Issue #21: Betting on the $99b pet industry and the market leader in audio and video production software 🎥
Let's get into this week’s report. Here’s what we found:
- A pet health and wellness company that has over 1,500 store locations plus a booming e-commerce business.
- A recognized leader in specialized software and hardware used in digital media production that has moved to a SaaS model.
Petco Health and Wellness Company, Inc.($WOOF)
$25.41 - Share price at time of writing
- Petco is a pet health and wellness company that provides pet healthcare supplies, veterinary services, insurance, and grooming services.
- It has over 1,500 physical stores, a booming digital business, and lucrative vet clinics in its stores, which separates it from digital-only pet businesses.
- In Q4 2020, Petco saw 92% growth in its digital business, as well as double-digit growth in Services & Vet, as well as Pet Care.
- With more than 70 million households in the US owning a pet, the industry is set to reach $100 billion in value over the coming years.
What they do:
According to its website, Petco is a "fully-integrated health and wellness company for pets."
Although Petco was founded in 1965 it has only recently transformed its business from a traditional retailer into a hybrid. That combines both in-store and online products and services.
Petco now has its own ecosystem – which offers premium pet products, services, veterinary care and membership options.
Why they’re spiking in interest:
According to MarketStream.io, the total Reddit mentions of $WOOF over the past 7 days have increased by approximately 700% compared to the previous week.
The surge in mentions of $WOOF was likely driven by its Q1 earnings results which were released recently. The results beat Wall Street analysts’ expectations with the company raising its forecast for the year. Petco also reported a 28% increase in same-store sales compared to the previous year.
Notable comments from Reddit:
"108% short on Petco, a company with insane earnings the past two Q’s? I think it’s time to buy more for me…." - ChiefSaid
"This isn’t a meme play Petco is a good stock and I don’t believe brick and mortar pet shops are going anywhere." - ThyMagicConch
Signal: Billionaire hedge fund manager Ken Griffin purchased $3.37 million shares in $WOOF during Q1 2021. Source - cheaperthanguru.com
Why WOOF could be valuable:
Not only is the pet industry one of the few "recession-proof" industries it's also growing rapidly.
According to ExplodingTopics.com, U.S pet market sales have increased every year in the last decade, growing from $50.96 billion in 2011 to an estimated $99.1 billion last year.
Petco is in a unique position compared to other online pet businesses such as Chewy.com (CHWY).
Rather than relying purely on its e-commerce revenue Petco also has 1,500+ stores to offer services that are impossible to replicate online. This includes pet health check-ups, vaccinations, and in-person consultations on things like pet allergies or what food to buy.
Petco's recent earnings release was impressive. Its net revenue for the quarter reached $1.4b, up 27%, driven by in-store sales which were up by 28%. The quarter was also Petco's tenth consecutive quarter of growth.
Petco's management is confident it will be able to sustain this growth the rest of the year, with its revenue guidance for 2021 increasing by an additional $225 million.
Petco’s strong revenue growth validates its complete pet ecosystem.
According to its investor presentation in March earlier this year, over 3 million pets were adopted in 2020. Creating years of potential revenue for the industry, which Petco will likely capture a meaningful portion.
Petco is also investing heavily in the areas where it can win such as its vet hospitals and member services.
Petco is now able to offer same-day delivery or in-store pickups. Although this doesn't give Petco a competitive advantage, it allows its e-commerce experience to keep up with the competition.
In addition to using its stores as distribution points, getting people in the store means Petco is able to upsell and cross-sell customers. For example, customers could stock up on pet food or get their pet vaccinated while in the store. This is why Petco's model is so attractive in an e-commerce dominated retail landscape.
Petco has also accelerated the rollout of its vet hospitals, reaching 125 locations plus 800 mobile vaccination centers.
The company is also seeing strong growth in its own private label brands, which come with better margins than the external brands that are stocked.
Petco is still in the early stages of this transformation, so it has the potential to meaningfully boost margins over time. Similar to what other retailers have done in the past with their own in-house brands.
What the risks are:
The company historically has had issues with profitability and taking on too much debt. Although in 2020, Petco reduced its net debt from $3.3 billion to $1.5 billion.
