High Conviction Concentrated Growth Investing, Fallacy Alarm

Fallacy Alarm

High Conviction Concentrated Growth Investing

High conviction concentrated growth investing. Blends single stock, macro and thematic research into powerful long and short ideas. I am convinced that a robust and comprehensive investment process requires macro and micro considerations. And it requires a deep understanding what you are looking for and what you are invested in. Digitization has changed the dynamics both how businesses operate and how investors compete for returns. Ideas can scale much faster and fail much faster than before. The biggest value creation happens before it can be spotted in financial statements. As a result, my approach can be best summarized as high conviction, high concentration growth investing, embedded into a macro framework built on the realization that our current demographic set-up, monetary paradigm and innovation cycle will likely deliver a strong decade for nominal and real returns of productive assets.

Equity Bottom-Up

<ul><li>Fiscal spending has been the key driver for this bull market as it reaccelerated in late 2022 following the inflation and subsequent interest rate shock.</li><li>This impulse will likely diminish over the next months. It will be replaced by a credit impulse from rate cuts, the first few of which will be very powerful.</li><li>Market mechanics will be accommodating. Leverage in the system is low. In fact, the pain trade is still higher.</li></ul>

Fiscal spending has been the key driver for this bull market as it reaccelerated in late 2022 following the inflation and subsequent interest rate shock.This impulse will likely diminish over the next months. It will be replaced by a credit impulse from rate cuts, the first few of which will be very powerful.Market mechanics will be accommodating. Leverage in the system is low. In fact, the pain trade is still higher.

Covering IPOs, Healthcare and Technology Stocks

Andrei Zakharov

Algosun Global

<p>In August, <a href="https://www.smartkarma.com/entities/root-inc" target="_blank" data-smartkarma-citation="entities:29692:1" rel="noopener">Root Inc (ROOT US)</a> announced the expansion of partnership with <a href="https://www.smartkarma.com/entities/carvana-co" target="_blank" data-smartkarma-citation="entities:26471:1" rel="noopener">Carvana Co (CVNA US)</a> , the leading e-commerce platform for buying and selling used cars. Root is partnering exclusively to develop and offer an innovative and integrated auto insurance solution for Carvana’s online car buying platform. In our view, this is a great opportunity for Root Insurance to expand customer base at lower costs and get access to a growing channel of prospective Carvana’s customers. Insurtech unicorn had ~383K policyholders as of quarter ended Jun-21 while Carvana sold ~244K vehicles in 2020 and ~200K vehicles in the first half of 2021. Carvana has a market cap of ~$62 billion and will invest ~$126 million of capital in Root. Convertible preferred stock will be issued and sold to Carvana with an initial liquidation preference equal to the purchase price that will be convertible at a price of $9.00/share into ~14 million Root shares of Class A common stock. According to form 8-K, Root will issue 8 tranches of warrants, which may provide Carvana with opportunity to purchase ~129 million newly issued Root shares of Class A common stock, what translates into ~30% post-transaction stake on a fully diluted basis.</p>

In August, Root Inc (ROOT US) announced the expansion of partnership with Carvana Co (CVNA US) , the leading e-commerce platform for buying and selling used cars. Root is partnering exclusively to develop and offer an innovative and integrated auto insurance solution for Carvana’s online car buying platform. In our view, this is a great opportunity for Root Insurance to expand customer base at lower costs and get access to a growing channel of prospective Carvana’s customers. Insurtech unicorn had ~383K policyholders as of quarter ended Jun-21 while Carvana sold ~244K vehicles in 2020 and ~200K vehicles in the first half of 2021. Carvana has a market cap of ~$62 billion and will invest ~$126 million of capital in Root. Convertible preferred stock will be issued and sold to Carvana with an initial liquidation preference equal to the purchase price that will be convertible at a price of $9.00/share into ~14 million Root shares of Class A common stock. According to form 8-K, Root will issue 8 tranches of warrants, which may provide Carvana with opportunity to purchase ~129 million newly issued Root shares of Class A common stock, what translates into ~30% post-transaction stake on a fully diluted basis.

New Exclusive Partnership With Carvana. A Turnaround Story?

