know, sales, 2019 sales, 40 million in euros, 7 million in EBIT, 4 million net income. I think I'm looking at your deck. 2021 was like 80 million euros. Net income actually wasn't great because they had some logistics problems. We can talk about that. But, you know, net income triples from 2009 to 2020. And I was looking at the stock chart and the IPO in 2006 and the stock does nothing for 13 or 14 years until COVID hits and then sales explode. So I guess the first question anyone's going to have when they look at it is they're going to say, hey, I've seen this story play out so many times over the past years, right? Company explodes their earnings during COVID. COVID starts waning away. People start going

outside. People bought all the units they have. You know, Peloton kind of comes to mind. They sold a lot of units in 2020 and 2021. And then they sold all the units. There's no one less that sells to. So when I look at End where I worry, massive COVID beneficiary, like, is there a hangover coming as we kind of lap all those comps? And as I said, if you're F1, you're always buying the top end. But maybe a lot of the guys say, hey, I just spent $3,000 in rigged in 2020. I don't need to upgrade right now. Yeah. Okay. So, Great, great question. And definitely something that we thought about and we're concerned about.

So there's a couple of metrics that we track. And I'd say there's basically three key drivers of growth here. The first is, you know, e-sports competition. Are those hundreds of thousands of people who are competing in e-sports? Are they still going to be competing? Are they still going to be buying indoor products? So basically, and actually I don't have this in my deck, but there's you can, there's actually, there's actually data that you can track of like the popular e-sports leagues for this. The most popular ones called iRacing.

And you see this huge step change increase in the number of competitors between 2019 and 2020. It goes from, like, let's say, 20,000 competitors a season to like 100,000, or I think it was maybe it hit like 80,000 in 2020. And you can track every season. So there's one, you know, there's like 10 seasons in a year, 12 seasons in a year. And you could see each cohort, how many people are playing on irasing. And what you'll see is not only have. has it maintained in terms of the number of competitors, but it's actually continuing to grow even so that in 2021,

the seasons were bigger than 2020. And the early indications that we're getting in 2022 is we're seeing something on the order of about 20% growth over 2021 in terms of the number of people who are playing on the most popular e-sports competition weeks, right? So, and it's been a very steady number of, very steady number and kind of a gradual increase. So, you know, as far as we're concerned, most of the COVID beneficiaries have already started to roll over. You've already started to see if they were just temporary beneficiaries. You've already started to see, you know, their end markets weaken.

We're pretty confident here that this is maintained, and we have basically monthly data going back for several years. And we're happy to share that with anyone. The second thing is indoor, you know, what this really is, is it's part of the motorsports, like, media ecosystem. And motorsports is having a moment. So F1 is having a moment. Drive to Survive is huge. You're coming off my next question. You're hopping out of me.

Drive to survive is huge. And it's huge, it's huge globally. So we just had, I mean, in the U.S., in the U.S., it's obviously having a moment, too. We just had the F1 Grand Prix in Miami. We're having one in Austin. I think they have, the Miami one was so successful. I think they're getting a permanent date. The TV ratings for Formula One are the best.

I think in history, at least the best in the last 30 years, I think, according to some reporting I saw from 20, so far in the 2022 season, there's a 49% increase in the TV ratings for F1 relative to 2020, 2021. And it's not just F1 because NASCAR ratings are actually up across the board as well. Really? Yeah. and and like you could trace this you could actually trace this not just it's not just a Europe and North America thing it's also Asia China F1's becoming a lot more popular

Latin America this is becoming a very popular global sport and it's it's a really incredible wave and I don't see that I see that continuing and that's a major driver of interest here for a number of reasons. Because, I mean, first of all, you have these celebrity drivers who are live streaming and they're posting about, they're talking about simulation racing in their interviews. They're posting about simulation racing on Twitter and their social media on their YouTube channels. If you're a fan, you go to these events, they have simulation racing rigs at the events,

you know, if you're a student. super fan and you want to like be more interactive um you can actually virtually race on your at home rig with with the you know it simulates how the actual professional drivers were doing in the race and you can virtually race with them right um and then um you know the video game thing we talked about that and we can talk a little bit more about that that's actually maybe the more that's more of a call option i think the video game growth is more of a call option for me but where this gets even more interesting is you see all the major racing organizations. It's not just F1.

