I recently wrote a deep dive on PayPal. It's free & linked below. Always open to any questions, comments or criticism. 🙂👍

I'm going with Revolve Group for the Commonstock competition.

This thing is a consistent 20% compounder with expanding margins fetching an earnings multiple around 20X.

As a consumer discretionary e-commerce play, many are worried about how the next several quarters will look. To me, this is a special exception and will buck the negative trends analysts are currently assuming.

Here's why:

This is an e-commerce player, but a unique one. The pandemic was NOT good for this company, but it's lumped into that aggregate beneficiary bucket. I'm excited to see how Wall Street reacts to its 2022 results.

Go Revolve.

How is it already earnings season? I feel like at this point the "season" is really just 12 months long at this point. Excited for all of the information coming our way in the near future. Exogenous tailwinds are long gone. Now it's time to see which holdings were reliant on those tailwinds to fundamentally execute and which can instead rely on a more durable, sustainable value proposition/advantage/moat.

One thing that has me somewhat worried is the continued strength of the dollar. Companies like Match Group saw this as a 500 bps revenue growth headwind this quarter, but it now could be even more severe -- as crazy as that sounds. CFOs can do their best to hedge away some of this currency risk... but eliminating it is not realistic.

Which companies are you worried about this quarter? (For me was Upstart but it already pre-announced).

Which companies are you most excited about? (For me is Revolve Group which typically smashes estimates and has a business model that should hold up relatively well in this environment).

This is section one of Tomorrow's News of the Week Post. Thought I'd give Commonstock a lil sneak peak! I'll link the trade when it gets entered.

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This week, I started a position in Lululemon and it will be the topic of my next deep dive after PayPal is published. For this issue, I wanted to provide a condensed (I promise) view of what I see in the company that excites me as well as my path for building the position. For my Shopify overview, there was pushback for how long it turned out to be. I’m going to do my absolute best to keep this overview short, sweet and still packed with information.

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a) Basics

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Lululemon is an athleisure apparel company with roots in Canada. The vast majority of its sales come from direct to consumer e-commerce and owned-stores which both serve up key company benefits for the firm such as holistic access to its 1st party user data to help guide product releases. In my now biased view, Lulu has a chance to join Nike and Adidas in terms of ubiquitous global clout and presence. And while there’s a several years-long way to go to get there, it’s that process playing out which would provide immense potential shareholder value.

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b) Performance

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I view this company as a high probability 15% revenue compounder for the long term -- which is where its team has guided revenue growth for the period 2021-2026. In 2018, Lulu offered long term 5-year targets that it eclipsed ahead of schedule across the board by several quarters to give an idea of its ability to overdeliver. And the runway is quite long. Lulu estimates its total global addressable market opportunity at $650 billion with its 2021 annual revenue representing around 1% of that. Since 2019, it has shown a keen ability to take more incremental market share within adult active apparel than any other company. So the opportunity is immense and Lulu has taken advantage since its inception.

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The Canadian firm has broad unaided brand awareness across North America, but carries very little clout internationally. Still, it has compounded international sales comfortably above 30% for the last several years with roughly 30% annualized growth expected to continue through 2026 as it gains brisk traction. There’s a large cohort of customers especially in Europe and China that should naturally be drawn to a brand like this -- so far, so good with much more work to be done.

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In terms of margins, performance here has been largely positive as well. The company’s selling channels are inherently higher-margin than wholesale endeavors, and so it boasts a lofty gross margin for a retailer. Specifically, this metric eclipsed 58% during the heat of pandemic tailwinds but has since cooled back off towards 53% -- still strong and better than most in its space. Just 11% of its sales are via “other” vectors which include lower margin wholesale.

