Musings by Mazwood

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Mazwood Memo #5
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Mazwood Memo #5

$DOCN $TTD $U $DIS

MazwoodCap
Aug 13, 2021
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Mazwood Memo #5
mazwoodcap.substack.com

Earlier this week, MT Capital made a mistake in a Substack post. After getting a little flack, he responded:

For those that want to hate… I’m 22, have been writing for four months and am proud of my work. In 10 years time I will be one of the best.

Twenty two!!

Like in investing, writing too, compounds.

Twitter avatar for @jmoserrJeremy Moser @jmoserr
If you can write well, you can: • Attract an audience • Grow a community • Teach & motivate • Persuade & sell Writing is a compounding skill.

April 17th 2021

65 Retweets410 Likes

Not only is writing a “compounding skill,” but as we read in The Joys of Compounding by Gautam Baid, it is also a “thinking tool.” He writes:

Writing, apart from being a communication tool, is a thinking tool, too. It is almost impossible to write one thing and simultaneously think something else… The more you write, the more precision of thought you build. Writing is a thinking exercise, and it acts as a shield against the rusting of our mind.

David Perrell takes it one step further and shares the wisdom behind writing in public.

Twitter avatar for @david_perellDavid Perell @david_perell
Writing in public is like cleaning. Just as inviting guests to your home motivates you to clean, writing in public motivates you to tidy up your thinking.

August 12th 2021

131 Retweets973 Likes

I’m excited for MT.

I’m excited for us investors as writers, as thinkers. Maybe this is our edge.

Let’s get after it.



📈 In the Market

Warren Buffett & Sleepwell Capital on Conviction

Am I the only one lying awake at night thinking about portfolio diversification? How many stocks is too much? What’s the sweet spot? Is there a sweet spot?

For some time, I’ve been struggling with (what I feel) is a bloated portfolio.

Twitter avatar for @MazwoodCapMazwoodCap @MazwoodCap
How many stocks can an individual investor reasonably and meaningfully follow?

November 19th 2020

28 Likes

Too many names. Too many low conviction ideas. Not weighted properly toward higher conviction names.

As the saying goes:

Twitter avatar for @SeekMasterySeekMastery @SeekMastery
Concentrate to get rich. Diversify to stay rich.

March 30th 2021

134 Retweets597 Likes

Now, I’ve always thought of Mr. Warren Buffett as “Champion of the Index Fund,” not Mr. “Concentrate to Get Rich.”

But, something is amiss. Buffett didn’t become one of the greatest investors ever by Dollar Cost Averaging into $SPY.

In an interview here, Buffett clarifies his position:

If you are not a professional investor, if your goal is not to manage money in such a way as to get a significantly better return than the world, then I believe in extreme diversification. So I believe 98 or 99%, maybe more than 99%, of people who invest should extensively diversify and not trade, so that leads them to an index fund type of decision... I don’t quarrel with that at all, that is the way they should approach it.

But, he continues (emphasis, mine)…

Once you’re in the business of evaluating businesses, and you decide you’re going to bring the effort and intensity and time involved to get that job done, then I think that diversification is a terrible mistake... If you really know businesses, you probably shouldn’t own more than six of them. If you can identify six wonderful businesses, that is all the diversification you need and you’re going to make a lot of money. And I guarantee you going into a seventh one, rather than putting more money in your first one, has got to be a terrible mistake. Very few people have gotten rich on their seventh best idea, but a lot of people have gotten rich on their best idea.

Aren’t we in the “business of evaluating businesses?”

In his post, The Raw Material of Long Term Investing: How I Build Conviction to Sleep Well at Night, Sleepwell Capital shares how he likes to evaluate businesses and his definition of conviction.

One line in particular, regarding simplicity, has stuck with me:

I prefer simpler stories where most of the value is derived from 2-3 variables instead of 10, and where I can build my assumptions related to those inputs with reasonable confidence.

This resonates with me regarding two positions I’m concerned aren’t simple enough: Redfin & Teladoc.

I own them for different reasons, but one common thread is the opportunity for disruption. The stories are amazing! But they are not simple businesses, which is causing me to question my conviction.

Maybe the market knows something I don’t.

Do you have low conviction names in your portfolio? Why? Do they need to be there?

Let’s invest in conviction.


📓 In My Portfolio

New Position in DigitalOcean

There’s a new cat in town called DigitalOcean.

On Wednesday, I began an experiment:

Twitter avatar for @MazwoodCapMazwoodCap @MazwoodCap
Trying something new. Grabbing a tiny position in $DOCN. Due diligence to come. Too many times I've lost out on a name bc I get anchored to a price. And then it runs away without me. So I'm buying a few shares so I don't lose it. Research to come. Then cut or add. Vamos!

