Learn how to Write an Funding Thesis

On this podcast, Motley Idiot analyst Jason Moser discusses:

• Recognizing short-term catalysts.
• Why house enchancment is “probably the most apparent long-term developments on the market.”
• Journey and return-to-work are two developments price watching.

Then, utilizing language-learning app Duolingo (NASDAQ:DUOL) for example, Motley Idiot analyst Alicia Alfiere shares key inquiries to ask when writing an funding thesis, together with:

• What are its aggressive benefits?
• Who’s operating the corporate?
• Will broader developments assist or damage?
• Shares mentioned: BKNG (NASDAQ:BKNG), HD (NYSE:HD), LOW (NYSE:LOW), MSFT (NASDAQ:MSFT), and DUOL.

To catch full episodes of all The Motley Idiot’s free podcasts, try our podcast heart. To get began investing, try our quick-start information to investing in shares. A full transcript follows the video.

This video was recorded on March 7, 2022.

Chris Hill: Inform the DJ to queue up ZZ Prime as a result of we’re speaking about investing developments with legs. Motley Idiot Cash begins now. I am Chris Hill joined by Motley Idiot senior analyst Jason Moser. Thanks for being right here.

Jason Moser: Hey, thanks for having me.

Chris Hill: Everyone loves a great development, proper?

Jason Moser: Positive.

Chris Hill: We’re buyers, we love a great development. These days, I do not know in case you’ve seen because the market has continued its grim slide of 2022, that does not cease potential developments from rising right here or there. I wished to speak with you about how to determine which developments have legs and which of them do not. I will simply begin with an instance of 1 that I believe for me anyway, would not actually have legs, and it goes underneath the umbrella of due to causes, this business has offered off tremendously. Subsequently, it presents a possibility for buyers as a result of it is buying and selling under the place it must be. The one which leaves to thoughts for me that is come up a number of occasions over the previous two plus years is the Cruise Business, and that could be a great short-term alternative for some folks. I am not all for that.

As a result of it is not an business that I believe has nice long-term tailwinds behind it, I do not imply to select on the Cruise Business, however you already know what I am speaking about. There are some developments that get numerous consideration, however it’s for short-term causes.

Jason Moser: Yeah, I am glad you mentioned short-term causes as a result of I agree with what you are saying. I believe the best way I usually attempt to break this down in my very own thoughts, and I’ve talked earlier than about the best way that I make investments. As a long-term investor, somebody who usually prefer to be a internet purchaser of shares, I would like to purchase, I do not actually like promoting. Usually I’m in search of firms that I really feel they are going to be related for many years. Determining and following the long-term development in differentiating that between what I might name a short-term catalyst, and so I believe that the Cruise instance there’s a good instance of one thing the place there is a short-term catalyst. Earlier than 2020, I do not know that Cruise ships have been actually a spot the place I used to be all for investing, it sounds you’re feeling the identical means. It is simply not an business that you simply’re all that all for. I believe that is how I begin to at the least have a look at this, since you might have a look at the Cruise liners for instance, and say, “properly, I am not all that .” However by the identical token, it does really feel there is a short-term catalysts in place that would lead to worth for shareholders if issues proceed to enhance. The journey business basically has been shellacked, however issues are beginning to come again.

There have been numerous questions early on in 2020 as as to whether these main Cruise liners would even survive. They did a great job, I consider determining methods to outlive and protecting their stability sheets in working order there, however I believe for me, you see the advantage of a reopen after which say, alright, Cruise liners may gain advantage from that, the inventory’s been might begin to replicate that optimism. However past that short-term catalyst, is there one thing there? Do you see extra folks clamoring to go on cruises because the years go by? I am not satisfied that is the case. I believe it is a related business. I believe there are individuals who like to take cruises, however I believe there are additionally numerous dangers that include one thing like that. For me, it is making an attempt to consider what route the world is headed and I will be trustworthy with you, I am certain you in all probability can relate to this as a father or mother. I checked out my children, I’ve two daughters, they’re are at sophomore junior and highschool. I checked out them and their mates and what they’re doing, what they’re watching, the apps that they are utilizing, ways in which they’re conducting their enterprise, that to me begins to inform somewhat bit extra about shopper habits, developments that could be forming, issues that matter to youthful generations that may proceed to matter at the same time as they become older. I usually attempt to break it down between a long-term development versus a short-term catalysts in determining methods to discern between the 2.

Chris Hill: Should you assume again to final yr within the late spring, one of many huge developments getting numerous consideration was what was known as the good reopening.

Jason Moser: Yeah.