It's not just NASCAR. You're seeing the rally racing organizations. You're seeing like the tier two, tier three racing organizations. They all are investing a ton of money into promoting, to creating esports leagues. They all have esports leagues. Yep. Creating huge prize pools, attracting more racers. And now what we're seeing is there's leagues that are even incorporating.

simulation raising into the main price pool events. So there's a league called the GT World Challenge, where last year they debuted this. There's a simulation race that happens the same weekend as the real race. The teams have a simulation race. Sometimes it's the main race or sometimes they have someone else. Last year, they got three, like there were three points that were allocated towards the main racing championship points.

It was very popular, and they've expanded it to five points this year. So when I asked the CEO, what is your growth thesis? His response to me was the merger between the virtual and the real life worlds of racing. And it's effectively a metaverse play, but that's like a really exciting aspect of the long-term growth. is this year. If I can just hop in here and spitball on two things. The two things in there, everything you said was interested, but the two things in there that really opened my eyes were, A, NASCAR ratings being up because I remember, like, since 2006, NASCAR has been in frequent decline. Small cap investors might remember Dover Downs was publicly traded. And actually another

one was publicly traded in ISCA, I think I, if I remember, International Speedway. And they had real trouble because NASCAR ratings kept going down and their TV contracts were getting renewed. And the fact that there's interest there shows me that there is a lot of of interest in motor sports in general, and it's kind of reviving. It's having a moment, as you said. And obviously, F1 and Drive Church 5 has that, but I think that has real legs. And then number two, I do think it's interesting, like, I love basketball, right? I can't go play LeBron, James, and basketball. It's not the same if I go load up NBA 2K and play LeBron, James, and basketball, and NBA 2K. But with this type of stuff, like, I do think the future

is things that are really interactive. And the cool thing about a driving simulation that so much mimics real life is I can load up and they can say, hey, here's, I don't know, Mario Andretti is a popular survivor. Who's the guy who wins all the races in F1? I can't eat. I don't even know. I'm not a big F1 fan. But you can load it up and you can actually challenge them. Or, you know, I'm sure at some point they'll be, hey, you can pay $10,000 and go have a three minute race against this famous F1 driver or donate $50,000 to charity and we'll put one person into a F1 simulation. regulation racing or something like that really plays to today's trend so I just thought those were two really cool things you said that play really well into the trends going forward yeah and and you know I'll expand on that right because there's this other aspect of just like e-sports viewership is also significantly growing and there's a lot of people who maybe have

no interest in the real world sport but they just they like video games you like e-sports and you know all of like the car brands they have their sponsoring uh East sports teams. And some of the F1 professional drivers are actually also competitors on the esports teams because they love it so much. So the key here, oh, go ahead, go ahead. The key here for the racing organizations is, and the reason why I think we're having a renaissance in ratings for these sports is because they figured out how to reach young people. And for F1, part of it was strive to survive. It was just incredible brand marketing. You know, Netflix has just such a great reach. And the way that they packaged it just made it so cool. They got so many

new people interested in the sport. The other thing, and is, and like, you know, I've spent a lot of times, a lot of time setting the video game ecosystem. The demographics are really clear. You know, younger generations, Gen Z, they consume more video. game entertainment than any other type of entertainment. And if you just look at like the size of the video game industry, it's a $200 plus billion annual industry. It's larger than TV, movies and music combined, right? So what these racing organizations are realizing is in order to reach, in order to get

young people excited, they need to go to where they are, which is, you know, Twitch, YouTube, social media, and video games. And because like all these, F1 has an annual, has a video game that comes out every year now. And I don't think that was a thing five years ago. The company that made the F1 game, if I remember correctly,

