MWI Veterinary Supply, Inc. (NASDAQ: MWIV)
Industry: Medical Distribution
Business in One Sentence
MWI Veterinary Supply distributes animal health products for companion and production animals (including pharmaceuticals, vaccines, veterinary pet food, and supplies) to veterinarians across the United States and United Kingdom.
MWI connects animal health product producers/manufacturers to veterinarians, helping ensure veterinarians have the necessary products for animal health.
Competitive Strategy and Advantage
Currently MWI’s average sales per veterinary practice in the U.S. is roughly $56,000. MWI’s strategy primarily centers on increasing sales per customer through marketing efforts, boosting its sales force, adding products to its portfolio, and expanding value-added services available for veterinarians. Value-added products are the main differentiator in this space. MWI’s value-added products include an eCommerce platform, technology management systems, and special order fulfillment, in addition to things like pet cremation (that’s a thing now?). MWI also pursues selective acquisitions.
MWI may have an advantage thanks to its vast network of products for both companion and production animals and a sales force of more than 500 people. In fiscal 2013 MWI sold more than 41,000 different products sourced from over 700 vendors (22,000 products from 400 vendors in the U.K.). MWI claims to have maintained long-term relationships with key vendors including IDEXX Laboratories, Boehringer Ingelheim, and Elanco.
Other Business Details
-- 97% of MWI’s revenue comes from consumable medicines and supplies, making for a recurring revenue stream. 86.6% of sales came from the U.S. (up from 83.3% in 2011).
-- Independent veterinary practices have historically accounted for about 87% of MWI’s product sales.
-- MWI’s senior management has an average tenure of more than 15 years with the company.
-- 43% of MWI’s fiscal 2013 sales in the U.S. came online (up from 36% in 2011); 96% of U.K. orders are done electronically.
-- Operates 13 distribution centers in the U.S. and one in the U.K., offering next-day delivery service on products stocked in warehouses.
-- 59% of MWI’s U.S. sales came from companion animal market; 41% from production animal market.
-- MWI’s ten largest vendors in the U.S. account for approximately 70% of total sales. Zoetis alone accounts for 20% of sales (down from 24% in 2012 and 2011).
-- Veterinary clinics buy products from more than one distributor and vendors also sell their products to multiple distributors. On the surface there appears to be very little switching cost.
-- The need for the distributor middleman in animal health products disappears over time.
1. What percentage of MWI’s customers utilize the company’s value-added services? How has this number been trending in recent years?
2. What does MWI’s customer and vendor retention look like and what are their trends?
3. Are other distributors in this space offering similar value-added products?
4. How does MWI’s scale and product selection compare to other distributors?
5. Is MWI a necessary middleman?
This is an interesting market, but I am not sure an animal health products distributor (like MWI) is the most appealing opportunity to take advantage of increased spending in the pet industry. As you can see here, spending on pets is steadily increasing in the U.S.: http://www.americanpetproducts.org/press_industrytrends.asp This is a category worth watching, but I'm not sure MWI has a sustainable business model for the long haul. [more]
The subject of growth and value comes up a lot in Fooldom and the investing world in general. I think there are components of growth and value that go into any investment. (Put in the simplest terms, we wouldn't invest if we didn't expect some measure of growth in our investments, whether in gold, stocks, bonds, and so on. And we wouldn't invest in a company if we felt the current price offered little or no long-term upside.)
The first thing that I remind myself is that growth itself is a form of value, especially sustained growth. Chipotle is a good example of this. Chipotle, as a stock, has rarely looked cheap based on traditional metrics. In 2007, following its IPO, Chipotle traded at a P/E of 55-60 and the P/E got as high as 75 in 2008. As the stock market plunged and the economy entered a recession, the stock briefly fell below a P/E of 17 toward the end of 2008. Today the stock is back at a P/E of 58, certainly higher than I would have anticipated when I first invested in the company in 2007.
Chipotle, as I've probably posted too often on this board, continues to knock it out of the park when it comes to financial performance. The company has thus far justified the premium valuation with sustained exceptional growth, recently reporting the best comps growth (17%+) the company has had since its first quarters as a public company. Total aside: just this weekend I went to a Chipotle in DC's Chinatown, and the place was swamped (the line double-backed and wrapped around the entire inside of the restaurant). It took us 25 minutes to get through the line and make our order. No wonder their comps growth has been through the roof, sheesh.