Korea/Asia, Events, IPOs, Douglas Research Advisory

Douglas Kim

Korea/Asia, Events, IPOs

Equity Capital Markets

<div>Our base case value of Waterdrop is $4.6 billion or $11 per share. This is essentially at the mid-point of the IPO valuation range. Given the limited upside, we would pass on this IPO deal.</div><div></div><div>Our valuation of $4.6 billion is based on EV/S multiple of 5.8x using our estimated sales of $670 million (4.3 billion RMB) in 2021. Our EV/S multiple of 5.8x is based on the median valuation multiple of our comparable companies in 2021. This valuation multiple is also close to the average EV/S multiple of 6.1x for the two China online insurance/healthcare related stocks including ZhongAn Online P&amp;C insurance and Ping An Good Doctor. According to our valuation sensitivity analysis, the IPO valuation ranges from $8.4 per share to $13.9 per share. </div><div></div><div>Given that the mutual aid platform has been one of the key generators of user traffic, discontinuing this operation would result in a major change in the company's business operations and its ability to generate sufficient sales and customers growth. As such, we believe this is a major risk factor for the company. </div>

Our base case value of Waterdrop is $4.6 billion or $11 per share. This is essentially at the mid-point of the IPO valuation range. Given the limited upside, we would pass on this IPO deal.Our valuation of $4.6 billion is based on EV/S multiple of 5.8x using our estimated sales of $670 million (4.3 billion RMB) in 2021. Our EV/S multiple of 5.8x is based on the median valuation multiple of our comparable companies in 2021. This valuation multiple is also close to the average EV/S multiple of 6.1x for the two China online insurance/healthcare related stocks including ZhongAn Online P&amp;C insurance and Ping An Good Doctor. According to our valuation sensitivity analysis, the IPO valuation ranges from $8.4 per share to $13.9 per share. Given that the mutual aid platform has been one of the key generators of user traffic, discontinuing this operation would result in a major change in the company's business operations and its ability to generate sufficient sales and customers growth. As such, we believe this is a major risk factor for the company. 

IPOs and Catalysts/Events, Global Equity Research Ltd

Arun George

IPOs and Catalysts/Events

Uncompromised, Independent, Conflict-Free Research

Global Equity Research Ltd

Global Equity Research was started in 2017 by a group of experienced research professionals. It was founded on a passionate belief in the importance and the need for uncompromised, independent, conflict-free research. We aim to provide differentiated and actionable primary and bottom up fundamental research.

<div><p><a href="https://www.smartkarma.com/entities/waterdrop-inc" target="_blank" data-smartkarma-citation="entities:33018:1" rel="noopener">Waterdrop Inc (WDH US)</a> is the largest independent third-party insurance platform in China as measured by life and health insurance first-year premiums (FYP) distributed in 2020, according to iResearch. Waterdrop is backed by <a href="https://www.smartkarma.com/entities/tencent-holdings-ltd" target="_blank" data-smartkarma-citation="entities:26:1" rel="noopener">Tencent Holdings (700 HK)</a>, <a href="https://www.smartkarma.com/entities/swiss-re-ag-1f83dcbc-730e-46fa-82f2-bfe7e8e361a1" target="_blank" data-smartkarma-citation="entities:27914:1" rel="noopener">Swiss Re AG (SREN SW)</a> and <a href="https://www.smartkarma.com/entities/meituan-dianping" target="_blank" data-smartkarma-citation="entities:26970:1" rel="noopener">Meituan (3690 HK)</a>.</p></div><div><p>At the mid-point of the proposed IPO price range of $10.00-12.00 per ADS, Waterdrop will have a market cap of $4.3 billion. At the mid-point of the IPO price range, the net proceeds are $301.6 million. New and existing shareholders have indicated on $210 million of the IPO, including Boyu Capital ($100 million), HOPU Investments (at least $80 million), and Kevin Sunny Holding ($30 million). The indications of interest represent 63.6% of the ADSs on offer at the mid-point of the IPO price range.</p></div><div><div><div class="content-highlight"><p>In <a href="https://www.smartkarma.com/insights/waterdrop-ipo-initiation-going-for-brokers" target="_blank" data-smartkarma-citation="insights:50610" rel="noopener">Waterdrop IPO Initiation: Going for Brokers</a>, we opined that as a leading online third-party insurance broker, Waterdrop is well-positioned to benefit from favourable industry trends. The key unknown is whether the changing regulations will throw a spanner in the works. Notwithstanding the regulatory overhang, we concluded that Waterdrop is worth a look. Our analysis suggests that the IPO price range is full at the high-end but has some upside at the low-end. </p></div></div></div>