they were publicly traded and there was a bidding more between Take 2 and EA to buy them, which I participated in way too small of a way in hindsight, but there was an incredible, that was an incredible over-bid. were you involved there um unfortunately i don't think i was i mean i had a token position i thought it traded a discounted deal and i was like this is one of the most uh easiest strategic bolt on assets i've ever seen you know we make one sports game there are two giant sports companies that could come by us and take all of the costs out and in hindsight it sounds so easy

in hindsight but uh let me let me ask another question so we we kind of hit on why you think this has more legs than just the COVID beneficiary. Yeah, and maybe a clarification too is I don't think anyone even racing fans, I don't think people really even knew this

was a thing before 2020. Right. And so what happened in 2020 was they suspended real racing and in F1, they had a virtual Grand Prix where the real racers all competed and they televised. And

they televised. it. NASCAR had a similar thing. They had a virtual NASCAR series, which then I know I know the NASCAR, I think they had like half a dozen races. And I think on average, they got like more than a million viewers per race on broadcast TV, which by the way, unheard of in e-sports. Like, esports have, they've tried to broadcast esports on major TV and they never get good ratings. But, I think there was just this big introduction to what this was in 2020 that was very unique. And now we're kind of riding the wave of not just, you know, people now know about this and realize how cool the technology is, but also just the wave of just the popularity of the underlying sports. And it is like sports are a little bit of a network effect, right? If no one else is interested, it's not as much fun.

But if all of your friends get interested and, you know, you go from $5,000 to $500,000, in the sport, like, that does create a network effect where, yeah, you want to keep investing into the things so you can kind of stay at the top and beat your friends and stuff, so that does create a network effect. But let me ask the other question. So, again, I think we've addressed why this wasn't just a one-time COVID bump, why this was a little more sustainable, the interest in the interest in motorized sports in general, all this stuff.

But there is the question of valuation, right? Like, so net income goes from $4 million in 2019 to $12 million in 2020, and this is all in euros, right? And I think in your deck, you're saying it's probably going to be around 12, 13, million in 2022. This is a 250 million market cap company in euros. So we're talking about paying 17, 18, 20 times earnings, right? Like, I get there are tailwinds here, but this isn't going to be 30% grower or anything. And, you know, I guess there's the opportunity cost of why am I going to pay almost 20 times earnings for this when we're in a pretty brutal market right now. And there's some pretty cheap stocks out there. Like, why is that?

this the best kind of risk-adjusted return? Yeah, for sure. I mean, there's like two aspects of that. The first is on the revenue line where the company had a very unfortunate supply chain issue in 2021, where effectively in 2019, they were doing 40 million euro. Their business increased 150% basically to 2020. And there was a lot of momentum. for them to sell more products in 2021, but they got stuck with this semiconductor shortage.

And, you know, the company definitely had, they made a lot of mistakes internally in terms of just not carrying enough inventory and some other product issues that they had. But a lot of it's also not their fault because they went from selling 40 million euro a year and to a hundred and, you know, I know this is in Peloton, but you say the story and so much of it does sound a lot like Peloton, right? Yeah, yeah. I mean, I think that's fair to a degree. But where they're basically at with it now is they lost, you know, they basically had a couple

of quarters mid-2020, where they just didn't have the inventory to sell. And they addressed it by the end of the year. and they basically had a record Q4 and they're having a record Q1. And I think they're going to grow top line this year somewhere in the neighborhood of like 50 to 60% year over year. And a chunk of that is just demand that shifted from last year to this year. Another chunk of that is, you know, all these other things that we mentioned. Plus, we're having a massive video game hardware cycle right now. And on the revenue side, basically, I'm pretty comfortable that we're going to have double-digit revenue growth.