August 12th 2021

2 Retweets27 Likes

Yesterday, I started digging in:

Twitter avatar for @MazwoodCapMazwoodCap @MazwoodCap
Re $DOCN: Where are the founders? Where are @benuretsky + @moiseyuretsky? It's a young co + as of the 2/21 S-1 the Founders, who own(ed) 16% of the co... are poof, gone. Not my favorite piece of news in starting to understand $DOCN. How is this not a founder-led business!?
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August 12th 2021

4 Likes

Lots more work to do here. I look forward to sharing my findings!

Earnings

Earnings season is quieting down, but still a few names to discuss.

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Let’s chat:

  1. The Trade Desk

  2. Unity

  3. Disney

1. The Trade Desk

Let’s start by saying, I’m a big Trade Desk guy.

Here’s what I wrote when I first purchased shares in 2017:

It became a 10 bagger for me last October.

Twitter avatar for @MazwoodCapMazwoodCap @MazwoodCap
Oh hello Mr. 10 Bagger, nice to see you there. $TTD
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October 6th 2020

4 Retweets241 Likes

I even put together an Oral History of the company last year.

So, we can keep this part short.

Max shares some numbers:

Twitter avatar for @MaxTheComradeMax Bosenko @MaxTheComrade
$TTD Q2 earnings and guidance 👇 “Revenue more than doubled YoY to $280 million in Q2. Our growth speaks to The Trade Desk’s position as the default DSP for the open internet. Nowhere is this more apparent than in CTV, as more premium streaming inventory becomes available”.
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August 9th 2021

5 Retweets51 Likes

Brad shares some color commentary:

Twitter avatar for @StockMarketNerdBrad Freeman @StockMarketNerd
$TTD earnings: A sizable top line beat & raise as ad-spend precipitously recovers. Margins exceeded expectations. Far more CTV growth color vs. previous calls. 👀 UID2 & Solimar adoption continues to be overwhelmingly positive. Great Q. My review. 👇
stockmarketnerd.substack.com/p/the-trade-de…The Trade Desk 2nd Quarter Earnings ReviewBreaking down this ad-tech company’s results.stockmarketnerd.substack.com

August 9th 2021

14 Retweets114 Likes

And Jordy shows us how Connected TV is quickly becoming the name of the game:

Twitter avatar for @KreizJordyJordy @KreizJordy
Fun fact of the day - The word CTV was mentioned 77 times in yesterday’s $TTD earnings call. This is the highest it has been mentioned so far of any TTD call growing 75% sequentially (Q1'21 was 44 mentions). C/T: a fellow adtech expert here on FinTwit that you all know & love.

August 10th 2021

1 Retweet22 Likes

Lucky for us, Max, Brad and Jordy teamed up with Kris for a Spaces to discuss earnings. And they uploaded it to YouTube! Nice work, guys.

Despite my insanely low cost basis (my first tranche is up 1,562% as of this writing), it still feels like The Trade Desk story might just be starting.

2. Unity

I like Unity, but I could not have timed my purchases more poorly, grabbing most of my shares in January at around ~$150.

Twitter avatar for @MazwoodCapMazwoodCap @MazwoodCap
If anyone needs living proof of the whole "when your position drops 33% you need to go up 50% to break even" look no further than my $U.
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June 9th 2021

12 Likes

Joining us again from last week is Eugene with the high-level earnings breakdown:

Twitter avatar for @EugeneNg_VCapEugene Ng @EugeneNg_VCap
Unity Software $U 2Q21 Earnings 👍🏻 - Rev $274m +48% ↗️ - Gross Profit $216m +50% ↗️ margin 79% +83bps ✅ - NG EBIT -$3m ⤴️ margin -1% +354bps ✅ - Net Income -$4m ⤴️ margin -2% +482bps ✅ - OCF -$27m* ↘️ margin -10% -1874bps ↘️ - FCF -$34m* ↘️ margin -12% -1489bps ↘️

August 11th 2021

1 Retweet13 Likes

Overall, the market was jazzed.

So was Fintwit:

Twitter avatar for @aadhansenAndreas Hansen @aadhansen
$U Solid report, largely driven by a strong performance in operate which grew 63%. Full year guide was also raised. It's not net/net though as they did acquire some co's. Decent performance across create as well with 31% growth y/y. DBNR stays at 142%
d18rn0p25nwr6d.cloudfront.net/CIK-0001810806…
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August 10th 2021

5 Retweets67 Likes
Twitter avatar for @SatoshiAlienSatoshi ₳lien @SatoshiAlien
I gotta say this $U quarter was pretty awesome and the guidance was great. I don’t do price targets and make guarantees, but it’s hard for me to imagine this not being worth more in the future. One of my favorite long term ideas for sure.

