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💰 I'm Buying this Stock
Running on clouds...
Happy Friday!
Before we jump into analyzing the company I’m planning to add to my portfolio — let’s go back in time and reflect on the last few companies we’ve covered here on Rate of Return.
👉 December 2022
In the above post I shared my conviction for both Academy Sports and Outdoors (ASO), and Hims & Hers Health (HIMS).
Since publishing, ASO stock is up +30% and HIMS is up +54% — compared to the stock market’s return of +3%.
The above performance was largely catalyzed by very strong earnings reports for Q4, as well as higher-than-expected guidance for Q1.
👉 March 2022
In the above post I shared my conviction for both Perion Network (PERI), and Monday.com (MNDY).
Since publishing, PERI stock is up +14% and MNDY stock is down -6% — compared to the stock market’s return of +2%.
The above performance wasn’t exactly catalyzed by any headline earnings movement, but instead the ebbs and flows of the stock market.
Perion Network likely saw some continued momentum throughout March as ChatGPT4 was released, and I’m unable to find anything that specifically caused Monday.com to trade down -6%.
👉 Quick Reflection
The companies that performed the best (all aside for Monday.com) had some sort of underlying factor that was propelling their stock prices higher.
Academy Sports & Outdoors: continued momentum + earnings guidance
Hims & Hers Health: flipping adj. EBITDA position + earnings guidance
Perion Network: ChatGPT being integrated into Microsoft Bing
However, the following stock idea isn’t exactly derived from some sort of underlying ideology — but it’s instead a long-term winner I want to own throughout 2023 and 2024.
If you’re looking for a company who might have an underlying catalyst to push their stock price higher over the coming 12-24 months, consider looking into Verizon (VZ).
Verizon not only has a dividend yield of nearly 7%, but their payout ratio is under 60% and their free cash flow per share is expected to grow by +12% in 2023, and another +13% in 2024.
This likely means both stock price appreciation and higher dividend payments to investors.
In a time of stock market turmoil, this company is poised for success. Shoutout to Austin Lieberman for bringing the company to my attention!
I’ll do a deep dive on Verizon very soon — and will be adding them to my dividend growth portfolio later next week. Stay tuned for that!
🏃♂️ On Holding (ONON)
ONON was born in the Swiss Alps with one goal — to revolutionize the sensation of running by empowering all to run on clouds.
Today, the company delivers premium footwear, apparel, and accessories for high-performance running, outdoor, and all-day activities.
As we take a step back, it’s clear this company is growing like a weed.
Revenue by calendar year ($CHF)
2020 — $425.3 million
2021 — $724.6 million (+70%)
2022 — $1.2 billion (+69%)
2023E — $1.7 billion (+40%)
But why?
Why is a company that sells shoes, apparel, and accessories growing revenue so quickly? And how much revenue can this company actually produce?
👉 Global Expansion
ONON first expanded into Germany in 2011, then the United States and Japan in 2013, followed by China and Brazil in 2018.
During their most recent quarter, ONON reported continued momentum across all regions and geographies they sell in.
Below is a quote by their CFO during their Q4 earnings call..
“Our continued success in building a global brand is reflected in the strong growth across all regions. In Europe, after muted start into the year, net sales have returned to strong growth in the past quarters, including the 80.6% increase to CHF 79.6 million in the fourth quarter.
Net sales have almost tripled in U.K., and net sales in Germany and Austria also grew strongly between 40% and 50% respectively. In North America, after the temporary slowdown in Q3 caused by the warehouse disruption, our business reaccelerated in the fourth quarter with a growth rate of 81.5% accounting for CHF 242.1 million.”
Their Global Expansion strategy is two-fold: direct-to-consumer (DTC) and wholesale.
Direct-to-consumer is exactly what you think it is — selling direct to their customers through their website or other direct channels.
To be quite honest, selling through their website has been historically challenging for ONON considering the lack of visual branding on their shoes. No one knows the name of the company, therefore they don’t know what to search for on Google.
For example, a lot of people mistake their company logo for “QC” instead of “ON.”
This is made apparent when you analyze the Google Search trends for “qc shoes,” people who are clearly looking to purchase ONON products.