It's really hard to know for sure. But from pre-COVID, like 2014 to 2019, their revenue Kager was over 40%. Right. So this was always a fast grower. It was just a much smaller industry. Yep. And, you know, another way to kind of bench. mark this is they have a publicly traded competitor. Thrustmaster is owned by a company

called, I'm going to mispronounce this, but it's Goulet, Goulematt, it trades in France. A plus for effort. A plus for effort. I'm not going to try that again. So Thrustmaster, last year, Thrustmaster read it, a monstrous 2020, just like Endor did. And last year Thrustmaster, on top of the 2020, grew an additional 50% in terms of revenue. And they're also expecting continued strong growth this year. They're projecting growth this year. That's really interesting. Yeah. So what you saw with Endor is basically flat sales from 2020 to 21. And a lot of that's just demand shifting. And then that leads to the obvious question is, okay, well, if you can't buy

indoor, you're just going to buy something else. But the problem is, that, and this is why the riches and niches thing is really interesting, Endor is a monopoly at the high end. Basically, if you're trying to buy something that is more than like a couple hundred dollars or euros, Endor is your only thing that will give you any kind of semblance of quality. So, and what I mean by that is Logitech and Thrustmaster, and there's a couple of other marginal players, they haven't figured out direct drives. They're still using belt-driven technology. Oh, interesting.

Yeah. So you can't really. Is it patent that's provided? It's not, it's not, it's just, it's just, it's just not easy to, to create. And that's why Endor had supply chain issues, because it's just not an easy product to manufacture and to do, and to manufacture it at an adequate cost. Interesting. I mean, just think about it for a second.

Like, I don't know if you've ever used like a Logitech wheel, like the most popular ones, a G9. You're not know, these are when I was a kid. These are plastic wheels. These are plastic. Endor is manufacturing things that are steel, carbon fiber, like real materials that are, you know, automotive grade, right?

And actually, another interesting, you know, twist is that Endor now has a wheel that is interchangeable between a real race car and their own rig. So what basically, Endor is making F1 grade products. whereas their competitors are making toys. You know, so that does make sense, but I'm just pulling up Logitech's financials right now, right? So Logitech, massive company, right? Massive company, and I understand this is not their focus,

but they spent $300 million in R&D in 2022, and that's more than Endor's revenue, right? So I get you, but at the same time, and this will actually bleed nicely to my next position. Logitech tried to buy Endor during that. Oh, did they? I was, when did they try to buy them? I think the company mentioned this in one of their calls, but it was sometime, I think it was in 2020 or 2021.

This will bleed nicely to my next question. I hear you, but I just, I look at that Logitech, uh, R&D budget of 300 billion. I'm like, really, if they, if they really wanted to recreate the Endor thing, like, I get. I don't think they could. Okay. Okay. I think the thing with Endor and this, we've done a number. of like calls with former employees and there's some tegis calls out there too

they're you get a sponsor of the podcast thanks for a lot thanks for loving it up for me yeah and yeah uh shout out to to stream as well but um so there's there's a there's a cultural magnet that pulls anyone who's who really wants to work with the best technology to this company And what you'll see when you talk to anyone in the industry is, you know, it's like comparing, you know, LVMH to, like, coach or cores, you know, like, I looked at Regeneron for a while. And I was just having trouble because very similar to Endor Logitech. I was like, look, regeneron, their annual sales budget is a fraction of Pfizer's R&D budget. How are they coming up with these technologies, Pfizer can't.

replicate. And the thing I consistently got was like, look, it's culture. If you're the top biologist in your field, it's similar to how Google says the top engineer is worth a hundred times the like average engineer, right? If you're the top biologist, you want to go work for regeneron because that's where the coolest stuff is getting done. And yeah, you're going to get paid well at either place. Maybe you'd make more advisor, but you just want to be on the cutting edge of the field and that like really reinforces itself. A couple other things that kind of demonstrate the point. The first is just end or base. basically invented this direct drive wheel.

So they've pioneered it. The founder is still the CEO, and he's viewed basically as like the Steve Jobs of the industry. My last question was going to be about him, yeah. And so he's, you know, he is the guy. And basically, the way that the way that this company is described, it's like a group of simulation racing nerds who have a company. Yeah. So it's, and, you know, a lot of times that, that, what that translates into is like a company that's undisciplined and it's a science project, but this company actually, they generate real earnings.

And the last thing I'll say about that moat there is Thrustmaster used to be the official wheel of Grand Trisno. They lost it to Endor this time. Thrustmaster used to be the official sponsor of a couple of these esports leagues. They lost it. That's awesome. So what you've actually seen is over time, you would think that, you know, they're generating excess profits. This is like a growing industry. You'd think that competitors would come in and arbitrage that.