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Since Lulu’s 2018 analyst day where it offered the targets it easily beat, the company has compounded earnings and revenue at 27% and 24% respectively. As a result, margins have gone up with operating margin specifically reaching a robust 22% -- and expansion is expected to continue through 2026. Interestingly, the company’s owned stores boast its best margins out of any selling channel as its complete vertical integration allows it to command a larger chunk of the profit pie. These owned stores possess an operating margin pushing 26%, and as brick and mortar shopping returns, that could push unit economics higher with owned-stores becoming a larger chunk of total sales. Impressively, comparable store sales soared 24% YoY last quarter on the heels of some difficult comps with store productivity re-surpassing pre-pandemic levels. That was wildly impressive to me especially considering it’s despite China -- representing 15% of its total stores -- shuttered during the period.

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Furthermore, in-store and e-commerce shopping both effectively raise a customer’s engagement with the other Lulu selling avenue. For example, its e-commerce conversion rate has risen 10% over the last few years with credit given to its omni-channel proliferation. This engagement juicing also comes without more customer acquisition cost making it an inherent margin tailwind as well. I’d just like to point out here that Lulu’s margins are already comparatively excellent. There may be a tad more margin expansion to come, but it will be subtle and that’s entirely fine with me as long as compression doesn’t become an issue.

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In terms of capitalization, the balance sheet is a strength for Lululemon. It has $1.3 billion in cash with another $400 million in current liquid assets plus zero debt. It bought back $813 million, or a little over 2%, of its shares in 2021 which represents a doubling pace vs. the previous 3 years. It’s leaning in here as its stock gets shellacked.

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c) Future Opportunities

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d) Leadership and Hiring Trends

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The company’s founder is no longer involved with Lululemon and has a somewhat colorful history. I’ll cover that in the deep dive but for the sake of brevity will focus on current leaders here.

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Hiring Trends Via LinkedIn

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e) Risks

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The main risk for Lululemon is shorter term macroeconomic volatility. Today’s economic cocktail of record low consumer confidence, generational high inflation and tanking savings rates will all inevitably weigh on discretionary spending. For a firm like this one which caters to a generally affluent shopper, it will be somewhat insulated from this pain, but certainly not immune. Macro creating more fragile customers also could present another possible issue: Shoppers flocking to cheaper brands. There are countless companies playing in Lulu’s space and most come at a lower price point. So as wallets are stretched, those fringe customers who can just afford a Lulu shirt may gravitate to a Gymshark shirt at half the price. I think Lulu’s superior quality will allow them to be somewhat resistant to that phenomenon, but we’ll see.

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We also must consider hectic supply chains as a risk for retailers most effectively matching supply and demand. Many of the largest have struggled to do so, but Lululemon’s vertical integration surely provides timely support here. Again, it’s resistant here, but not immune.

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This team has also not done all that well with M&A. The MIRROR acquisition could very well eventually be written all the way down as it jumped into a faddish trend at the heat of the pandemic. Thank goodness it didn’t try to buy Peloton. I still think MIRROR can enhance Lulu’s overall omni-channel value proposition but this deal is not off to a great start and it surely overpaid when playing Monday Morning Quarterback with the luxury of hindsight.

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Finally, athleisure got a somewhat large boost from stay-at-home orders. No longer did employees have to wear a suit to work, and many embraced Lulu’s apparel niche as a result. Was that the reason it was able to reach its long term targets so soon? Or will the momentum be more sustainable than that? Work from home is not totally going away and Lulu had been compounding long before Covid-19 entered society’s vocabulary -- so I’m optimistic, but time will tell.

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f) Expectations and Plan

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At 26.8X NTM earnings, Lulu trades right at its 5-year earnings multiple average of 27X. At these prices, I think a few things are true. The deal is compelling enough to start a position and there could also very well be more downside ahead. Specifically, 21X forward earnings looks like it will offer Lulu’s stock with significant support and I’ll use the 21X to 27X multiple range as a guide to filling out my position. With this in mind, I started VERY small with just 18% of a full position. It’s always a marathon and never a sprint, but today that may be even more true.