My friend and fellow Fool John Rotonti wrote a great article examining lessons investors can learn from Google's ten years as a public company. Here are two quick snippets relevant to this conversation (emphasis added):
The lesson here is that DCF's and P/E ratios can't be used to reliably value a fast growing company that has the potential to change the world. This obviously begs two questions: How can investors determine which companies are going to change the world (which company will be the next Google, Netflix, Amazon, or Facebook) and how do we value them?...
Above average companies deserve to trade at an above average multiple because they have the ability to increase their intrinsic value over time. Paying a dollar for a dollar is still "value" investing if that dollar will be worth five or even ten (in the case of Google) dollars down the road. -http://www.fool.com/investing/general/2014/08/25/2-lessons-i...
Growth is valuable. The tricky part is finding companies capable of sustaining strong growth over many years, rather than fizzling out after a few years. The way I see it, qualitative factors are what drive a business to deliver superior financial performance: leadership, vision, strategy, and so forth. I start with the qualitative factors and then begin to assess, given market size/opportunity and reasonable growth estimates, what this company can realistically be worth in 5 or 10 years.
Finally, I don't usually invest in a company with an intent to sell. Traditional value investors, on the other hand, are often looking to sell a stock once it hits a certain level. I see the ideal holding period as forever or many, many years. I think it is important to distinguish between the difference ofinvesting to sell versus investing to hold. With my own portfolio I am increasingly focused on the latter. [more]
I have been very intrigued by GoPro and spent some time over the past few weeks researching the company in more depth. I thought I would share my thoughts and findings here for those interested.
GoPro, Inc. (NASDAQ: GPRO)
Sector: Consumer Cyclical
Business in One Sentence
GoPro designs wearable and mountable high definition cameras and provides a platform for users to manage and share their video content.
GoPro’s lightweight HD devices (“capture devices”) and content management/sharing platform -- through GoPro Studio and the GoPro App -- enables users to capture, edit, manage, and share high quality video of just about any activity.
Competitive Strategy and Advantage
GoPro has been developing wearable technology devices “before they were cool” -- the first GoPro product developed by Nick Woodman in 2004 was a film camera that could conveniently be strapped to one’s wrist, allowing users to easily snap a photo of memorable moments (including those underwater) on the go. GoPro’s camera design evolved into what is today an incredibly versatile wearable/mountable HD video device (powered by Ambarella’s chips).
GoPro’s underlying focus is to eliminate the pain points of capturing, managing, creating, and sharing video content. Put in other words: GoPro wants it to be a frictionless process for anyone to capture great video footage, easily (and quickly) edit that footage, and share that footage with others. As we will see below, GoPro’s skyrocketing user engagement numbers suggest that the company is making significant progress creating a seamless content creation process for its users.
GoPro’s strategy starts with and hinges on the development of new capture devices, with specific innovations in mind for technologies such as sensor and digital signal processing and custom lens, audio, battery, and accessory design. GoPro relies on providing small, versatile, and powerful cameras that can capture video in high definition.
The second component of GoPro’s strategy is developing and simplifying its content management, editing, and sharing solutions for users. GoPro acquired General Things, a web and software development firm, in October 2013, bringing on new insights into software to assist this strategy. This content editing and sharing capability helps establish GoPro as a platform and network for its users, rather than only providing a commodity product. GoPro Studio was installed by more than 850,000 users in the second quarter of 2014, during which time the GoPro App was also downloaded 1.6 million unique times.
“How do you get millions of people on your platform sharing compelling content and giving you credit for it? You build GoPro.” -- Nick Woodman
The most recent strategic development is the creation of GoPro Network, a media platform to share both original content (such as mini-documentaries filmed with GoPro devices) and the best content uploaded and shared by GoPro users. In early 2014 GoPro entered into an agreement with Microsoft to develop and launch the GoPro Channel on Xbox Live, and also became a platform partner with Virgin America.
Founder and CEO Nick Woodman says GoPro aims to “leverage our customers as the world's largest production force.” Truly a Rule Breaker vision, in my eyes. This “production force” includes amateurs (the vast majority of us) as well as professionals. There is even a GoPro Film School, launched in 2013, which teaches people how to shoot, edit, direct, and effectively gain exposure (through social media outlets) with their GoPro videos.
“Our customers are the best storytellers in the world. And we have this phenomenal opportunity to build our media business on top of that, and leverage our customers as the world's largest production force.” -- Nick Woodman
The GoPro channel launched on Xbox Live on July 22, 2014, and had over 500,000 downloads in less than one month, with an average engagement time of nearly 30 minutes in the U.S. GoPro is empowering hundreds of thousands of “content creators”, branching out its platform to enable easy editing and sharing for GoPro users, and is now developing its social media and overall media platform to further spread the content (all of which serves as an advertisement for GoPro cameras, thus reinforcing the cycle of content creation with GoPro). Keep in mind that GoPro cameras are already used in more than 70 TV shows.
