Sharing my top positions here.
A few points / caveats:

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Still bullish on $MNTV, but still a bit annoyed with their decision to merge with $ZEN on those terms. I ended up selling 50% of my MNTV, and took 20% of that and bought $ZEN, since I think their getting a sweet heart deal and their stock got hammered. (I won't buy more since I think $ZEN is a fine but not great company, at a fine but not cheap price (before the drop)
Finding discounted ‘hidden gems’ business lines within a larger company
It’s no secret that now more than ever before you have to pay up for great businesses.

For example, over the past 15 years, a majority of my portfolio has been in SaaS (Most of my career has also been in SaaS). However, with the average SaaS company trading at a >24x revenue multiple (source: Bessemer Cloud Index) and top companies at over 50-75x, I’m increasingly concerned about an across-the-board compression in revenue multiples in valuing these companies. This is especially true with the concerns of mild inflation and interest rate increases.

As a result, I’ve started to look for and invest in ‘hidden gem’ business lines that trade at a discount probably due to the fact their metrics are hidden within a large organization. I have 3 criteria:

  1. The ‘hidden gem’ is a fast-growing business with a good product in a large TAM (basically all criteria you’d apply in assessing pure-play high growth businesses)

  1. I don’t expect any improvement in operating metrics in either the ‘hidden gem’ business or the rest of the business. I rely purely on arithmetic. Since the ‘hidden gem’ is growing far faster, it’ll become a larger and larger part of the overall business, and soon the overall business ~= hidden gem business making it a pure-play.

  1. If the ‘hidden gem’ business line were to be trading close to its pure-play peers, its valuation would be around or greater than the valuation of the entire company

Let me explain with a few examples

Before I do so, it’s important to note, while I plan to continue adopting this strategy since I think there is good upside with a margin of safety, it does have some risks or at least is ‘making money the hard way’ in a bull market. The risks are:

  1. ‘Hidden gems’ can stay ‘hidden’ for longer than you expect

  1. The operating metrics are not as clear since it’s part of a larger business. You need to spend time going through earnings call, decks to truly understand this. Even then, you may have to make some assumptions

E.g. I sold a lot of my $TWLO to buy $VG over the past ~2 years. I’ve done well. Up over 100% on $VG and think there is still some room to grow in their CPAAS hidden gem. But my avg selling price of the pure-play $TWLO was $145. If I had just held onto it, I would have made 150%!

Let’s take a look at $VG as an example.

The total valuation of $VG is $4.5B, for a company projected ~$1.4B in revenues this year. Its overall growth isn’t exciting enough for the growth investors and its overall profitability isn’t high enough for the value investor.

But looking at the individual business lines, it tells a different story. $VG has 3 business lines

Cash cow - Consumer Phone Service. Gone from 100% of their business to ~22%. Predictably declining revenue but with $185M annual cash flow.

UCaas / Communication as a service: Great market with companies like $RNG flourishing, but competitive and $VG lags (only ~10% growth) due to historical focus on SMB. 35% of their total revenue

‘Hidden Gem’ - CPaaS / Communication API: Similar business as Twilio. $VG has 40%+ growth and now ~43% of total revenues.

Critics may argue that Twilio is a significantly better product / business. I’d agree. $TWLO is a great business. But I also do think B2B CPAAS is a HUGE market that isn't a winner take all. Plus, I believe $VG has particular strengths in areas such as international, video, and companies wanting a single vendor for UCAAS/CPAAS. That shows up in the numbers and is mentioned in the calls. This checks criteria #1 for me.

Now let’s look at a sum of the parts valuation.

Even applying a modest 8X valuation (compared to ~25X for Twilio), I believe the value of the CPAAS business is $5B or greater than the entire market cap of $VG. This checks criteria #2. And the consumer VOIP business is a safe bet likely to generate $600M cash flow in the next 5 years and I assume only a modest residual value. All-in-all I think $VG is 73% undervalued today. And the ‘hidden gem’ which is 43% of business will only become large purely by arithmetics (criteria #3)

2 other 'hidden gems' I’ve invested in:

$AKAM. It has a $1B ARR security SaaS business growing 30%+. Security + SaaS is hot. Given the total valuation is $17B of $AKAM, it’s 17x security ARR. And security is only 35% of their business. The other 65% is CDN, which is also a good business to be in. Just ask $NET.

$MNTV. Fka Surveymonkey. Their enterprise business is growing nicely around 25-30% which I believe is worth at least the total ​​market cap of $3.67B. However, the larger business is the self-service product that you’ve probably used. Slower growth, but nice product and strong cash flow.

Ironically activist investors have recently gotten involved in both $VG and $MNTV to sell all or parts of their business to unlock ‘value’. Maybe these hidden gems are not / will not be hidden much longer!
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Featured earnings for the week of Oct 18
Earnings season (finally) getting into full gear!

So many interesting companies announcing earnings next week. Here are is the Fincredible Featured list. View all here.

Here are some I own / or particularly interested in

$JNJ - very interested to see results in the medical devices segment. Specifically are their signs of closing the gap with $ISRG with their new platform and are elective surgeries coming back

$ISRG - flip side of the $JNJ narrative. I love it when competitors announce close to each other :)

$NFLX - international subscriber numbers

$T - update on discovery spin-off, dividend and 5G capex

$XM - $MNTV is my top 3 holding based on thesis they are making inroads in enterprise market, which $XM dominates. Big enough market for both but want some context.

A few companies like $PG on inflation numbers, but I suspect @awallis will be kinda enough to provide a MacroTalk update on this topic again

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