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Furthermore, the earnings estimates for Lulu and public companies could be coming down over the year as the economy weakens. I would point out that Lulu has a wonderfully consistent track record of beat and raise, just boosted its own estimates last month and has seen analyst estimates rise accordingly, but these are unprecedented times.

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Based on my preliminary research into the company and historical results, I think the following 5 scenarios encapsulate where Lulu could be in the next 5 years. I would point out that estimates like these include several rough projections making accuracy a rarity. Please take this with a large grain of salt. Results could surely vary and I do try to lean pessimistic whenever possible when building these models.

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Sold ~5% of my stakes in $FROG and $DUOL (will link the trades when they're entered here at some point today).

Had been adding to both all the way down, and we've now gotten ~50% pops from both. I continue to be excited to own both companies as neither have done anything but execute since going public amid a wildly hectic and dynamic backdrop. I continue to think 2022 will be about staying nimble which I accomplish with cash.

Happy to add back the small pieces into more market turbulence. Also happy to do nothing.

Have a great weekend friends!

Bumble -- Match Group’s most formidable competitor -- released a fiery blog post this week throwing quite a bit of shade at Match. It accused Match of copying its product and some poor behavior within its apps while trying to establish itself as the kind vendor in the concentrated field. I would mention that massive dating apps will inevitably deal with bad actors and Match (not just Bumble) has focused heavily on limiting these outcomes.

But that’s not the main point I wanted to make here. Companies don’t send notes like this out of positions of strength -- but weakness and insecurity. Perhaps Bumble should focus on Hinge quickly passing it as the 2nd most popular dating app globally rather than getting upset with them for being better at competing. Match is eating their lunch -- Bumble can get mad about it or they can be better. It’s their choice and they seem to have made the wrong

one. It’s not illegal for Tinder to emulate the female-first offering of Bumble, it’s a good business decision and something I as a shareholder applaud.

If Bumble were smart (and regulators allowed it), they would sell to Match Group in an instant. The synergies associated with combining Match’s 50%+ global market share with another successful app would be compelling to say the least, but Bumble won’t sell. Its founder came from Tinder and left in a not-so-amicable way. To her, this is clearly personal and if I were a Bumble shareholder that would gravely concern me. Business is not personal. Match is a better company, Match boasts a more sustainable business model and this somewhat childish blog post merely reiterates that to me.

SoFi's Anthony Noto interviewed with Morgan Stanley this week. I didn't double check for typos so I apologize in advance. Here are my notes:

SoFi’s attempt to insulate itself from Macro-cycles is not new. Not only has it sought to do so through product diversification and the bank charter lowering cost of capital, but by adding more funding options as well. In 2018 when the taper tantrum was wreaking havoc on markets and capital markets grew timid, SoFi aggressively expanded its funding diversification. This ambition 4 years ago is paying off today.

The banking charter making loan holding more flexible and profitable helped greatly, but SoFi still taps into whole loan markets when the economics are better than simply holding. Its commitment and consistent delivery of variable profit margins per loan of 40-50% along with its relatively affluent borrower cohort have both kept institutional demand for its paper robust through all of this. SoFi’s 7-8% loss rate target is not a goal, but an imperative for the company -- this is how it maintains investor confidence as macroeconomic tailwinds shift to headwinds.

Luckily, SoFi’s institutional demand is satisfied in the Whole loan market and so it hasn’t needed to use ABS markets in a long time. Whole loan markets are more often “hold-to-maturity” players that don’t rely on quick flipping of loan pools to generate profits like in ABS markets. Whole loan markets are far more durable across economic cycles than ABS markets are. These whole loan purchasers -- per Noto -- are seeking out higher quality borrowers

and that’s exactly what SoFi provides.

SoFi’s weighted average cost of capital has risen in the very recent past with the sharp rise in treasury yields it uses as benchmarks. Luckily -- and again thanks to the financial health of SoFi’s typical consumer -- it has been able to pass on the vast majority of this cost increase to its borrowers with volumes still in line with expectations. The end of stimulus juicing loan demand is surely helping with pricing power here.