Not only does GoPro provide superb versatile cameras that allow people to capture special moments in high resolution (whether it be skydiving, a POV of a pelican’s first flight, a toddler’s first steps, and everything in between), GoPro also provides a platform that enables quick and easy content management, editing, and sharing capabilities. An average of 20,000 videos per day are exported by users on GoPro Studio, and more than 6,000 videos uploaded to YouTube each day are tagged GoPro.
“We’re a hardware company but we’re turning more into a content company. The camera is just the tool to get to content…. Most people don’t view GoPro as a media company but we’re quickly changing what media is.” -- Adam Dornbusch, GoPro’s head of content distribution
What’s most impressive to me is how engaged people are with GoPro’s content. In the most recent quarter the number of GoPro videos published on YouTube increased 160% year-over-year, views on YouTube increased 200%, and video minutes watched on YouTube increased 270%. GoPro is the #1 brand channel on YouTube, and there is little doubt that the company’s content is engaging viewers. This is a gold mine for both licensing and advertising opportunities -- not to mention free publicity for GoPro -- which makes the company’s expansion into the GoPro Network all the more appealing as an avenue for future growth.
In June 2014 GoPro brought on Tony Bates as president and its board of directors. Bates, who most recently served as CEO of Skype at Microsoft and has also served on the boards on YouTube and LoveFilm, will head up efforts to scale GoPro’s media operations. Other notable board members include Kenneth Goldman, CFO of Yahoo, who has also served on the boards of companies including Ambarella and Infinera. Venture capitalist Peter Gotcher, who serves on the boards of Dolby Laboratories (where he is chairman) and Pandora Media, joined GoPro’s board in May 2014. In short, GoPro is not lacking in leadership talent.
“We’re in the business of enabling great content, but we’re taking it to a level that’s never been done before, where we are enabling the entire life cycle of the content from the initial hardware all the way through the distribution thereof.” -- Nick Woodman
I don’t see any clear second in this space when it comes to GoPro’s media strategy -- nothing quite like it has been done, and it will be difficult for any other camcorder companies (Sony, Garmin, Polaroid, etc.) or media channels to replicate the community and content of GoPro. If GoPro can build and scale this media platform, I think we will have a solid long-term market outperformer on our hands.
I initially perceived GoPro as a company developing and selling a commoditized product (video cameras), but GoPro is much more than that. GoPro is as much a content and media company as it is a hardware company. Founder Nick Woodman, who is 38 years old and owns 46.7% (56.59 million shares) of all shares outstanding, has a clear passion for GoPro and carrying out the company’s vision. Woodman is an extraordinary entrepreneur and exactly the passionate leader I like to see at the helm of a young business.
The holistic vision for GoPro as a hardware and content company -- backed by the leadership of Woodman -- will be, in my opinion, exceedingly difficult for other players to replicate.
Over the past four quarters GoPro brought in $1.03 billion in sales with a net income of $33.8 million. Revenue grew at a compounded annual rate of 148.2% over the past three years through 2013, including 87.4% growth in 2013. In the most recent quarter, total revenue grew 38.1% year-over-year to $244.6 million. As of the first quarter of 2014, 53% of sales came from outside of the U.S. (up from 35% in 2011).
Top line growth is always nice to see, but what especially impresses me about GoPro is the company's free cash flow production. GoPro produced $13.2 million in free cash flow in 2011, but that number has ballooned to $89.4 million over the past four quarters ending June 30, 2014. This free cash flow production has helped GoPro maintain a healthy balance sheet of $104.9 million in cash with $41.4 in debt, making for a net cash position of $63.5 million. (This does not include the $200.8 million in cash raised by GoPro from its IPO.) In other words, GoPro is producing sufficient cash to finance product development as well as expansion into its content and media segments.
GoPro is plowing money into product development, with R&D expenses increasing 121% year-over-year in the first two quarters of 2014 to $63.4 million. Of GoPro’s 800 or so employees, approximately 300 are focused solely on product development. Of those 300, roughly 200 are focused specifically on the development of hardware (e.g. the design, look, and functionality of the video cameras). The other 100 are focused on software development, including content management and platform-based software (initiatives relating to the GoPro Studio, GoPro App, and GoPro Network). Per its prospectus, GoPro has 42 issued patents with 72 patent applications pending in the U.S. and 15 issued patents and 12 patent applications pending outside the U.S.