Waterdrop Inc (WDH US) is the largest independent third-party insurance platform in China as measured by life and health insurance first-year premiums (FYP) distributed in 2020, according to iResearch. Waterdrop is backed by Tencent Holdings (700 HK), Swiss Re AG (SREN SW) and Meituan (3690 HK).At the mid-point of the proposed IPO price range of $10.00-12.00 per ADS, Waterdrop will have a market cap of $4.3 billion. At the mid-point of the IPO price range, the net proceeds are $301.6 million. New and existing shareholders have indicated on $210 million of the IPO, including Boyu Capital ($100 million), HOPU Investments (at least $80 million), and Kevin Sunny Holding ($30 million). The indications of interest represent 63.6% of the ADSs on offer at the mid-point of the IPO price range.In Waterdrop IPO Initiation: Going for Brokers, we opined that as a leading online third-party insurance broker, Waterdrop is well-positioned to benefit from favourable industry trends. The key unknown is whether the changing regulations will throw a spanner in the works. Notwithstanding the regulatory overhang, we concluded that Waterdrop is worth a look. Our analysis suggests that the IPO price range is full at the high-end but has some upside at the low-end. 

<div><p><a href="https://www.smartkarma.com/entities/waterdrop-inc" target="_blank" data-smartkarma-citation="entities:33018:1" rel="noopener">Waterdrop Inc (WDH US)</a> is the largest independent third-party insurance platform in China as measured by life and health insurance first-year premiums (FYP) distributed in 2020, according to iResearch. Waterdrop is backed by <a href="https://www.smartkarma.com/entities/tencent-holdings-ltd" target="_blank" data-smartkarma-citation="entities:26:1" rel="noopener">Tencent Holdings (700 HK)</a>, <a href="https://www.smartkarma.com/entities/swiss-re-ag-1f83dcbc-730e-46fa-82f2-bfe7e8e361a1" target="_blank" data-smartkarma-citation="entities:27914:1" rel="noopener">Swiss Re AG (SREN SW)</a> and <a href="https://www.smartkarma.com/entities/meituan-dianping" target="_blank" data-smartkarma-citation="entities:26970:1" rel="noopener">Meituan (3690 HK)</a>.</p></div><div><div><div class="content-highlight"><p>Waterdrop is pre-marketing an NYSE IPO with a placeholder amount of $100 million. In <a href="https://www.smartkarma.com/insights/waterdrop-ipo-initiation-going-for-brokers" target="_blank" data-smartkarma-citation="insights:50610" rel="noopener">Waterdrop IPO Initiation: Going for Brokers</a>, we opined that as a leading online third-party insurance broker, Waterdrop is well-positioned to benefit from favourable industry trends. The key unknown is whether the changing regulations will throw a spanner in the works. Notwithstanding the regulatory overhang, we concluded that Waterdrop is worth a look. In this note, we present our forecasts and take the first look at Waterdrop's potential valuation range. </p></div></div></div>

Waterdrop Inc (WDH US) is the largest independent third-party insurance platform in China as measured by life and health insurance first-year premiums (FYP) distributed in 2020, according to iResearch. Waterdrop is backed by Tencent Holdings (700 HK), Swiss Re AG (SREN SW) and Meituan (3690 HK).Waterdrop is pre-marketing an NYSE IPO with a placeholder amount of $100 million. In Waterdrop IPO Initiation: Going for Brokers, we opined that as a leading online third-party insurance broker, Waterdrop is well-positioned to benefit from favourable industry trends. The key unknown is whether the changing regulations will throw a spanner in the works. Notwithstanding the regulatory overhang, we concluded that Waterdrop is worth a look. In this note, we present our forecasts and take the first look at Waterdrop's potential valuation range. 

United States

Root, Inc. of Ohio operates as a technology company in the insurance industry. The Company offers mobile telematics and technology platform to segment individual risk based on complex behavioral data and a customer experience to make pricing decision and grow business. Root serves customers in the United States.

Root /OH (ROOT US)

Fallacy Alarm's Elevator Pitch Party

Fiscal spending has been the key driver for this bull market as it reaccelerated in late 2022 following the inflation and subsequent interest rate...

Fallacy Alarm

New Exclusive Partnership With Carvana. A Turnaround Story?

We consider Root Insurance business as a “turnaround story” and exclusive partnership with Carvana may change the business model of insurtech unicorn

Andrei Zakharov

Waterdrop IPO Valuation Analysis

Our base case value of Waterdrop is $4.6 billion or $11 per share. This is essentially at the mid-point of the IPO valuation range. Given the...

Douglas Kim

Waterdrop IPO: Valuation Insights

Waterdrop has launched its IPO to raise net proceeds of $301.6 million at the mid-point of the price range of $10-12. The price range is full at...

Arun George

Waterdrop IPO: Valuation First Look

Waterdrop is pre-marketing an NYSE IPO with a placeholder amount of $100 million. In this note, we present our forecasts and take the first look at...

Arun George