"With your mind power, your determination, your instinct, and the experience as well, you can fly very high."
- Ayrton Senna
When hunting for new ideas on the long side, I look for at least two of the following:
- High probability, asymmetric risk/return with catalyst(s)
- Underappreciated growth story entering fast part of adoption curve w/great management team (building for the future)
- Transformation/turnaround with free/cheap call option(s) on change
Out of the dozen or so ideas we pitch each year, only a handful meet these criteria. These are the names we have the highest conviction in - companies where we have done the work and have some data advantage. Conviction doesn’t come easy, though. This is especially true when you are making a calculated bet on something that doesn’t exist today, or exists, but hasn’t shown up in the fundamentals yet because another part of the business is masking it. Or suppose you are betting on a turnaround. In that case, it usually means fighting against a bearish consensus telling you all the reasons why you are wrong (which can be mentally exhausting but incredibly rewarding when/if proven right).
Back to the Communications Grind…
Some of our more successful long ideas like Roku (ROKU) and current top longs like Match Group (MTCH) and Twitter (TWTR) meet these criteria. Even the more widely owned and less controversial mega-cap stocks such as Facebook (FB) and Google (GOOGL) share these characteristics. Facebook has been and currently is an advertising-based business (and likely always will be). However, investments the company is making in e-commerce and virtual reality (Oculus) can transform Facebook’s business into something much more. However, most investors don’t have the time to understand Oculus today, because it won’t get them paid next quarter or even next year. Even though ~50% of FB’s +$18B R&D budget is allocated to these projects.
Match Group (MTCH) is one of my favorite examples because it is recent and a bit more tangible. Early investors were rewarded with a 3x return in the stock from 2015-2019 as Tinder scaled globally and the monetization thesis played out (lightning in a bottle). Before the break out success of Tinder, Match Group was primarily a portfolio of desktop native, online dating brands going back to the early ‘00s. However, as Tinder matured, the question became what’s next? While Tinder direct dating revenue went from ~$50M in 2015 to ~$1.15B in 2019, the Non-Tinder business declined by ~1% to $855M. Many of those early investors were now net sellers of the stock.
In September 2020, we concluded that Non-Tinder growth was about to break out in a big way. In our view, that wasn’t priced into the stock or reflected in consensus estimates. We constructed Match Group’s portfolio of apps using third-party, mobile-app download, revenue, and user data. We paired that analysis with historical disclosures provided by the company and former parent IAC to understand better the composition of desktop revenue (that was in decline) and mobile revenue (that was growing). In doing so, it became clear that the headwinds from desktop were close to behind them and more than offset by strong growth from emerging mobile brands like Hinge, Pairs and Chispa. Fast forward to today, and Non-Tinder revenue growth has accelerated to ~32% YoY as of 1Q21 and management has provided a long-term, Non-Tinder growth target of 15-20%.
We still think there is more opportunity ahead and laid out the case for a $200+ stock over the next 12-18 months in a black book in June 2021.
One of our more recent ideas (May 2021) is Liberty Media Formula One (FWONK), which also fits into the “transformation/turnaround” bucket. F1 is one of the most popular premium sports globally and is considered the pinnacle in motorsport. Ten teams and 20 drivers fight to claim the most prestigious motorsport accolade, an F1 World Championship. F1 has a large and growing worldwide audience that is under-monetized; in 2020, F1 averaged 87.4m viewers per race and had a global cumulative audience of 1.5B. The 2020 season consisted of 17 races in 12 countries (COVID impact), and this year's season will consist of 23 races in 20 different countries spanning five contents.
F1 is governed by a document called the "Concorde Agreement" that sets in place the number of races allowed, car and safety regulations, and the amount each team can spend. F1, the teams, and the Sport's safety regulator, FIA, must all agree to the terms for the document to be official and for the Sport to continue. F1 generates revenue from three primary sources 1) race promotion 30% of ’19 revenue - fees paid to F1 to host, 2) broadcast rights (38%), and 3) sponsorship and advertising (15%).