Chris Hill: It appears we’re at that time once more, as Omicron ranges proceed to drop, vaccines proceed to rise, an increasing number of companies, we talked about this final Friday on Motley Idiot Cash about a few of the greatest tech firms in America opening up their places of work, masks mandates coming down. You have been speaking to the parents at Cheddar, and I am comfortable to share Jason Moser as a useful resource our with media retailers. [laughs] You are welcome Cheddar. However critically, you have been speaking to them about this development, weren’t you?

Jason Moser: Yeah, we have been speaking about reopening, and to me it looks like reopening 2.0. We did undergo a reopening earlier than, the place I believe numerous us are beginning to get again on the market and resuming considerably regular habits. That is the following iteration of that, the place I believe the wall begin to come down and much more folks begin to exit and actually get their lives again to regular. We have been speaking about concepts, investments, firms that may profit from this subsequent section of reopening, after which what future they might have even past that, as a result of I might have a look at reopening as undoubtedly a short-term catalyst. This isn’t one thing the place the long-term development is for our economic system to reopen, and so for me that does not imply that there aren’t nice concepts on the market, that does not imply there isn’t any cash to be made, however by the identical token, and I believe, we mentioned this quite a bit after we have been speaking concerning the keep at house inventory, theme that we have been delving into a few years in the past. 

You need to guarantee that regardless, these are companies that you simply really feel will proceed to do properly even past the short-term catalysts. As a result of this short-term catalyst will finish, and then you definitely need to just be sure you’re not left holding the bag with the enterprise that perhaps is not going to proceed to learn past simply that catalyst. For me, there are numerous other ways you possibly can have a look at the businesses that may profit from this. I imply, you are speaking about incremental site visitors in every single place, folks going again to work, workplace buildings getting busier, the areas across the workplace buildings getting busier, malls getting busier, so what firms are you able to count on a profit there? To me, there are numerous other ways you possibly can have a look at it. I believe journey is one which stands out instantly simply because so many individuals are ready-to-go do one thing. We noticed a few of the snap-back in journey earlier by means of the course of this final couple of years, however it does look issues proceed to get even higher. 

I used to be trying by means of Reserving Holdings, for instance their most up-to-date earnings name, they have been speaking about the truth that they’re seeing the developments persevering with to maneuver in the proper route. They mentioned the primary half of February they noticed significant enchancment throughout all of their areas in comparison with January, however then they made this reference to gross bookings. They mentioned gross bookings for the summer time are increased than they have been right now in 2019, in order that’s encouraging for a variety of completely different causes and it sounds lots of people are planning journeys. I do know that we’re each planning to get a visit and I will be going just a few locations right here over the summer time as properly trying ahead to that. However when you consider simply the truth that gross bookings for the summer time are increased than they have been right now in 2019, that is actually encouraging. The great factor about journey is it is really a worldwide alternative. I believe journey goes to proceed to be a long-term development that buyers can profit from, so Reserving Holdings stands out as a technique to take a look at this reopen 2.0.

Chris Hill: It’s fascinating. The distinction, as you mentioned, the long-term development versus the short-term catalysts, as a result of finally there needs to be one thing sustainable. There needs to be one thing about an underlying enterprise that we as buyers can see a pathway for development. Which, and this can be simply my choice, I at all times choose natural development versus development by means of acquisition. It is to not say that that does not work, there are many companies which have rewarded shareholders by going the route of acquisition. However to me, it is simply preferable to see a enterprise like I’ve talked earlier than about Residence Depot and Lowe’s, and never that they do an amazing quantity of accelerating their retailer depend year-over-year, however you have a look at the best way that they’ve grown out their on-line presence, their deliveries, that type of factor, that is simply simpler for me to wrap my head round.

Jason Moser: Effectively, yeah. I believe Residence Depot and Lowe’s, two superb examples of companies that I believe might actually profit right here over the following a number of months as shopper site visitors continues to select up. We have seen the power within the housing market over the previous couple of years, and the neat factor about housing is whether or not you personal otherwise you hire, house enchancment upkeep, all that stuff is at all times on the desk. That is to me probably the most apparent long-term developments on the market, as a result of everyone wants a roof over their head. You have a look at Residence Depot and Lowe’s, the quarters that they simply chalked up, to have the ability to preserve their gross margins in a time like this when inflation actually is entrance and heart, Lowe’s really expanded their gross margin very modestly. Residence Depot, somewhat little bit of stress, however total they’ve actually been capable of preserve costs very properly and passes these prices alongside to customers.

