Doing much better now - Carousell

Readers will know I did an analysis  back in 2016 and updated it in 2018. In 2016, I was quite disturbed because they have not switched on revenue tap after 4-5 years.   My reason is that the organization cannot learn what works and build the right sized complement of capabilities internally if it does not start charging. Also I think very much from founder pov and I felt the amount of dilution the founders took was not optimal for their own life outcome.

Then in 2018, I commented again as they finally switched on the revenue and the initial revenue was very low at 1+m compared to expenses and valuation. 

Then things got better for them. They used their high valuation to acquire some solid revenues from SPH and OLX. I thought this was a very good move. Much like grab buying Jaya and now transcab.  These moves helped a lot. They also learned how to sell and are trying to earn a cut from all the activity happening.

Now 5 years later, I think carousell is a changed animal for the better. Mgmt has matured, usage is still strong at 35m visits per mth. Still loss making but with 100+m revenues but it should be sustainable if they run lean to ensure low overheads and pick high gross margin verticals to enter. And very important, the direction seems clear as Siu rui articulated a clear positioning for the company as the dominant asean classifieds that focuses on sustainability. 

So moving forward, I see 2 key challenges. First, pick and grow the right verticals that are very large and the company can grow into. At same time these verticals cannot be cash intensive and/or too low margin. I would avoid jobs, property if I can. Incumbents way too strong and synergies not great. Used cars maybe as there are profitable models whether it is listings or transactional. And if growth is by acquisition, the internal capability to integrate is critical. Second, the environment has changed at later stage investor and listed side. Listed side investors now want to see both profit and growth esp if niche areas. So mgmt have to walk that balance to show both are happening. And all this time, they must make sure have enough cash. 

These 2 challenges are not easy. Verticals usually have incumbents. And they can be very strong. See seek and propguru, sgcarmart/motorist etc. Other verticals may be weaker but their gross margins are poor and fraught with execution risk. See theRealReal and redbonz in the 2nd hand fashion space. 

So assuming mgmt navigate well, what will success look like in medium term? 

To me good execution will be to succeed in 1-2 verticals that are large and growing well. Eg fashion, watches, used cars etc. Financially, breakeven or very small loss on revenue of usd200m in 3 years. Then the valuation will  likely go back >$1b.  I am assuming interest rates stay high which means growth stocks no longer have a crazy premium. 

Case in point, job classifieds can make $30m net profit on 100m sales. Company will be valued at 1B even if growing just 10-15%. So if carousell can blend out a gross profit of 35-40%, then its revenue needs to double to $200m to have a gross profit of $70m. And if  lean like a job classified on overheads, it will be worth the 1b or so. 

Or if we want to compare against currently listed entities, propguru does about 110m usd revenue, growing in low to mid teens and is valued at 5 times revenue less cash on hand. So that triangulates with the 200m revenue number. And this assumes the GP  both are same. I suspect propguru will always be higher margin but carousell may be growing faster if they pick big solid underserved verticals.

So what do with SEA- a losing core stock?

Quick thoughts on how to handle a losing stock like sea.  It’s the biggest loser in our portfolio this year (almost everything else is up) and we have a good chunk of it as it’s one of the few stocks that we stock pick and own. 

Latest quarter, growth rates just mid single digits at 5.2%. Grew profits to 330m but stock plunged. reason is: 

- sea is facing competition by Lazada and possibly TikTok.  No new big game on the horizon to replace the declining free fire.

- mgmt (rightly) wants to reinvest more into growth and so the 300+m quarterly profit may reduce or even go negative. So investors get jittery.

So how to view a stock that has lost 60% of value from our buy price? We obviously believe in the mgmt otherwise we would have cut loss at 20-30%.  But we have not added much as the logic is down can go down more. Lucky for us. And we also kept to our overall limit per stock of 5% of portfolio.

Now of course sea is down to 1.5-2% of portfolio esp since rest of equities did very well beating SPY this year. 

So the question is what to do now that it looks like sea has capitulated with the huge drop to 38.

Long story short, have used options to double down. Sell put buy long dated call to an effect of doubling holding. This will put my average price down to 60ish or so. 

Main reason is conviction this mgmt knows what they are doing. Let’s see next 1-2 years if we are right. 

Side note: psychology plays a big role. 3 points

- It’s much easier doing this double down this year than adding to FB or SPY, QQQ last year oct. Reason is last year everything and overall already down. So its very hard to add in a falling market. Had to force myself and in the end skipped one major chance though caught most of it.

- Overall, sea is our biggest stock gain ever. So it’s easier to have conviction when the 60% loss is 20% of the old gain. However, I am mindful this can end up being a blindspot to be too generous in our assessment of sea. Have to remember.

- note I used far out of money long dated call options to double down. So i am also limiting my losses to the call premiums while riding most of the upside esp if sea rebounds big. But for options side of things, I will take profit if it rallies big. Then switch into actual long holdings if we want to own more sea.