- GRIT
- Posts
- 📈 Stock Ideas <$7 Billion in Market Cap
📈 Stock Ideas <$7 Billion in Market Cap
ChatGPT + work-from-home..
Our Favorite Stocks Right Now
🥂 Before we get started, I want to make a toast to everyone who hopped on the Hims and Hers Health (HIMS) train with me after pitching the stock on December 6th.
It seemed like such a no brainer that $6 / share — and after reporting their recent Q4 earnings results and issuing guidance for 2025, their stock price is closing in on $12 / share. Nearly +100% increase in price in only a few months.
It’s certainly a stock pickers market right now, and I’m excited to give it my best!
In this edition of "Our Favorite Stocks Right Now,” we’ll be covering two names — one is poised to grow as the adoption of ChatGPT continues to ripple across the internet, and the other is a work-from-home favorite.
Both of these companies are certainly on the “smaller” side of the equation — offering investors an opportunity for meaningful upside, assuming all goes well.
We find ourselves constantly talking about the $100B+ companies (semiconductors, cybersecurity giants, EV titans, etc.) but don’t spend enough time analyzing the smaller names out there.
Again, this is because we’re relatively confident in the fact that these non-profitable small cap companies will continue to get crushed as the Fed maintains a tighter monetary policy for longer — however, they’re still absolutely worth covering.
🌐 Perion Network (PERI)
There are a ton of reasons why people invest into stocks — because they’re run by proven management teams, they’re operating in a secular growth trend, or even some sort of special circumstance.
This specific stock idea stems from the latter.
One might argue it even leans into the “pick and shovel” strategy — invest into the companies supplying the “picks and shovels” for whatever the current “Gold Rush,” might be.
But I’ll let you be the judge.
Who Are They?
Perion Network is a digital advertising company based in Israel. They deliver digital advertising solutions for brands, publishers, and agencies — specifically through ad search, social media, and connectedTV.
They execute against these solutions through their marketplace dubbed “iHUB.”
It’s simple — think of them as the “middleman” as it relates to advertising.
On one side, you have the supply — websites, social media platforms, ads on Hulu, and search ads when you’re browsing the internet.
On the other side you have the demand — the small business trying to sell more candles, the movie production company trying to build excitement for their new blockbuster hit, or even Beyond Meat trying to convince you fake beef is better than the real deal.. 🤢
Then in the middle you have Perion Network’s iHUB — connecting the folks looking to advertise their products with the open slots available to be advertised on.
In case you’re still confused, this is how Perion Network describes iHUB:
“iHub sits in the center of the supply and the demand side of the market.
This is an innovative model that no one else in the industry has — aggregate data signals from all channels and from both sides of the open web to create the model that eliminates waste and rewards clients.
The data goes into Perion's privacy-first cookieless solution known as SORT. So the iHub is both a source of data and operational platform.”
Why Am I Excited?
There are a few catalysts — but one in particular.
Starting with the “general” excitement — Perion Network is able to provide outsized value to their customers in two unique ways: their cookieless “SORT” product, and connectedTV.
In case you’re unaware, Google is phasing “cookies” completely out of Chrome by 2024 — which means it’s going to become a lot harder for advertisers to target very specific types of people who browse the web.
Cookies are text files that contain data — usernames and passwords — used by the website owner to identify who is visiting their website. A ton of websites use cookies to better understand who’s visiting their website, where visitors click, and why they’re visiting.
Considering traditional advertisers are being forced by Google to stop depending on cookies when running campaigns, they’re beginning to test — and more frequently use — alternatives like SORT.
According to Perion Network’s recent earnings call:
“Ad campaigns using SORT represented $26 million, up +82% quarter-over-quarter, reaching 21% of advertising revenue.
The number of SORT customers increased by +36%, 76 new SORT customers, overall 191 customers using SORT. On average deal size, that’s the most important factor, using SORT increased by +33% to $137,500.
So when customers are using SORT, they feel comfortable and safe to spend more because that’s what consumers like.
And last but certainly not least, SORT delivered a 1.33% CPR, almost three times the Google benchmark of 0.46. And let me repeat, this is without cookies.”
Not only is Perion Network pioneering a solution for advertisers in a soon-to-be cookieless world, but their connectedTV business is also growing rapidly — having grown CTV revenue by +42% year-over-year in Q4.
But connectedTV and SORT are not why I’m excited about this company — those two business segments / product features are only icing on the cake.
⚡️ ChatGPT
In case you haven’t heard, ChatGPT is a generative artificial intelligence application used by 100 million people around the world.
Created by OpenAI — a company co-founded by Elon Musk, Sam Altman, Peter Thiel, and others — ChatGPT has taken the world by storm given it’s easy-to-use search interface.
If you haven’t tried it, click this link.
If we rewind the clock to 2018, you might remember reading Microsoft investing $1 billion into OpenAI with the hopes of seeing them build something useful for everyone.
Well, announced in January Microsoft has further extended this long-term partnership to include billions of dollars in funding and a few perks:
Supercomputing at scale
New AI-powered experiences
Exclusive cloud provider
Then in February announced that their search engine, Bing, will include generative AI capabilities powered by ChatGPT.
Okay, but what does this have to do with Perion Network?
I’m glad you asked.
Perion Network is Bing’s strategic partner for all things search advertising. If someone wants to advertise their business on Bing — they exclusively must use Perion Network to accomplish that goal.
Read that again.
42% of Perion Network’s revenue derives from Search Advertising — and as Microsoft Bing continues to take marketshare from Google, Perion Network will be the beneficiary.
