Issue #26: The undervalued tech-driven real estate giant and the trillion-dollar mobile broadband opportunity 🚀
Chase Coleman is one of the most successful young fund managers in the world. At 45, he’s managing $50 billion and earned a $10.4 billion return in 2020.
Coleman started his first fund at the age of 25, with seed capital from mentor Julian Robertson of Tiger Management (we talked about him 2 issues back).
Coleman’s first move was audacious: at the pit of the dot com bust he started a technology fund. Much of Wall Street thought he was crazy, but his profits proved them wrong.
His secret? In his own words, “identify high-quality businesses levered to the most important secular growth trends while shorting poorly positioned companies on the wrong side of change.”
That’s a fancy way of saying “hold the good companies and short the bad ones”.
The key lesson: when markets are being hammered, look for the worst-hit sector and buy the best companies in it. If you want to buy low and sell high you have to start by buying low.
Let's get into this week’s report. Here’s what we found:
- A tech-driven real estate giant that dominates the US online property marketplace.
- A company that aims to convert every mobile phone into a sat phone with a network of satellites capable of connecting directly to mobile devices.
Zillow Group, Inc.($Z)
$104.15 - Share price at the time of writing
- Zillow is a digital real estate company that has been called “the Amazon of real estate”. It is the dominant provider of online real estate services in the US.
- Their products and services cover the entire real estate spectrum: buying, selling, renting, financing, title and escrow services, title insurance, and more.
- Zillow is ideally positioned to benefit from today’s booming real estate market.
- $Z stock has retreated from last February’s highs and currently trades at an attractive valuation.
What they do:
Zillow is America’s leading full-service real estate portal. Zillow’s websites receive over 200 million unique visits a month. Zillow maintains a living database on 110 million US homes.
Zillow provides a range of services through multiple brands.
- Zillow, Trulia, and HotPads provide listings of homes for sale or rent, with a sophisticated system allowing customizable searches and comparisons.
- Zillow Offers buys and sells homes directly in many American markets. This service enables fast sales and gives buyers and sellers control over their timelines.
- Zillow Home Loans allows fast, easy pre-approval, mortgage financing, title, and escrow services.
- Zillow Closing Services streamlines the closing process and provides smooth, reliable, surprise-free closings.
Zillow uses information, cutting edge technology, and a service-oriented culture to provide the simplest, most efficient real estate transactions possible.
Why they’re spiking in interest:
Data from MarketStream.io show an abrupt spike in Zillow mentions on July 16 and 17, rising to 894 mentions in two days from a daily average of around 25 a day.
That surge does not appear to have been driven by any company or industry news or by movement in the stock price.
The interest came from a single discussion on the Wall Street Bets forum. That discussion - based on a post suggesting that Zillow may replace traditional realtors - generated almost 5000 responses and almost 25,000 upvotes.
Our main takeaway from that thread is that Zillow is a household name. Anyone who has bought or sold a home, or even casually browsed homes for sale, knows exactly what Zillow is and what it does.
That’s a huge contrast to the many companies that investors know only from investment-related discussions. Warren Buffet is famous for stating “Invest in what you know”, and almost everyone knows Zillow.
Notable comments from Reddit:
"I've listened to their earnings calls, and their CEO speak to investors. Am all in on Zillow. The fund I'm in reckons it'll 2-3x at least."
"This is actually a great entry point to buy some Z stock. This is a buy and hold, though, so patience would have to be key. Should be a triple bagger in 2-3 years.”
Signal: Cathie Wood of ARK Invest holds over $1 billion in Zillow stock.
Why $Z could be valuable:
The US residential real estate market is red hot, with prices setting new records and transaction volume constrained only by limited supply.
Continued low interest rates are driving strong demand despite high prices.
Zillow is the dominant provider of online real estate services. No competitor offers anything like the reach and the variety of services that Zillow provides.
Access to comprehensive information and services in a single location has long been a problem for home buyers. Zillow provides an effective solution.
Zillow is positioned to dominate the entire real estate value chain, from comparison shopping to closing. This is a huge market: the total addressable market for real estate advertising is estimated at $18.8 billion and the market for transaction services is nearly $2 trillion.
Zillow’s revenues and gross profits have increased every year since 2017. The Company has consistently beaten analyst earnings estimates.
19 analysts are currently covering Zillow. The overall rating is “Buy” and the average price target is $183.20. That’s a $75.9% gain from the current price.
What the risks are:
The current real estate market boom may not last. As we saw in 2008, real estate is not immune to crashes. A serious market downturn could harm Zillow’s prospects and stock price.
Rising inflation may force the Fed to increase interest rates. Rising rates could affect real estate demand and transaction volume.
The Zillow Offers service is actively buying and selling homes. They hold a significant number of owned homes in inventory. A price downturn could reduce the value of this inventory.
While Zillow faces no equally comprehensive competition, it competes with national and local businesses in each of its market segments. A large nationwide enterprise may have less agility and personal connection than local competitors.
Zillow has invested large sums in its Zillow Offers and Zillow Mortgage businesses, and as a result is not profitable despite increasing revenues. If these businesses fail to produce the expected results the Company may fail to achieve profitability.