GoPro is focused on innovation and is already producing free cash flow to fuel this innovation, although it means that the bottom line will likely see sporadic performance in the shorter-term. This means we will probably see higher multiples (and more volatility) with the stock, which doesn’t bother me. GoPro is quickly growing under the guidance of a passionate, dedicated, and invested leader, and long-term results are what I am most interested in. Nick Woodman and company are very much focused on working toward a long-term vision, and at this point it appears the company has the financial backing to help make this happen.
GoPro by the Numbers
** GoPro’s products are sold in over 100 countries and more than 25,000 retail stores.
** GoPro’s HERO cameras controlled 45% of the U.S. camcorder market (by dollars) in 2013.
** GoPro’s accessories represented a 4% share of the U.S. camera accessory market (by dollars) in 2013.
** Sold 8.5 million HD cameras since 2009 (3.8 million in 2013).
** Average of 20,000 videos per day exported by users on GoPro Studio, which has been downloaded more than 5 million times in total.
** Over 6,000 videos uploaded to YouTube each day are tagged GoPro.
** GoPro has over 7.6 million “likes” on Facebook, 2.7 million followers on Instagram, 1.1 million followers on Twitter, and 2 million subscribers (568 million video views) on YouTube.
GoPro is currently valued at $5.5 billion, trading at a P/S ratio of 5.3 by my calculations. The P/E ratio sits at 137, but keep in mind that this reflects the company’s investments into R&D (which reduces the bottom line). GoPro is trading at a P/FCF ratio of approximately 87. The stock isn’t cheap, and much is riding on the company’s future performance. GoPro’s lofty valuation in the short-term doesn’t concern me to a great degree, although investors today must recognize that the stock will be volatile and the company will have to perform very well in the coming years to deliver market-beating results to investors.
Over the next five years, I believe GoPro can expand its sales at an average pace of 25% annually. This would lead to total sales of more than $3 billion in 2019. Slap a P/S ratio of 3 on that and you have a market value around $9 billion, slightly less than a double from today’s levels (not including potential share dilution, which we will have to watch closely). With a P/S of 5 we reach a value of $15 billion in 5 years, well more than a double from today’s prices.
There is no other company with the offerings or strategy of GoPro, so it will take some time to figure out how to best analyze the company from a valuation perspective compared to its peers. As a reference point, Garmin’s market cap currently stands at $11 billion with a P/S of 4. Netflix has a market cap of $28.3 billion with a P/S of 5.8. GoPro is growing significantly faster than both companies and will likely command a premium valuation so long as it continues growing at these levels.
** GoPro’s strategy to become a media channel is still in its infancy and won’t generate revenue in 2014. If this move goes kaput, GoPro’s growth prospects and strategy will be seriously dented.
** GoPro is partially operating in a commodity business, despite branching out into content management and media channels. Cameras as a whole are becoming smaller and more powerful, potentially diminishing how differentiated GoPro’s physical cameras can really be. My feeling is that this is played up by many analysts to be a greater risk than it really is (I think people misunderstand how differentiated GoPro’s offerings really are), but it remains a potential risk nonetheless.
** GoPro currently affirms that mobile technology and smartphones complement its products, but the company’s products could face stronger competition from smart watches and other wearable technologies. With GoPro’s focus on product development -- both from the hardware and software perspective -- I am confident the company can keep the performance of its products at the front of the pack, thus enabling its users to continue generating the incredible content that fuels the GoPro Network.
** GoPro’s strategy and vision are undoubtedly tied to Nick Woodman. If Woodman left the company anytime soon or got hit by a bus, I would have to seriously reconsider the long-term thesis of GoPro as an investment.
Foolish Bottom Line
One of the advantages of GoPro’s strategy, according to Woodman, is the company’s laser-focus on its vision, whereas other competitors like Sony and Garmin are competing in a variety of electronics markets (not just video cameras). GoPro is focused on providing the best hardware and software to help its users tell their stories, and in turn share that content with others. This makes for compelling and engaging content and the growing network that is GoPro. Woodman describes this strategy as a “differentiated, defensible, and exciting business opportunity,” and I am inclined to degree. This will be a challenging model for anyone to successfully replicate.
GoPro enables people to self-document themselves engaged in their interests and passions. Even with the impressive engagement numbers highlighted above, the percentage of GoPro content actually uploaded and shared by its users is still in the single digits. GoPro’s opportunity going forward is three-pronged:
1. Continue developing world-class cameras capable of capturing high definition footage in a versatile way.
2. Refine and improve the software end of the business, making it a quick and painless process for users to edit and share GoPro footage through GoPro Studio or the GoPro App (ideally increasing the percentage of GoPro footage that is uploaded and shared by users).