I believe a part of that’s simply as a result of nature of the market that it serves, it is a needed market. Then they like to throw the statistics on the market, 50 p.c of the properties right here within the US are over 40 years outdated. Lots has modified in 40 years. The ways in which we construct homes, the ways in which we have restore our properties and replace and enhance our properties. What that finally means is you get this huge put in housing base on the market simply on this nation alone, that basically requires numerous what Residence Depot and Lowe’s are promoting. They will not be the sexiest names on the planet, and so they might not just like the world on hearth within the near-term, however once you stretch the chart out, in case you have a look at the best way these firms carried out by means of the years, 3, 5, 10 years, they’re simply large performers. Lowe’s in significantly, you have a look at what Marvin Ellison has accomplished there, that has been simply nothing wanting spectacular. I believe what we have got now’s actually two companies there in Lowe’s and Residence Depot that you simply and I’ve likened earlier than to MasterCard and Visa. It is nearly like a which one ought to I decide? Why trouble selecting? You may really personal each and get away with it simply wonderful. It is not a foul concept, really.

Chris Hill: Not a foul concept in any respect. Last item after which I will allow you to go. When you consider long-term developments, I suppose there are a few other ways you possibly can take into consideration them. One is to attempt to predict the place the longer term goes and be proper, not solely concerning the route, however the timing of how quickly we will get there. I used to be on David Gardner’s Rule Breaker investing podcast lately and on an episode that have been set within the yr 2052 and one of many jokes we made on that was that self-driving automobiles, nonetheless not a factor [laughs] and it will not be by the best way. That is one technique to do it, like OK, that is the place the world goes. However one other technique to do it’s to take a look at developments proper now and say, OK, do I believe that is going to be right here in 20 years? You possibly can say that about particular person merchandise, you can too say that about industries. It is why at any time when somebody has a brand new child and he is like, I need to purchase a inventory for them. My reply is at all times Starbucks. As a result of I do know that the best way we drink espresso in 50 years goes to look an entire lot like the best way we drink it now.

Jason Moser: [laughs] If it appears any completely different, Starbucks might be going to be one of many firms that’s innovating and iterating there. So that you in all probability win both means. Yeah, I believe to me, one of many developments that I believe it is entrance and heart proper now for lots of people is figure, precisely how we will be working. We’re speaking about keep at house, now we’re speaking about reopen. It has been a bizarre two years. There’re places of work that by no means closed down after which there are different places of work that simply have closed down utterly and also you surprise what precisely the longer term holds. I look to a enterprise like Microsoft, for instance, and I believe it is very telling that you’ve numerous these huge tech firms which might be reopening their places of work. They’re keen and excited to do this, and I believe that is for a variety of causes. I believe that you’ve got seen a few of the CEOs of those companies, Twitter for instance, they’re speaking about the truth that, sure, distant work is accessible, however it’s tougher. It makes issues much more tough. I am certain in all probability you run into some challenges the place distant work does make issues tougher. 

However by the identical token, there are numerous of us that like that, comfort in with the ability to go do what they need to do after they need to go do it, it actually expands that work schedule. For me, I have a look at the absolutes as being in all probability what you need to keep away from. Should you’re saying, properly, we’re simply going to be a virtual-only firm, you are in all probability leaving one thing on the desk there. However in case you say that, properly, everyone needs to be on the workplace on a regular basis, properly, you are leaving some expertise on the market that you simply may not be capable to get in any other case. To me, the hybrid work surroundings, that is what looks like the longer term holds. You have a look at an organization like Microsoft, an organization that is liable for getting so a lot of these instruments that we have been in a position to make use of, whether or not you are Slack or Zoom or Microsoft Groups, Microsoft Groups and the entire instruments that Microsoft gives, they assist allow what finally I believe we will see is the hybrid work surroundings the place numerous of us have the chance to do it nevertheless they need to do it, however firms nonetheless have a course of and a philosophy in place that leaves everyone feeling included. I believe that is in all probability one of many larger challenges. I believe that is going to be one of many issues that firms will determine as time goes on, is managing the distant and the bodily current workforce collectively. Not saying that is a simple factor to do, however I believe that is going to be one thing that firms are going to should do. As a result of to me, once more, it feels such as you’ve take it to the acute, in case you go absolutes somehow, that to me appears to open up extra challenges of alternatives the longer you play that out.

Chris Hill: Jason Moser, thanks for being right here.

Jason Moser: Thanks.