Bottom line: Zillow combines the opportunity of a growing tech company with a dominant presence in one of the most durable businesses on the planet. Analyst evaluations indicate a strong short-to-medium term upside. If Zillow can execute its vision to dominate the US real estate market - the long term upside could be even greater.
AST SpaceMobile, Inc. ($ASTS)
$11.01- Share price at the time of writing
- AST SpaceMobile is building a satellite-based broadband cellular network that connects directly to mobile phones.
- AST intends to eliminate connectivity gaps and bring reliable mobile broadband coverage to areas not served by current networks.
- AST has over 1000 patents and patent pending claims covering all aspects of its operations.
- The Company went public through an SPAC in April 2021. Shares have remained in a band between $7 and $11 since then.
What they do:
AST SpaceMobile is developing a mobile broadband network that uses low Earth orbit satellites to connect to any mobile phone. No other hardware or software is needed.
This technology could effectively eliminate coverage gaps and deliver reliable mobile broadband service to those who currently don’t have it. That’s over half the world’s population, a potential market worth trillions.
The service will be delivered through a network of 168 satellites. Users will connect to the network in the same way that they would connect to a local cell tower.
AST intends to initiate service in 2023, with 20 satellites covering 49 equatorial countries with a combined population of 1.6 billion.
A demonstration satellite has been launched and has proven that it can communicate directly with mobile phones, according to the company. The satellite was built by NanoAvionics, a Lithuanian company. AST SpaceMobile owns 51% of NanoAvionics.
AST’s partners include major wireless companies like Vodafone, Rakuten, and American Tower.
Why they’re spiking in interest:
AST SpaceMobile is generating increasing buzz on social media. According to marketstream.io, Reddit mentions in June and July jumped 240% over the previous 2 months.
Much of that surge was a peak on June 8, coinciding with a 51.5% single-day gain in the stock price.
The increase in interest - and the price jumps - were driven by a sequence of events.
- On May 7 a widely read post on Reddit’s Wall Street Bets placed $ASTS on the radar of many retail investors.
- The June 8 spike was sparked by rumors that $ASTS would be added to the Russell 2000 Index. That would drive buying by funds tracking that index.
- On June 30 highly rated analyst Brian Kraft of Deutsche Bank initiated coverage of $ASTS with a “Buy” rating and a price target of $35.
AST SpaceMobile has an extremely ambitious plan with strong appeal to future-focused investors. Interest peaks on any news suggesting progress toward implementing that plan.
Notable comments from Reddit:
"Holding ASTS till $500, game changing tech here. World wide 5g service via satelite. Incredible stock!" - LucidLarry69
“This stock has all sorts of potential to rocket on good news and ultimately any lame bear arguments have an expiration date - when BlueWalker 3 (BW3) launches in late Q4 2021. BW3 validates the technology again because it is a scaled down version of the final product (1.5 tons) set to be deployed in 2022 with equatorial coverage (accessing up to 1.6 billion clients).” - Commodore64__
Signal: Rakuten, Vodafone, and Samsung NEXT (the investment arm of Samsung) put $128 million into AST in early 2020.
Why $ASTS could be valuable:
AST SpaceMobile is targeting a revolutionary niche. The total addressable market for wireless services is over $1 trillion. 90% of the 4 billion Internet users access the web on a mobile phone, and 51% of the world’s population lacks access to mobile broadband.
AST has no established competition. Another startup, Lynk Global ($LYNK) is pursuing a similar business plan but is in the same early stage of development.
AST does not see companies like Elon Musk’s StarLink as competition, as they fill a different niche. AST management points out that these operations actually help AST, as the increased volume of satellite launches produces lower prices.
AST will deliver service through local telecom providers. Potentially lucrative 50/50 revenue sharing agreements are already in place with AT&T, Vodafone, American Tower, Liberty Latin America, Telefonica, and others.
If AST can successfully execute its business plan it could emerge as one of the world’s dominant telecom companies. That makes the potential upside almost unlimited.
What the risks are:
The technology used by AST SpaceMobile is proprietary. Much of it has not been independently reviewed. The technology may not meet the challenge of directly connecting a mobile phone to a satellite.
Building and launching satellites requires large amounts of capital. The Company may not have enough financing to implement its business plan.
AST is not profitable and its only revenue comes from its 51% stake in NanoAvionics.
AST’s proposed schedule for the deployment of its technology is extremely ambitious. Any deviation from the schedule could reduce market confidence and affect the stock price. Such deviations could be caused by an inability to launch the required number of satellites, problems with satellites already launched, issues in the core technology, or other factors.
Bottom line: Either the technology will work or it will fail. If it works, there’s potential for exponential gains. If it fails, investors could lose everything.
Disclaimer: The information that Ticker Nerd provides is general in nature as it has been prepared without taking account of your objectives, financial situation or needs. It does not constitute a recommendation to buy or sell any stock. This email is not intended as legal, financial or investment advice and should not be construed or relied on as such. Ticker Nerd is not responsible for any damages. Before making any commitment of a legal or financial nature you should seek advice from a qualified and registered legal practitioner or financial or investment adviser. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Ticker Nerd has no position in any stocks mentioned.