Quick quote from their earnings call:
“Our portfolio and healthy direct response solution via search advertising continues to be one of our most profitable and sustainable product solutions.
The business is driven by two levers: increasing the number of publishers and aggregate number of monetized number of searches we transfer, mainly to Microsoft Bing. That number is robust and impressive.
We are reporting today 22 million average of daily — I repeat, daily search that is going through us in Q4 2022, an increase of +26% year-over-year. This number is growing every day and I can tell you that this quarter, actually, the first five weeks of the quarter, we are seeing 25 million searches, daily searches or average daily searches.”
Here’s the Deal
If you have any inkling of bullishness around the adoption of generative AI as it relates to search traffic through Microsoft Bing — Perion Network doesn’t sound like a bad idea.
If I’m being 100% honest — I’m not even excited about this company for their connectedTV or SORT products. Don’t get me wrong, they’re growing business segments — but there’s always another marketplace out there that agencies, brands, and others can use.
The sole reason I’m excited about Perion Network as we head into the “Age of AI” is because of their 4-year $800M strategic partnership with Microsoft.
Just in case this whole “ChatGPT” thing is real — and everyone begins to use this generative AI technology throughout their daily lives — I want to be sure I’m positioned well to profit.
Do I think Microsoft’s stock price can rise from continued Bing adoption?
Sure.
But there’s also a ton of different variables that go into their earnings i.e. cloud, gaming, etc.
Nearly half of Perion Network’s revenue derives from their search advertising business — again, which could experience some serious upside if Microsoft Bing begins to demand more users and therefore more advertisers.
But, let me clear — this is all speculation.
There is no evidence that ChatGPT being integrated into Microsoft Bing will drive more users, take marketshare, or have a material impact on the business. I have no “inside information” about this integration or what might be around the corner for Bing.
All I know is that AI is going to absolutely override the way we think about productivity — and if somehow someway Microsoft Bing benefits from that, so be it.
Monday.com (MNDY)
I’ll keep this pitch rather short considering we just covered them a few months ago in our “Stocks in Charts” post — but the momentum they’ve seen as reported in their recent earnings results catalyzed me to share them with you all again.
In case you’re unfamiliar with the company, they’re a collaborative workflow management software for businesses of all shapes and sizes.
— Q4 Earnings Results:
Revenue: $150.0 million, an increase of +57% YoY
Operating Loss: -$10.1 million, compared to -$31.6 million last year
Net Loss: -$1.4 million, compared to -$32.6 million last year
Notice the GAAP operating and net loss figures narrowing — a sign of economies of scale. From a non-GAAP perspective, their operating margin actually just flipped positive — a very good sign!
It’s obvious management has been able to effectively control the pace of investment in the form as R&D — while leveraging performance marketing spend to support new customer pipeline / generation.
“Our performance in Q4 and FY’22 demonstrates that monday.com continues to drive growth and profitability at scale. These strong results make us even more confident in reaching our targets in both the short- and long-term, and we expect to again be free cash flow positive in FY’23.”
— Eliran Glazer, CFO of monday.com
Revenue is growing quickly, gross margins are 90%, free cash flow is expected to remain positive, customers paying >$50K / year are piling in, and operating income was positive for the very first time.
Why Am I Excited?
At the end of the day, investors can buy equity in any company for any reason — however, with Monday.com I’m specifically looking at their cash flow.
“Growth” technology companies are able to demand such high valuation multiples (usually expressed as price-to-sales) because they’re growing their revenue at such a fast clip — it’s only a matter of time until the profits catch up to them.
Monday.com has demonstrated they can do both — expected to grow revenue by+35% in 2023 (to $700M), while maintaining a positive operating margin.
For example, mature technology companies like Google (GOOGL) tend to be valued by how much operating cash flow (and free cash flow) they can generate for shareholders during the calendar year.
The black line is the stock price, the blue line is their operating cash flow. They move in tandem — same with other mature technology companies like Amazon.
2023 will be the first year Monday.com reports positive cash from operations ($42M — 6% margin), and this figure is expected to double in 2024 ($71M — 8% margin).
Don’t get me wrong, I would have loved to have purchased heaps of stock in MNDY in November when it was $75 / share — but there was still too much uncertainty with the tech sales cycles and layoffs.
At $150 / share ($7B market cap), Monday.com is trading at ~10X forward revenue expectations. I don’t think this stock will continue rocketing higher in the near-term, but instead slowly grind higher quarter after quarter.
The company has proven they’re not to be lumped in with the other “2020 tech IPOs,” and instead are very special — very profitable.
Monday.com (MNDY) is my largest “fun idea / risky” holding as shared in the Portfolio Tracker — I’m excited about where this one will be in 3 years time.
Thank you for reading! Below are a few other companies on my radar:
Grainger WW Inc. (GWW) — shoutout to our Founding Member Tom for sharing this one with me!
3M (MMM) — read Austin Lieberman’s recent deep dive on this one, essentially he thinks they’re trading at multi-decade lows as an overreaction to the lawsuit.
Salesforce (CRM) — despite only +8% growth in revenue expected for 2023, their margins are expected to expand. This should catalyzed +15% growth in FCF and OpCF, more than likely pushing their stock price higher.
Update: I wrote this on 2/28 and just realized Salesforce (CRM) crushed their Q4 earnings expectations — causing their stock to trade up +14% to $190 / share. I think this recent earnings release only solidified my above-mentioned bullish thesis.
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.
Reply