But what we found is their remote's only gotten stronger and where people have tried to copy them and do things and try to, you know, bribe the tournament sponsors and bribe the, you know, the video games to get those official sponsorships. they're unable to because there's just such a gap in the product, right? And this really, you know, it's really one of these things where you have to talk to people in the industry, you have to talk to the people who actually use these products, and then you'll understand. I wish I could bump that part up to the first part, because that's the most interesting thing that, like, reinforces the moat for Endor that I've heard. Let me ask last question here.

And maybe, should I address the margins? Because there's a margin story. Yeah. So basically, we believe relative to where their EBIT margin, where their operating earnings were in 2020, we believe that they're going to double or triple that over the next five years or so. So what basically happened was in 2020, and historically like pre-2020, they used to do an above 20% EBIT margin. but what effectively happened was their company like their industry blew up right like and they more than tripled their headcount they had to start building a much bigger like basically production capacity and more like fulfillment more people in customer service they had to like

just invest in the business to scale up and that's led to growing pains that's why um 2021 was so painful because they were hiring a ton of people and they just didn't have, I mean, we also had just the supply chain also got really screwed up. But they're at a point now where they've already made these investments and they have enough production capacity to basically more than 3X, the annual turnover, without having to make incremental capital investments. So we're, it's, it's become a story. of operating leverage where the company in their last earnings release said, you know, as they kind of get up to scale, they expect to hit an EBIT margin of at least 25%. Right. And, you know,

they're basically at scale. And the company itself is very bullish. I mean, the founder owns 50% of the company. He really believes in the growth story here. But they see this like massive, you know, continued growth in all of those different segments of the market that I mentioned. And they see this being like, you know, a 300 million plus euro revenue story in, you know, three to five years. And now they have the infrastructure to support that. And as we kind of get closer to that, we should see, I mean, this is going to be obviously a key thing that we monitor is we should see continued margin expansion.

And, you know, in the past, they have demonstrated these margins, and we feel pretty good about the unit economics. And just to benchmark for everyone, you just mentioned 300 million revenue, three to five years out, 25% margins. Hide of COVID, 2020, this was under 100 million in revenues, and this was a 21, 22% margin business. So they're saying, hey, we can be way bigger and we can do way more in profits. Let me ask you last question here. And then I have one unrelated question for you. But last question, you said how they're moving into a little bit on the lower end, right? They're the official sponsor of the Grand Tourismo.

If you get that on Xbox and you want like an Xbox control, it's going to be more than just your plastic wheel. It's going to cost, but it's not going to be their $3,000 rig set up and stuff. And you know, so they're moving into the low end. And that's obviously an opportunity. And I think the first thing that comes to mind when you have a technology product and you move in the low end, you worry, oh, it creates a bigger market, that's the track competition, and you've addressed why that won't attract competition. But I do worry, the history of the highest end brand moving into lower end products is not exactly great, right? Like, you kind of destroy your brand or, yeah, you sell a

couple extra units, but guess what? Your people who are paying $3,000, a lot of them look over and say, oh, we can get 98% of the performance or 50% of the price. Let's switch there. So I do worry as they move into that, do they start impacting the brand? Does that create some weird dynamic? do you have any concerns there yeah um and i'll just make a clarification on like those estimates to the the financial estimates like it's really hard to know for sure you know is this going to do 200 million 300 million there's a range right there's a range and teachers unknowable i hear you and a lot of that will just depend on you know do you think f1 is going to continue to be popular in five years right like and then do you the company is also hired

a lot of talent in the bench. Like they just hired a COO. They just hired people in between. So we have a lot of confidential space on who they've been hiring that they can manage the growth and hit the margins. On the product,

on moving into lower end, it's actually, it's kind of, they're not really moving into the low end. They're moving into a lower end. And, you know, they're moving into like an average sale price of like between 1,000 to 2,000 to like a little bit below 1,000.