Petco also faces strong competition. Competitors such as PetSmart have also started to offer integrated in-store solutions, which could affect revenue moving forward.
Avid Technology, Inc. ($AVID)
$36.38 - Share price at time of writing
- Avid Technology provides software and hardware used to produce audio and video content.
- Over the past two years, the company has shifted focus to its cloud-enabled software subscriptions. The results have been impressive.
- Its subscription revenue reached ~$100m annual run rate in Q1 2021 and is expected to generate $47-$55m in free cash flow this year compared to $12m in 2019.
- Subscriptions for enterprise solutions are driving the next stage of subscription growth.
What they do:
Avid Technology is a recognized leader in specialized software and hardware used in digital media production.
Specifically, digital non-linear editing (NLE) systems, video editing software, audio editing software, music notation software, management and distribution services.
Its products are used by a wide range of customers including news and sports broadcasters, movie production companies, music recording studios and educational institutions.
For example, the NBC Olympics recently announced that it has selected Avid to provide the content production and media management platform for the Olympic Games in Tokyo this year.
Why they’re spiking in interest:
According to Gambiste.com, the Twitter score for $AVID over the past 3 months has increased by 71.03.
Gambiste.com uses a proprietary algorithm that filters out spam and weighs each user mention depending on the account's reputation.
The recent growth in mentions of Avid was likely driven by its recent virtual investor day presentation that impressed a number of analysts and ratings firms.
An article from MarketBeat published on 06/14/21 also noted that Avid currently has a consensus "Buy" rating from the six ratings firms covering the company.
Signal: Billionaire hedge fund managers Ken Griffin and Jeremy Grantham purchased 90,600+ and 50,400+ $AVID shares respectively during Q1 2021. Source - cheaperthanguru.com
Why AVID could be valuable:
The demand for high-quality audio and video content has exploded over recent years.
Here are a few reasons why:
- There are more channels for people to consume content.
- There are fewer barriers to entry for creators to create content.
- As more and more content is created, the quality consumers expect has increased.
Avid has already begun to benefit from these trends as demand for its core products has grown rapidly.
Avid's product offering can be split into three key areas: creative software, enterprise software and integrated solutions.
Its creative software is used to create high-quality audio and video content. This segment includes tools such as Pro Tools DAW, Media Composer Video Editor and Sibellius Notation.
Enterprise software refers to Avid's cloud-enabled platform used for media production workflows to create content more efficiently.
While its integrated solutions is a bespoke offering that includes both hardware and software that are packaged based on the individual needs of a company.
Its editing products Media Composer Video Editor, Pro Tools DAW, and Sibelius Notation along with its content management tools have become the standard for major video and audio production companies.
Avid recently shifted towards a cloud-enabled subscription software as a service business model that has resulted in tremendous growth in revenue and free cash flow.
Subscription revenue reached approximately $100m annual run rate in Q1 2021 is expected to contribute over 50% of total revenue by early 2024.
Its subscriber growth has a compound annual growth rate (CAGR) of over 54% adding 187,000 subscriptions over the past 2 years.
Avid is also seeing healthy organic growth in the total number of paid users (which includes active maintenance contracts) with a CAGR of over 23% in 2 years.
Despite this impressive growth the future still looks bright for Avid.
Avid's products and services are essential for the production and management of digital content across the whole workflow from creation to distribution.
Its products are also extremely sticky. Once a user enters the ecosystem, it's difficult to migrate into alternative solutions.
Outside of its enterprise-level users, Avid is now expanding into the "serious music creator" demographic made up of professional and aspirational creatives. This market has an estimated annual spend of $570 million.
Avid is also building on its large, profitable on-premises installed base (such as news stations and movie studios) by offering hybrid cloud software subscriptions.
This opportunity of helping on-premises users transition to cloud storage is forecasted to be worth $2.1b alone by 2025E, according to research from Coughlin Associates.
What the risks are:
The biggest risk to Avid's share price is the ongoing volatility in tech and high-growth stocks.
Repricing of tech stocks due to higher interest rates could put downward pressure on the share price. Weaker-than-expected results in the upcoming quarters could also see the share price drop to be more in line with long-term earnings estimates.
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