August 10th 2021

1 Retweet95 Likes

I wrote a Deep Dive on Unity earlier this year. In it, I said:

As a gaming company, I am intrigued by Unity. Powering creators is certainly of the moment. But what Unity offers is much more. While the there is obvious short-term trepidation, I can’t help but want to be part of the future!

Powering creators, dominating mobile-game development, an impressive partnership list out of the gate—and this is all before we get to how Unity can transform the architecture/design, automotive and film industries. I like being a part of the future. So I’m starting small, watching and being patient.

Despite the excitement, it takes time to build the future.

I remain bullish on what Unity can mean for gaming and beyond, something I covered in the Deep Dive:

We continue to gain significant traction with customers and leading brands in industries beyond gaming, including architecture, engineering and construction; automotive, transportation and manufacturing; and film, animation and cinematics.

Measured by 2019 revenue, Unity works with:

  • Eight of the top 10 architecture/design firms

  • Nine of the top 10 auto companies [Volvo Case Study ⬇️ ]

Unity is obviously exciting, but what about its valuation?

Evergreen doesn’t like it:

Twitter avatar for @Evergreen_CapEvergreen Capital @Evergreen_Cap
In order to justify the current $U valuation (>$28bn), you need to pay 1) 25x Operating Rev on this yrs 46% growth (huge premium to peers, >0.5x EV/S/gr), and 2) 35x Create solutions rev on this yrs *33%* growth (>1x EV/S/gr!). Unless Create inflects, it may be a short. https://t.co/mpdcqi3npC

Evergreen Capital @Evergreen_Cap

$U with a big rev beat $274mn vs cons/guidance $245mn. However, the beat was entirely driven by Operating Solutions, whereas creative software revs of $72mn missed consensus $75mn, with 31% growth decelerating 20ppts vs 1Q. Hence, the Software bull case continues to lag.

August 10th 2021

3 Retweets26 Likes

Francis is considering:

Twitter avatar for @InvestiAnalystFrancis - Analyst @InvestiAnalyst
$U - Unity (no-position), but looks interesting at current prices. Revenue Last 3-Qtr's: +39% YoY +41% +48%YoY + FY-21 Rev. guide: 37%YoY - 888 $100K clients - Net expansion rate 142% - Best Ops-Margin in a while - Top mobile game player - Better diversification in non-gaming

August 13th 2021

8 Likes

In the regret department, I’m happy to hold the stock.

I just wish I bought it at $90 and not $150.

And at a more palatable valuation (my purchases at the blue arrow).


3. Disney

Oh, Disney. Where do I start with you?

Over the last few years, I’ve initiated positions in two accounts.

  • In account A: On 3/21/2019 at a cost of $108.79.

  • In account B: On 2/24/2020 at a cost of $133.79.

In a weekly review last summer, when COVID was, shall we say, not so hot, I wrote:

I’m a little befuddled with Disney. I can’t for the life of me understand how it’s trading at ~$131 today. I'm on the record simultaneously loving the company, the IP, the opportunities… but also thinking it will be a drag on the portfolio for some time.

Let’s get into the weeds for a moment, if you don’t mind.

2019 Annual Report Numbers:

One by one, here we go:

  1. Media Networks: Um, cord cutting? ESPN? Live sports? TV production schedules halted? This feels like a severely impacted category.

  2. Parks: Uhhhh, yea.

  3. Studio: They can't shoot movies. Or show movies. Feels like kind of a problem.

  4. DTC: Yes, Disney+. Amazing acceleration in subscriber base. 100%. But doesn’t the other $62B worth of business matter to anyone else?

I can't figure this one out. Part of me wants to trim the position, because it feels like it should be a drag. But so far the market doesn’t agree with me. And I’m not really a trimmer.

A few months later (in November 2020) I sold the Disney position from Account A:

Twitter avatar for @MazwoodCapMazwoodCap @MazwoodCap
Sold my $DIS position at $138.96 This actually bums me out. 🙁

MazwoodCap @MazwoodCap

A few thoughts on $DIS: I'm on the record for liking $DIS (the company very much) but being very concerned with the stock. (Screen grab from https://t.co/ydjtUGuBVv) https://t.co/C8gPHdQ8ga

November 9th 2020

6 Likes

Up 30% from cost basis, after a rocky year, and after a quick 20% bump seemed more than reasonable at the time.

Since that fateful day last November:

Whoops.

I still hold the position in Account B.

Okay, back to earnings. What happened? Pre-market this morning, things were looking good.