So like 700 to 900, 600 to 900, they're not going to be comparable or competitive with like a $100 Logitech wheel or, you know, there's some wheels are even cheaper. They're just not, they're not going to like create plastic toys, basically. They're going to still create their high-end product, but instead of licensing like a McLaren, and they're going to, it's going to have like a Grand Turismo logo and it's going to be for Xbox. And I guess the opportunity with the video game segment is, you know, like there's, by our estimate, there's a few million people who are like more serious in like the esports competition and like F1 racing, there's probably a couple million people out there who would be a customer

of Endor, which translates into them selling about 50,000 to 100,000 units per year. right now. But when you start talking about, like, video games, there's tens of millions of potential customers. And right now, we're having a huge hardware cycle where we just had a new Xbox and PlayStation come out two years ago. And if you've studied the way hardware cycles work in the video game industry, all the best software for those hardware releases typically come out about 18 months after the

initial hardware release because it takes time for developers to. optimize their best titles to get the most out of the hardware. So we just had the signature racing game for Xbox come out in December, November December. It's called Forza Horizons. We just had Grand Tourism of Seven come out in March. And these are kind of like the call of duty and halos of racing, right? So on average, a Grand Turismo game sells about 10 million copies. And force does a little bit less right um now fanatech is the official wheel of both of those games um and you know i just told you that right now they're only selling like 50 000 to 100 000 units per year so we don't know like what kind of attachment rate but you know even if you think

like a sub 1% penetration rate of that player base and you're already getting to like you know 50K plus incremental volume. And the good news is, and we've interviewed the company about this, is they built up their inventory for these products. So they have the inventory to sell. And yeah, like, so we're pretty bullish on that. I mean, it's just,

it's kind of uncharted territory because they're getting into, you know, they're targeting a different end market. But it is kind of like an extension of the ecosystem, right? Because if you get really, really into Grand Turismo and you start watching Twitch, and then you see, like, your favorite racer, your favorite driver using the Vanotech wheel, like, that might make you interested in the product. And then what the company says is, we want people to get in at the entry level so they could start the process

of, like, upgrading their rigs and get more into it over time. Expand that, expand that to him. Yeah. And I think there's actually one topic that I want to talk. about, which I want to address the liquidity of the stock and why I think that this is actually a temporary situation. And I apologize, I don't think I put this in my notes to you. But yeah, right now, the company is, it trades on an OTC orphaned exchange in Germany. And, you know, only 50% of the stock is free float. So the company is actively working on changing that. And they are planning to uplist to the extra exchange in Germany in the next year or two, we, you know, based on their earning trajectory, we think that the company could support a much larger enterprise

value. So the stock is a little bit hard to buy today, but, you know, we believe that when our thesis plays out, it won't be hard to sell. Yeah, look, one of the best things about these I mean, you can get stuck in them. They take a while to buy, but the best thing is eventually a lot of them do uplist. And one of the best, one of the only consistent catalyst I've seen that really works is you take a good company that's on the wrong exchange, you uplist them, and all of a sudden people can buy it and the stock, you know, it works a lot. We mentioned Jeremy Raper was in, he's the one who, where I first heard Endor from years and years ago, but that's one of the best trades he makes consistently it's buy this company backwater stock they uplist to the

US or they uplist to the top thing and it seems like that will happen here because yeah we think the company the way this plays out for us if it works is we think that the company upless and multi you know compound is earnings power and it's not and by the we think it's either going to get into that situation or it's going to be sold right so then we won't have to sell it I was kind of wondering in the back of my head like wouldn't it make sense for just to buy these guys like incorporate them into their events incorporate i i don't know but it's yeah maybe not but thought that was interesting uh look we're talking for over an hour at this point i have one other unrelated question for you but before i hit that talked a lot about

endor we had a lot of really interesting points but want to give you the last word here anything you wish we had hit harder anything we didn't hit that you think we should have fit on endor yeah i mean maybe maybe just in terms of evaluation right like i think it's just kind of given the disruption they had in their supply chain, looking at a backwards-looking valuation doesn't really make sense. There are no, you know, sell-side analysts, so you kind of have to do your own work. That's my favorite type. The way that we see it, and on our numbers, this actually trades for a low double-digit multiple earnings on a forward basis. And, you know, we think, we think earnings are going to two, three, maybe more X over the next five years. So, you know,

