Off to a great start
Earnings of the latest addition to the portfolio
A couple of weeks ago I published my last in-depth report.
In it, I profiled a very interesting business that had been sold-off by the market for several reasons, some of which I deemed to be temporary and other which I deemed to be outright wrong. Here’s a short summary of the investment thesis:
A 90%+ share of the single workflow its customers can’t operate without. This company exhibits monopoly-like characteristics on the thing that matters most in its industry.
Regulators effectively confirmed the superiority by blocking an acquisition that, in hindsight, did not change the fate of the industry.
Management’s own incentive plan is based on aggressive stock price targets. Boards don’t set stretch targets like that unless they genuinely believe the shares are cheap and the objectives are achievable.
There’s roughly a 10x gap between current revenue and management’s own estimate of the total addressable market — and by management’s own admission, about 80% of the growth needed to close that gap can come from customers the company already has. That’s a very different growth profile than needing to win new logos in a crowded market.
Buybacks have already cut shares outstanding by more than 20% and management continues to simplify the business. Shrinking to become better is almost always a great capital allocation sign.
The company recently reported its first earnings as a portfolio company and the stock enjoyed a mid-teens pop (probably aided by somewhat of a short-squeeze). I don’t know who in their right mind would short a company that’s…
Accelerating its growth
Expanding margins significantly
Repurchasing its undervalued stock aggressively
…but I guess there’s a market for everything! Now, the most important takeaway from the earnings release was (in my view) that the company continues to slowly but steadily put to rest the market’s concerns and that the investment thesis is now playing out faster than previously anticipated.
Let’s take a look at the quarter.