Thankfully, they’ve somehow optimized their search to now rank at the top of Google when anyone searched for “qc shoes.”
Here’s a quick update for their CEO regarding their DTC efforts..
“We’ve completed the rollout of our new website and the purchase of our new domain on.com, which will allow us to attract and convert even more fans online.
Reflecting on the full year of 2022, we were able to build on the significantly elevated base of our DTC channel during the pandemic and drive 61.4% DTC growth in 2022.
The number of visitors to our website in 2022 increased from 102 million to 143 million year-over-year. Our e-commerce capabilities and direct customer connections will be long term assets for On and our journey of profitable growth.”
Turning now to wholesale — this is where things get exciting.
The company added +1,200 new wholesale locations over the last 12 months (+15%) — while wholesale-specific revenue increased by +73%.
This just blows my mind!
The company added +1,200 more wholesale locations — a +15% increase over the previous year — but wholesale-specific revenue increased by nearly five fold.
The reason for this exponential demand curve is their insanely high sell-through rates in specific wholesalers. For example, steady-state Foot Locker wholesale locations experience a +50% quarter-over-quarter increase from Q3 to Q4.
ONON's management team reaffirmed to shareholders they’ll continue to carefully select wholesale retailers throughout 2023 that will catalyze over-the-top sell-through rates.
“Even with this incredible growth, we still see ample opportunities for higher penetration in many areas of the U.S., and we will continue to calibrate and selectively expand our footprint with wholesale partners to ensure we are present in the most meaningful doors that support our growth and the brand positioning.”
👉 Looking Ahead
In anticipation for strong momentum and continued demand during the first half of 2023, ONON further strengthened their inventory position to nearly $400M — which makes a ton of sense considering they’re opening two more flagship stores across the US and expanding into Italy and Korea this year.
ONON is guiding to $1.7B in revenue for 2023 — reflecting a +40% growth rate. This figure is nearly +$500M higher than originally anticipated when they released their multi-year growth strategy upon IPO in 2021.
For Q1, the company is expected to rake in $380M in revenue — an increase of +60% YoY. Given their recent (Q4) resolution of supply chain disruptions, they’re assuming +45-50% growth in revenue during the first half of 2023, then about +35-40% growth during the back half of the year.
They’re anticipating gross margins to bounce back to the 60% range by the end of the year — while Wall Street is assuming they’ll land somewhere just shy of it. Despite this assumption, Wall Street is still assuming a 15% adj. EBITDA margin — representing an absolute increase of about +55% growth YoY.
👉 My Perspective
I really like this company. They’ve shown their ability to build products people love, expand globally, and partner with the right wholesalers — all while keeping margins high.
I also believe their target demographic will be a bit more resilient than the average consumer during times of macroeconomic uncertainty — further solidifying my confidence in their near-term future.
The company’s stock price is $30 / share right now — putting their market capitalization around $9.5B. Assuming they’ll generate $400M in adj. EBITDA in 2024, they’re currently trading for around 23X EV / 24EBITDA — somewhat frothy.
However, Nike is currently trading around 23X EV / 24EBITDA with a slower growth rate and lower margins. The company peaked around 30X forward EBITDA just a few years ago.
ONON is growing much faster than Nike, has a clear path to $5B / year in revenue and $750 / yr in adj. EBITDA, and has higher margins.
At $30 / share, I’m happy to begin accumulating slowly. At $25 / share I’d begin to get more aggressive. The goal is to have this company make up a decent weight of my “Fun Ideas” tab in the Portfolio Tracker.
Likely landing between 1.5% and 2.5% total portfolio weighting.
Have an idea for a stock analysis?
Let me know in the comments below! I love researching companies you all come up with — and sometimes, I buy them myself.
For example, during our Founding Members livestream a few weeks back one of our community members suggested W.W. Grainger (GWW). The company now makes up 3% of my portfolio!
Quick list of other companies on my radar:
Super Micro Computer (SMCI)
Skyline Champion Corporation (SKY)
United Rentals (URI)
Disclaimer: This is not financial advice or recommendation for any investment. The content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.
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