F1 as a business, is still early in its turnaround after Liberty Media acquired the asset from private equity group CVC Capital and Bernie Ecclestone in 2016. The previous management's lack of long-term focus left F1 with poorly constructed race agreements and few sponsors relative to most premier sports brands. Liberty has been working to resolve these issues. In 2020, F1 reached a new Concorde agreement for the 2021-2025 seasons that improves the economics and long-term viability of the sport. Liberty has also focused on entering more attractive, long-term race deals like the Vietnam and Miami Grand Prix agreements (neither has ever held a race in F1's 70-year history).
We believe there is more grease on the wheels. Liberty can maximize its efforts to increase interest in the sport (especially in the U.S.), continue to go after underpenetrated markets, and use its SVOD service to capitalize on its content more efficiently. Since we presented our Black Book in May 2021, we are tracking well against our key thesis points:
- New Race Formats Support Broadcast and Promotion Revenue: We anticipated the new sprint qualifying would attract advertisers and the potential for a title sponsor, along with increased fan engagement. Last week, F1 announced that Crypto.com had become the official title sponsor for their sprint qualifying format race. The deal with Crypto.com is estimated to be worth ~$100M over a five-year period, which represents ~30% of F1’s 2019 Sponsorship and Advertising revenue of $309M, or an incremental 7% lift assuming ~$20M revenue recognized per year.
- Sponsorship and Advertising Rebounding Post-COVID: We initially flagged how impressive it was for F1 to attract title sponsors for 18 of the 23 races in this year's calendar due to COVID restrictions (reminder Monaco doesn't get a title sponsor). Since our presentation, there have been two new title sponsors, increasing the number of races with sponsors to 20 and Sprint Qualifying now getting a title sponsor with Crypto.com. On 6/16, BWT, a water treatment supplier, became the title sponsor for both races in the Austrian GP doubleheader. As a part of the agreement, BWT received both the naming of the G.P. and trackside advertising.
- U.S. Momentum Building w/Miami on the Circuit 2022: Our main way to track U.S. momentum for the sport has been the U.S. viewership data for each G.P., which has surprised meaningfully to the upside. So far, the average U.S. viewership of the current F1 season is up over 50% compared to last season, with multiple races reaching over 900k viewers (metrics typically reserved for the most premier races of the season, such as Monaco). Below is a snapshot of our U.S. viewership tracker we have been publishing weekly.
Looking ahead, we have another round of major broadcast renewals coming up in 2022 – 2024 that should be positive catalysts, including negotiations for U.S. linear broadcast rights currently held by ESPN. There is also the potential for F1 to sign rights deals with streaming services (e.g., Amazon, ESPN+, Peacock, Paramount+), many of which have been actively bidding on sports rights to drive further engagement and subscriber growth. As long as the positive momentum we are seeing in the business today continues (we will be tracking it closely), F1 is well-positioned heading into the next round of negotiations.
If you would like to learn more about my research team's in-depth investing research please reach out to .
Immediate-term @Hedgeye Risk Range™ with TREND signal in brackets:
UST 10yr Yield 1.27-1.59% (bullish)
UST 2yr Yield 0.19-0.29% (bullish)
SPX 4 (bullish)
RUT 2 (bullish)
NASDAQ 14,206-14,745 (bullish)
Tech (XLK) 143.27-151.75 (bullish)
Energy (XLE) 51.06-56.14 (bullish)
Financials (XLF) 35.64-37.30 (bullish)
Utilities (XLU) 62.74-65.25 (bearish)
Shanghai Comp 3 (bearish)
Nikkei 28,002-29,201 (bullish)
DAX 15,403-15,750 (bullish)
VIX 14.97-19.63 (bearish)
USD 90.32-92.82 (bearish)
EUR/USD 1.181-1.205 (bullish)
Oil (WTI) 71.61-76.07 (bullish)
Nat Gas 3.36-3.72 (bullish)
Gold 1 (bearish)
Silver 25.60-26.77 (bullish)
Make it a great one…
Andrew Freedman
Managing Director
Communications Sector Head