Noto told us this week that the financial services segment for the company would become contribution profit positive by the end of the year. Management likes to say that the segment is already there when you sub out marketing costs but that item was a massive piece of the top line growth allowing for this profitability inflection. By the end of 2023, the segment will be profitable enough to also cover fixed costs and will thus be generating a positive net operating profit like its other two segments.

Noto also reiterated that stock-based compensation as a % of revenue would fall from the mid 30% range to single digits by 2024. This is when SoFi expects to become GAAP profitable -- but this timeline is wildly conservative. It assumes student loans remains challenged with the moratorium through 2024 and doesn’t factor in things such as improvement in the home loan business or expected revenue segments blooming from the banking charter such as serving in a sponsor bank role for Galileo clients. These high probability tailwinds would move that profitability schedule up materially.

This has been the central piece of SoFi’s rapid success in attracting direct deposits (which greatly bolsters its customer lifetime value (CLV)). How? It has allowed them to pocket an additional 1.5% in cost of capital to offer the 1.25% APY savings rate profitably. It’s the only company with this rate in place without any deposit maximums. As long as the company stays above $100 million in new deposits per week, SoFi does not plan to raise this rate again. But it doesn’t sound like this rate will be lowered either which many, many analysts

expected out of the gate.

“We’ve only passed 25 basis points of the Fed’s rate hikes onto our consumers (raised APY from 1% to 1.25%) and it’s really doing well where it’s at.” -- Noto

This also puts SoFi in a better bargaining position with those aforementioned whole loan investors. Why? It gives SoFi far more holding period flexibility which raises the bar for what these investors must offer to justify SoFi forgoing the added net interest income.

SoFi was missing a multi-core technology across all products. It had it for lending and payments with Galileo but will use Technisys as a unifying layer to build one singular platform encompassing every product that an enterprise customer could need while also allowing SoFi to fully vertically integrate its product suite to drive faster innovation and lower cost.

“Technisys is really brining clients to the table from the traditional financial industry that wouldn’t have come to the table with just Galileo before…. it’s really complementing Galileo… Galileo was a huge home run and it looks like Technisys will be too.” -- Noto

“The headline is that this is in case of emergency. I’ve lived through the GFC, and dot.com and we’re obviously going through a huge dislocation now… we wanted to give our Board the option to reverse split if we enter an even more irrational market. Our confidence is in no way reflected in the ask to vote. What is reflecting is prudent management… we’re one of the few companies to exceed Q1 expectations and raise guidance.” -- Noto

SoFi will become an insurance principal at some point. It’s currently shipping about

a billion in premiums per year to referral partners but wants to bring this in

house in the coming years.

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service where you get a whole host of member benefits in loans, investing rewards

and more if you direct deposit with SoFi. This will be free for direct deposit

users but will be a paid subscription for others.

Anthony Noto has entered Pac-Man mode with his insider buying pace. In the last 10 months, he has now made 22 separate purchases worth $3.9 million. This represents 2.6% of his combined net worth with nearly 15% of the net worth now in common shares of SoFi (not including options) alone.

Doug Bland (head of PayPal Consumer) interviewed with RBC today. Here were the key highlights:

This sucks. It could continue to suck (or not) depending on how the macro-backdrop & coinciding monetary policy shakes out.

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But for now it sucks. Even with my 21.5% cash position, it sucks. I'm still 78.5% invested in shellacked growth land.

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& just wanted to let whoever needs to hear this know that there will be brighter days ahead at some point & you're far from alone. Nobody is doing well right now. If it sucks for you... ditto.

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For me it's about patience, humility & cash preservation. This too shall pass & this too shall suck less eventually.

There are 11 different investor conferences that my holdings are participating in this week. I wanted to offer the highlights of each (I'm only through 6 of them so far) before I published the more detailed report on Saturday:

SoFi

CrowdStrike

Progyny:

Revolve Group: