Optimist Fund Q1 2024 Quarterly Letter | Old North State Wealth News
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Optimist Fund Q1 2024 Quarterly Letter

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To the partners of Optimist Fund,

At Optimist Fund, we run a concentrated portfolio of 15-25 stocks and aim to maximize returns over a 5-year investment time horizon.

In the quarter, we reached our 2-year anniversary and now have a little less than 3 years before completing what we will call our first “5-year vintage”.

We’re up ~6% since inception, ~19% year-to-date, ~74% in the last year and we continue to see significant future upside.

The portfolio consists of 19 market leading companies that we believe have the potential to appreciate ~4x over the next 5 years.

% Returns

Optimist Fund*

Benchmark**

2022***

-51.4%

-17.5%

2023

82.9%

30.4%

Q1 2024

19.1%

9.7%

History rhymes

In the early 2000’s, amidst the collapse of the tech bubble, Amazon’s (AMZN) share price declined 95% while their sub scale competitors went bankrupt or exited the ecommerce market. The dramatic decrease in competitive pressure allowed Amazon to cement their position as the global e-commerce leader.

The bursting of the tech bubble helped Amazon become the dominant company they are today, which drove material returns to their investors over the last two decades.

In our view, 2022 in many ways mirrors 2001/2002, and a similar story is playing out with many of our largest investments.

We believe Carvana (CVNA) has won the online used car market, UBER has won the ride-share market, Doordash (DASH) has won the restaurant delivery market, and Wayfair (W) has won the online furniture market. Over the last 2 years the competition has either died or shrank dramatically and we aren’t seeing any appetite from venture capital or legacy incumbents to fund new competitors.

We believe the market is dramatically underappreciating how big, profitable, and valuable the leaders in these markets will become over time, which Optimist Fund is positioned to capitalize on. Now let’s review the quarter.

In Q1 most of our holdings demonstrated continued strong fundamentals which drove strong share price performance.

Top Contributors

Contribution

Q1 2024 TSR

Top Detractors

Contribution

Q1 2024 TSR

Carvana (CVNA)

13.3%

66%

HelloFresh (OTCPK:HLFFF)

-3.3%

-54%

DoorDash (DASH)

3.5%

39%

Smartsheet (SMAR)

-1.7%

-20%

Xponential Fitness (XPOF)

3.0%

28%

Cricut (CRCT)

-1.1%

-28%

Uber (UBER)

2.5%

25%

ACV Auctions (ACVA)

1.9%

24%

Top Contributor Total

24.2%

Top Detractor Total

6.1%

Source: Optimist Fund Attribution Report, Eikon price data TSR = total shareholder return

Top Contributors

  1. Carvana: On the Q4 earnings call Carvana announced that they expect to grow retail units sold year over year in Q1 while generating over $100 million of adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization). We are now at the growth inflection we’ve been waiting for as alternative data providers are indicating Carvana grew units at a ~15% y/y growth rate in Q1. The combination of accelerating revenue and profit growth sets Carvana up well to prove to the skeptics they are on a path to becoming the largest and most profitable US used car dealership.
  2. DoorDash: DoorDash continues to grow revenue over 20% while materially expanding margins. They provided strong guidance for 2024 implying continued strong revenue growth while profits will continue to grow >2x faster.
  3. Xponential Fitness: Xponential Fitness is a founder-led boutique fitness market leader that has significant future growth opportunities trading at extremely depressed valuation. This was a new position in the quarter that we’ll shed more light on later in the letter.
  4. Uber: Uber continues to deliver strong bookings growth over ~20% while free cash flow is growing at over double that rate. At their investor day they stated they expect bookings to grow in the high teens while free cash flow will grow closer to 40% over the next 3 years. Given they now generate billions of free cash flow annually they also announced a $7B buyback authorization which was welcomed by investors.
  5. ACV Auctions: ACV Auctions has started to experience accelerating growth as the wholesale automotive market has finally returned to growth. They guided to revenue growth for 2024 of 25-30% while finally becoming adjusted EBITDA profitable. We believe the wholesale auto market now is in the first inning of a multiyear tailwind that will dramatically accelerate ACV’s revenue and free cash flow generation.

Our top contributors generated ~130% of Optimist Fund’s quarterly return.

Top Detractors

  1. HelloFresh: The company recently provided disappointing 2024 guidance due to slower progress in their meal kits business. Despite their historical track record of meeting or exceeding expectations, recent performance has fallen short. We are waiting for evidence of improved execution before considering increasing our investment. Failure to deliver on their recently provided guidance could lead to exiting the position.
  2. Smartsheet: While reporting strong Q4 results, Smartsheet’s revenue growth guidance for 2024 fell below investor expectations. However, considering the broad slowdown we’ve seen in the collaborative work management software market they serve and our expectation for growth acceleration in 2025, our thesis remains unchanged.
  3. Cricut: Cricut continues to face revenue challenges due to weakness in the crafting end market. Despite disappointing results, the company has been generating cash above expectations, which will benefit shareholders through special dividends and buybacks. Today Cricut is under a 3% position. We need to see revenue growth acceleration before we would consider buying more.

Recall that Carvana went from being our largest detractor in 2022 to the most profitable investment we have made. It is often the companies that are most doubted in the short term that present the most compelling future investment opportunity.

Aggregate Portfolio Composition

Here are the top 10 holdings in our fund, comprising approximately 80% of the portfolio as of March 31st, 2024.