we think that we're actually paying a really good valuation and we think that we could so when it when you when you're talking about like getting until we i was telling you before we started like i don't usually buy i it's not my goal to buy like oddball stocks that are like illiquid like this is actually probably the smallest company we own um but if if it's has basically the bar is much much higher to to want to go down into like something that's less liquid or a little bit weird or like an international stock. But, you know, we basically think the risk reward's really great because we think that we can three to five X over the next five years.

And we just don't see a lot of downside. They have no debt. It's, you know, we really like the management team. It's a great product. The risk is that, you know, maybe we overpaid. Maybe it takes a little bit longer to up less. You know, maybe there's a bit of a COVID hangover. Maybe there's some temporary supply chain issues this year that make it, that make the story

extend a bit. We're okay with like that long term. perspective. But we also just think it's super asymmetric and it's also just a company that not a lot of people follow and where we think that we actually got, we've developed a legitimate edge on understanding the story. I think that's right based on some of the stuff you told me. Let me ask one unrelated question to Endor. You list 10 portfolio companies in your thing. One of them is MoneyGram. Are you still following MoneyGram? Are you still involved there? Yeah, I'm still following it. we so what I was actually pretty public um last year I put out my money gram thesis I think I even

did a podcast about it um you didn't come on here how dare you we we talked about it but I think it I think the I think the thesis played out a little bit too quickly unfortunately which basically our thesis was that um it was very likely to be sold and it was and it was sold um and it hasn't been fully sold yet they haven't been fully sold we haven't closed It hasn't been fully sold. And maybe the other thing we didn't mention is we also run, we run two portfolios. One of them is looking for these more growth-oriented companies and the other portfolios event-driven where we do a lot of merger ARB. And it's funny because when MoneyGram announces acquisition, it kind of transitioned from one of our portfolios to another one of our portfolios.

And the environment for merger arbitrage got really dicey this year. And, you know, we actually decided, at first we decided to hold on to it because there was a decent spread. And we understood the story really well. And we kind of liked the idea that, you know, if the deal got busted for whatever reason, like we would actually like to own it, even at a lower price. But we actually decided to sell it a while back. I mean, not that long ago. but you know and that's more of just a market call um we've seen some things in the financing environment that have changed and not just this deal but a lot of other uh financial buyer

oriented deals we we've just gotten a little bit more concerned about um so we actually sold it look i we think it's still we think it's really interesting there's a lawsuit out there um we've done some work on the lawsuit The company has made some really interesting statements about that lawsuit. I could talk about that if you like to. No, you and I can have a quick chat off line. But we're not involved as of the recording. If, you know, we're very interested in the space and maybe we'll get back involved

because we know it so well and we really like the company. Listeners can feel free to reach out. The only reason I ask is, as you said, there's a, I think it's a regulatory investigation. I don't know if it's a, it is a lawsuit at this point. The CFPB is suing them. Yep. The stock, there's, the deal is at 11. The stock as we talk is trading at like 970.

So that is a big, big spread because people are worried Madison Dearborn, the buyer is going to try to use the regulatory crackdown to walk. Obviously, financing environment's gotten pretty bad since this deal was announced about three months ago. So people are saying, financing is going to be tough. We've got a regulatory crackdown. Is the buyer going to walk? off. 970 to 11 is a huge spread, but, you know, the downside is probably in the sixth range, so there's a lot of downside if the steel breaks, too. I think it's very interesting, but we can leave it at that, and you and I can talk offline. I'll just remind everyone, I'm going to include

a link to Lewis's pitch on Endor in the show notes. I'll include a link to his Twitter. So if you want to go reach out to him, talk more Endor, try and figure out what's going on with MoneyGram. Go ahead and reach out to him. But thank you so much for coming on, and we will have to have you on again. Thanks for having me, man. This was a lot of fun.