Chris Hill: Bear in mind again in highschool when your English instructor taught you the right way to write a thesis statements, it is the principle concept of your essay and you aren’t going to get an A with out a sturdy thesis assertion. It seems that is a type of expertise that turns out to be useful for buyers such as you and me. Right here to speak by means of the nuts-and-bolts of an funding thesis is Motley Idiot Senior Analyst, Alicia Alfiere. Thanks for being right here.

Alicia Alfiere: Thanks for having me.

Chris Hill: Earlier than we get into a few of the key questions that may go into an funding thesis. Why do you assume an train like that is useful for us as buyers?

Alicia Alfiere: First, after we consider an funding thesis, it is actually a abstract of what you consider the corporate and why you assume it makes a great funding case, in addition to a few of the dangers. It is actually necessary, significantly now after we are seeing numerous market volatility. The thought right here is that I’ll make it easier to lower by means of all of the noise of that market volatility and centered on indicators on your firm and hopefully cease you from promoting an organization that is really fairly good.

Chris Hill: I do know that you’ve got been utilizing Duolingo, let’s use that for example right here, and a few of the key questions that folks can ask after they need to construct an funding thesis for any enterprise, for any inventory and it begins with actually understanding the corporate.

Alicia Alfiere: This one feels like a no brainer, however there are literally firms on the market that require somewhat bit additional time and analysis to have the ability to reply questions like, what does this firm promote? Do? What drawback are they fixing? Who’re their clients? How do they earn cash? That is actually elementary to grasp. If we use Duolingo for example right here, Duolingo is a worldwide cell studying platform with the mission to develop the very best instructional content material on the planet and make it universally out there. They provide a gamified method to studying over 40 languages and so they provide numerous completely different options right here. They’ve their flagship Duolingo Studying Language App, which is free. They’ve Duolingo Plus, which is a subscription. Duolingo English Take a look at, which is a proficiency examination, and Duolingo for Colleges. Basically the issue that they are fixing right here, is making schooling accessible to the cell technology and their classes are fairly efficient. In keeping with their inside research, customers with 5 Duolingo items have been as proficient in studying and listening as college students with 4 school semesters of language courses. Then when it comes to how do they earn cash, once more actually necessary to grasp. They make most of their cash from their subscription merchandise. The remainder comes from the Premium Apps, so these are primarily based revenues and revenues from their English tax.

Chris Hill: Each enterprise has competitors, so clearly it’s price spending a minute or two once you’re placing collectively an funding thesis excited about aggressive benefits {that a} enterprise may need.

Alicia Alfiere: Have a look at the competitors throughout the business. Is there a services or products sticky? Does the enterprise have community results? Once we speak about community results, consider a platform like Fb. The place you’ve got this virtuous circle of knowledge which makes your customers use it extra, which brings in additional knowledge, which lets you get extra insights, [laughs] which once more makes that product much more precious. When it comes to Duolingo they’re in a extremely aggressive business. A lot of choices to study new languages, whether or not it is a digital or in-person courses, different apps and web sites and there may be substitution objects that you can use as properly like translator apps. However what benefits does Duolingo have? They’ve a robust model, they’ve had over 500 million downloads and their flagship app is the highest grossing app within the schooling class on Google Play and the Apple App Retailer. This sturdy model recognition actually helps to drive natural development for them. 

In addition they have sturdy community results so 41.7 million month-to-month energetic customers, which features a US contingent that truly out numbers. Whole US highschool overseas language learners which an enormous quantity right here. They’ve over a half billion workouts accomplished day by day on the platform and on account of that sturdy community, Duolingo beliefs, they’ve the most important assortment of language studying knowledge, and so they feed this digital cycle of their community by utilizing their assortment of knowledge, to make studying experiences extra environment friendly and differentiated for its customers. When it comes to platform stickiness, over 50 p.c of day by day energetic customers have used the app for greater than seven days in a row, and a million customers have an energetic stretch of longer than twelve months. Fairly spectacular there, however there are some tough components right here for paid subscribers, it’s kind of extra sophisticated. About 40 p.c of annual subscribers renew their subscriptions after a yr or about 9 p.c of month-to-month subscribers renew their subscription after one yr. They received some work to do right here.

Chris Hill: On the Motley Idiot, we’re not simply within the enterprise, we’re within the administration as properly. It is price spending time determining, hey, who’re the folks operating this enterprise?