Carvana

Xponential Fitness

Wayfair

Smartsheet

DoorDash

Colliers (CIGI)

ACV Auctions

Revolve (RVLV)

Uber

Monday.com (MNDY)

Q1 Portfolio Changes

Q1 was an active quarter as we added Xponential Fitness, Ashtead (OTCPK:ASHTF), Basic-Fit (OTCPK:BSFFF), Latham Group (SWIM), and FIGS to the portfolio. We also sold Opendoor (OPEN) and Peloton (PTON).

Other than Xponential Fitness, all our new additions are currently what we would call a minimum position size of ~2% of the fund.

We parted ways with Peloton and Opendoor as their turnaround efforts continue to take longer than we expected which calls into question whether they can ever return to meaningful growth.

Xponential Fitness

Xponential Fitness is one of the largest franchisors in the boutique fitness sector worldwide, owning ten brands, each offering a unique fitness experience. Its largest brands are Club Pilates, Stretch Lab, and Pure Barre.

Xponential Fitness evolution

Source: Xponential Fitness February 2024 Investor Presentation

The founder and CEO Anthony Geisler has been successfully navigating the boutique fitness industry since the early 2000s. Geisler’s journey began with the acquisition of LA Boxing, which he transformed from a handful of locations into a network of nearly 100, culminating in its acquisition by UFC Gym for $25 million. Following a couple years with UFC Gym, Geisler’s desire to scale another boutique fitness brand led him to purchase Club Pilates for $2 million, which at the time had less than 20 locations and generated around ~$500k of EBITDA. Over the next 3 years Geisler grew Club Pilates to ~100 locations and ~$6 million of EBITDA, after which he sold the company to the private equity firm TPG for $100 million.

TPG’s acquisition marked the genesis of Xponential Fitness, with Geisler spearheading a multi-brand entity poised to repeat the success of Club Pilates. Today, Geisler owns around 15% of Xponential Fitness, which today is valued at ~$100 million. We believe, and historical performance suggests, Anthony Geisler is an exceptional CEO.

Xponential Fitness financials

Source: Xponential Fitness February 2024 Investor Presentation

In the middle of 2023, an anonymous short report was released claiming that Anthony Geisler is an unethical, untrustworthy businessperson, and Xponential is an entity that oversells failing fitness concepts. Since this report was released the share price declined over 60% while the financial results continued to be robust. To address some of the concerns mentioned in the short report, the company hosted an investor day and dug into the health of the business and each individual boutique fitness brand. We believe the short report found a few disgruntled franchisee’s, which every franchise system has, and claimed their complaints are shared by the entire franchisee base. From our research we don’t believe this to be true. In aggregate the portfolio of brands is doing well, and franchisees are profitable and growing.

Ultimately after investigating all the claims from the short report and speaking with management on multiple occasions, we believe Xponential fitness is a high-quality business trading at an extremely attractive price. Even if half the claims from the short report were true (which we don’t believe to be the case) we believe the business would still be worth significantly more than the current market price. Xponential will generate around $100 million of free cash flow in 2024 and is currently a ~$850m market cap company.

We believe Xponential can deliver on their 2026 adjusted EBITDA target of $200m (implying a 24% 3-year compounded annual growth rate) and their valuation will gradually return to ~20x adj. EBITDA (versus today’s valuation of ~7x adj. EBITDA) which is where Xponential was valued before the short report was released. Put together, this implies a target price in the next 2 years of $56, or a 275% return from today price of ~$15. We think the risk/reward is attractive.

Founders Class units will close on December 31st, 2024

When we first launched Optimist Fund, we created a discounted fee structure to anyone who invested in the early days which we named the “Founder’s Class”. Today we are officially announcing that the Founders Class will close to new investment on December 31st, 2024. Below I have outlined our Founders Class fee structure as well as our fee structure starting in 2025.

fee structure

Closing Remarks

We continue to believe we are in the early innings of a multiyear re-rating in the companies we own that will drive exceptional 5-year investment returns for our investors.

If you have any questions, please don’t hesitate to reach out. We value your feedback and always make time for our investors. Thank you once again for your trust and support.

Speak soon,

Jordan McNamee, Founder & Chief Investment Officer


Footnotes

*Rates of return are for Class E lead series net of all fees and expenses for Optimist Fund to illustrate the historical performance of our investment strategy.

**The Benchmark has a 50% weighting in the MSCI World Growth Index and a 50% weighting in the Russell Midcap Growth Index. The Benchmark is provided for information only and comparisons to benchmarks and indexes have limitations. Investing in global equities is the primary strategy for Optimist Fund but Optimist Fund does not invest in all or necessarily any of the securities that compose the Benchmark or the market indexes. Reference to the Benchmark and the market indexes does not imply that Optimist Fund will achieve similar returns.

***Fund start date was March 1, 2022. This report is neither an offer to sell nor a solicitation of an offer to buy any securities in any fund managed by us. Any offering is made only pursuant to the relevant offering memorandum together with the relevant subscription agreement, both of which should be read in their entirety. No offer to sell securities will be made prior to receipt of these documents by the offeree, and no offer to purchase securities will be accepted prior to completion of all appropriate documentation. The discussions in this report are not intended to be investment advice to any specific investor. Some of the discussions are based on the best information available to us, publicly or otherwise, but due consideration should be given to the fact that much of it is forward-looking or anticipatory in nature, which is inherently uncertain. Past performance of a fund is no guarantee as to its performance in the future. This report is not an advertisement, and it is not intended for public use or distribution.


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