Eugene, like always, take it away:

Twitter avatar for @EugeneNg_VCapEugene Ng @EugeneNg_VCap
Disney $DIS 3Q21 Earnings 💪🏻 - Rev $17b +45% ↗️ - EBIT $2.4b +117% 🚀 margin 14% +466bps ✅ - Net Income $923m ⤴️ margin 5% +4548bps ✅ - OCF $1.5b +26% ↗️ margin 9% -125bps ↘️ - FCF $528m +16% ↗️ margin 3% -75bps ↘️
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August 13th 2021

2 Retweets20 Likes

And streaming numbers, Alex?

Twitter avatar for @TSOH_InvestingScience of Hitting @TSOH_Investing
$DIS
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August 12th 2021

8 Retweets57 Likes

What about Parks, KnowHow?

Twitter avatar for @CapitalKnowhowKnowHow Capital @CapitalKnowhow
$DIS parks profitable in Q3… that’s a big win. Sets strong visibility for the rest of the year. ARPU is lower in Dis + but we known slate strong through rest of the year. Market should be able to look through that.
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August 12th 2021

9 Likes

And you, Julia, on Parks:

Twitter avatar for @loudmouthjuliajulia alexander @loudmouthjulia
Disney's Parks division also finally manages to swing to a profit — the last quarter didn't really capture Disneyland's reopening, or lessened restrictions. Good news for Disney on both fronts: people are returning to enjoy its legacy businesses, and streaming is still growing.

August 12th 2021

1 Retweet13 Likes

Ultimately, in a world where entertainment options are fragmenting, Disney is King of IP. If the business is swimming, how do you stop it?

Twitter avatar for @EdBorgatoEd Borgato @EdBorgato
There is no amount of money that would allow you to replicate $DIS's business, its assets, brands, or the relationship they have with customers/fans. It would require a generations worth of time, care, and creativity to cultivate something as unique and enduring.

August 12th 2021

11 Retweets113 Likes

For those interested in Disney, make sure to check out Bob Iger’s 2019 autobiography, The Ride of a Lifetime: Lessons Learned from 15 Years as CEO of the Walt Disney Company:

If you’ve only got 45 minutes, these three chapters on acquiring Pixar, Marvel and Star Wars will show you the power of acquiring IP in building a behemoth entertainment company.

With Parks trending up and to the right, Disney+ not even at its second anniversary and this unparalleled IP chest, Disney might just be a “set it and forget it” kind of name.


🖥️ On the Internet

Warren Buffett on Diversification

While spending time on YouTube watching Warren Buffett wax poetic on all things concentration, conviction and diversification, I found this gem from Berkshire Hathaway’s 1996 Annual Meeting. (I went to the Annual Meeting in 2017).

The highlights:

We think diversification as practiced generally makes very little sense for anyone that knows what they’re doing.

Diversification is a protection against ignorance.

If you know how to analyze businesses and value businesses, it’s crazy to own 50 stocks or 40 stocks or 30 stocks, probably. Because there aren’t that many wonderful businesses that are understandable to a single human being.

Three wonderful businesses is more than you need in this life to do very well.

There is less risk in owning three easy-to-identify wonderful businesses than there is owning 50 well-known big businesses.

Defunctland

Sometimes, when I tell people there is amazing content on YouTube, they look at me like:

Tom Cruise What GIFs - Get the best GIF on GIPHY

If you’re a fan of Disney (beyond its earnings) or documentaries or history or theme parks or just great content for that matter, take a look at Defunctland, a YouTube channel that dives DEEP into the history behind defunct theme park rides. Talk about niche, right?

I started with Journey into Imagination, a ride I remember so well as a kid.

With over 150 videos on the channel to date, I hope you, too, can find something awesome here.

Once Upon a Time in Hollywood

Sticking with the theme of entertainment, Quentin Tarantino made the podcast rounds a few weeks ago, promoting his new book, Once Upon a Time in Hollywood: A Novel.

Yes, a novelization of his movie, Once Upon a Time… in Hollywood, his second highest grossing movie ever.

I particularly enjoyed Tarantino’s appearance on The Big Picture podcast, where he discusses why he wrote the book, how it’s different from the movie and a whole lot more.

If you like movies, and in particular moviemaking, you’ll love this thirty minute featurette, Once Upon a Time in Hollywood - A Love Letter To Making Movies:



That’s it for Mazwood Memo #5! Thanks for sticking around.

We’ve written Deep Dives on Adyen, Snap, Okta, MercadoLibre, Lululemon, Veeva and Unity. And now, Mazwood Memos! Check out last week’s post.  

Have a great weekend!

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mazwoodcap.substack.com
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