Alicia Alfiere: Completely. Check out who’re the co-founders, who’s main the Firm? Have they got a long-term imaginative and prescient? What’s their tradition like? Bear in mind their workers are what make a imaginative and prescient come to life. If workers do not buy in, it will be actually laborious for an organization to develop. For Duolingo, it was based by Luis von Ahn and Severin Hacker, two engineers who met at Carnegie Mellon. Luis is the CEO and Director, Severin is the CTO and Director. They’re each closely concerned within the firm, which we actually like. For Luis rising up in Guatemalan, he noticed how entry to schooling can really rework lives and when he met his kindred spirit in Safran the 2 embarked are creating an accessible, efficient, and clever studying resolution. Whereas they began with languages, their long-term purpose is to have language studying be simply one of many schooling options that they provide. They’ve already began alongside this path. They’ve their Literacy App, Duolingo ABC, which teaches kids the right way to learn and so they’re engaged on an app to show elementary college math. For tradition, I like to take a look at web site like Glassdoor to see what workers assume. Do they like working there? Are they devoted to imaginative and prescient? On Glassdoor, 93 p.c of workers would suggest Duolingo to a pal and 97 p.c approve of the CEO, so fairly strong outcomes right here.

Chris Hill: We are saying on a regular basis investing is concerning the future. Sooner or later once you’re placing collectively an funding thesis, you bought to examine a few packing containers when it comes to what does the longer term appear like for this enterprise?

Alicia Alfiere: Sure. Take into consideration the longer term. What is the market alternative for them? Can they develop? How can they develop? Are there any broader developments that may assist or damage the corporate sooner or later? For Duolingo, they seem to be a participant in a rising market, the cell studying area. Preferences for comfort, an on-demand providers have pushed numerous customers towards cell options. Whether or not it is procuring or studying, and COVID accelerated the utilization for cell studying. Although the expansion will in all probability edge away from a few of that COVID highs, it is nonetheless anticipated to develop. International language studying spending each on-line and offline, reached 61 billion in 2019 and is projected to develop to 115 billion by 2025. Inside this market, on-line studying is rising quick. From 12 billion in 2019 to 47 billion in 2025. Maybe the comfort and adaptability of cell studying, in addition to smartphone adoption total, is broadening the demand for that language studying merchandise. Since Duolingo’s annual revenues have been about 161 Million in 2020, they’re solely about 1.3 p.c of the present marketplace for on-line language studying, which provides them a ton of room to develop. They’ve a plan to develop, which is de facto necessary. They assume that they might develop by growing the variety of customers, changing free customers to these paid subscription customers, growing subscription stickiness, which we already talked about, and increasing their options, past that language studying.

Chris Hill: We need to be bullish after we’re considering [laughs] about inventory that we’re contemplating including to our portfolio. However in some unspecified time in the future it’s important to placed on the naked hat and take into consideration what are the dangers to this enterprise?

Alicia Alfiere: As a result of each funding has dangers, that is the character of the beast and if you cannot discover one, that you must analysis extra. Be curious, play the a part of the skeptic and ask, what might go flawed. That is particularly necessary in occasions of market volatility. For Duolingo, we already talked about a few of the points that they’ve right here. Working in a extremely aggressive surroundings and subscription retention numbers that could possibly be higher. However there’s additionally one other problem we did not speak about, and that is low switching prices. What that signifies that it would not actually price some huge cash and it is not an enormous trouble for customers to easily change apps, or absorb particular person prices as an alternative and so that’s one other danger.

Chris Hill: You have clearly put in some work on Duolingo, inform me how the story ends. Is that this inventory you are including to your portfolio or is it in your watchlist for proper now?

Alicia Alfiere: Effectively, proper now it is extra on my watchlist. On the finish of this course of, what I love to do is summarize and truly, hey, what would the funding thesis appear like? On this case, I might say Duolingo has gamified method to studying, which has helped the corporate construct a robust model and profit from sturdy community results in some platform stickiness. With these aggressive benefits, sturdy tailwinds from on-line schooling developments, a big market to increase into, and a plan for growth, Duolingo is an intriguing firm by subscription retention statistics and people low switching prices give me a little bit of a pause for proper now. I will proceed to observe them and analysis them as a result of I discover this firm fascinating and a extremely worth management’s imaginative and prescient and plans for the longer term.

Chris Hill: Do you have extra details about placing collectively your individual funding thesis in our present notes. So examine these out once you get an opportunity. Alicia Alfiere, thanks a lot for being right here.

Alicia Alfiere: Thanks for having me.

Chris Hill: That is all for at present, I shall be arising tomorrow, three analysts share a few of the greatest investing classes that they’ve discovered over the previous 20 years. As at all times, folks on this system might have curiosity within the shares they speak about and the Motley Idiot might have formal suggestions for or towards. So do not buy or promote shares primarily based solely on what you hear. I am Chris Hill. Thanks for listening. We’ll see you tomorrow.