3. Further leverage the content created by GoPro users worldwide through GoPro’s media channel, original productions, and social media networks.
I am yet to find another company pursuing a similar strategy to GoPro, and I believe GoPro’s vision and competitive moat are much stronger than many give the company credit for. Nick Woodman and GoPro have come a long way in ten years, but the company’s global growth story is just getting started.
I started a position in my portfolio a couple weeks back and look forward to following the company’s progress. Like I said, this will probably be a very volatile stock (especially following the IPO) but I like the long-term prospects of the business (and the stock) the more I learn about the company. I’ll be following along for the ride.
P.S. My four favorite GoPro videos at the moment:
GoPro: Fireworks From A Drone: https://www.youtube.com/watch?v=PvkcqgpZJCw
GoPro: Highest Road in the World (mini documentary) - https://www.youtube.com/watch?v=DwV-Im0kGqg
GoPro: Epic Roof Jump - https://www.youtube.com/watch?v=f0xyzj545tc
Superman With a GoPro: https://www.youtube.com/watch?v=H0Ib9SwC7EI
P.P.S. For more on the story of Nick Woodman and GoPro:
GoPro: Our Story - https://www.youtube.com/watch?v=048YByO2vr0
How GoPro Made A Billionaire - https://www.youtube.com/watch?v=Gd-k-395KtA
A Conversation with GoPro's Nick Woodman - https://www.youtube.com/watch?v=l9d6Dk3K4Xk&feature=yout... [more]
zulily, Inc. (NASDAQ: ZU)
Sector: Consumer Cyclical
Business in One Sentence
zulily is an online retailer offering customers a fresh selection of new product styles and deals launched each day.
zulily launches a fresh sales event from different vendors every morning which lasts for 72 hours, with deals typically more than 50% off the suggested manufacturer’s price. Most of the products sold through zulily come from emerging brands and smaller boutique vendors -- providing an opportunity for these smaller brands to gain exposure by offering great deals for a short amount of time to a large consumer audience.
Competitive Strategy and Advantage
zulily sees several strategic areas to expand the business. First, testing new marketing channels and campaigns to attract and retain new email subscribers and convert existing email subscribers into customers. zulily also wants to boost customer loyalty and repeat purchases, which is currently pursued by offering compelling deals in a fun format each day. The company aims to add new vendors with unique merchandise to its lineup of vendors, further boosting the value proposition to zulily’s base of customers. In addition, zulily continues to invest in its mobile platform as well as international expansion outside of North America.
zulily’s competitive edge comes from its niche focus, targeting moms who are purchasing products for their children, themselves, and their homes. By building its network of vendors, zulily is offering deals that cannot be found elsewhere. zulily itself has minimal inventory -- the company doesn’t usually purchase inventory from vendors until customer orders are placed -- and can experiment with a wide array of products and vendors on a regular basis. Because particular deals on zulily are short-lived, there is a sense of urgency for customers to take quick advantage of a deal that is appealing to them on zulily (similar to the “treasure hunt” at TJX stores).
Other Business Details
** Children’s apparel is zulily’s largest product category, making up 43% of total sales in 2013 (down from 55% in 2012).
** In addition to children’s apparel, zulily’s other current product categories are women’s apparel, children’s merchandise, and “other merchandise.”
** The average value of an order placed on zulily during 2013 was $54.75.
** 83% of sales in 2013 came from repeat customers.
** In the 4Q 2013, roughly 45% of North American orders were placed from a mobile device (up from 31% in 4Q 2012).
** Cofounders Mark Vadon and Darrell Cavens together own 24.3% of all shares outstanding.
** zulily typically doesn’t have long-term agreements or exclusive arrangements with its vendors, but its business model depends on having a substantial number of vendors, new products, and deals.
** eCommerce is obviously a very competitive field, and zulily is a much smaller player compared to behemoths like Amazon.com.
** zulily has significantly slower shipping/delivery times and higher shipping costs for consumers as compared to other eCommerce players.
1. Are there any international eCommerce players with a similar business model to zulily?
2. What is the rough size of the children’s/women’s apparel market? Is zulily planning to branch out into other product categories, or focus on these niche markets?
3. zulily cofounders Mark Vadon and Darrell Cavens came from Blue Nile (which Vadon cofounded). What is their end game with zulily, and do they have a longer-term focus with zulily than they had with Blue Nile?
Questions and input always welcome! Any zulily shoppers here?
David K [more]