Goooood Afternoon!
I hope everyone has had a great couple of weeks, and I am pumped to be back! I had a blast soaking in some warm weather, and it was great to do some R&R. Special shoutout to Boston for welcoming me back from the heat with single digit temperatures this weekend!
Showtime!
The Big Three
1. Tonal vs. Peloton — We Nailed It!
While we were on vacation, Tonal, the all-in-one at home fitness machine, announced that they are looking to raise money or be sold at a $500M valuation – significantly less than the $1.9B valuation they were looking to raise at in September.
In October '22, a month after the $1.9B rumored valuation was announced, I shared a piece called “Tonal: An Overvalued Venture?” In the newsletter, I broke down why I thought Tonal was overvalued – especially when you compare it to Peloton.
Some of the reasons included included:
Serious cash burn
~$3,500 pricing + $49 monthly subscription and STILL having bad unit economics
19x ARR multiple
Thematic headwinds
I also argued that Peloton was a much more attractive option in comparison to Tonal due to the effective moves by new CEO Bob McCarthy to get $PTON near profitability, the 9x ARR multiple, and strong core unit economics.
Since the newsletter dropped on October 7, 2022 here is how Tonal and Peloton’s valuations have faired:
Tonal: -74%
Peloton: +45%
2. Swimming in the Digital Ocean
Last week, one of my favorite portfolio companies Digital Ocean announced their Q4 earnings:
Revenues: $163M (actual) vs. $161.1M (expected)
EPS: $0.28 (actual) vs. $0.19 (expected)
The company focused on helping SMBs deploy and scale on the cloud with ease, had a great quarter with top and bottom line beats. The revenue figure represented 34% growth YoY and the EPS beat was fueled by a 400 BPS increase in operating margin to 16%.
Other key numbers from the quarter include customers spending more than $50 per month increasing from 99.4k to 144.2k (44% growth) and an ARPU increase from $65.87 to $80.27 (24% growth)
Outside of the thematic tailwinds that come with cloud computing for SMBs, part of what excites me so much with Digital Ocean is that they generate FCF in partnership with top line growth.
Due to the current macro environment, Digital Ocean actually has doubled down on their fundamental belief in FCF, by announcing they are accelerating their goal to reach 20% FCF margins by focusing less on top line growth and more on bottom line profitability which has led them to taking actions like laying off 11% of their workforce.
The company now expects to do $700M-$720M (~22% growth) in revenue in 2023 with FCF of around 21%-22% (~$150M). Not bad for a company trading at a $3B market cap.
Also, management is very focused on returning capital to shareholders/ensuring that there is not significant dilution from SBC. $DOCN bought back $600M in stock in 2021 and announced an additional $500M buyback – with a commitment of buying back at least $230M in shares.
FCF positive, top line growth, and share buybacks for a company at this early of a stage is rare. Bullish on $DOCN.
Here are some links below if you want to learn more about $DOCN:
3. TopGolf Keeps Crushing It
Portfolio Pick TopGolf Callaway Brands announced their Q4 earnings and Guidance for '23.
Revenue: $851M (actual) vs. $840M (expected)
EPS: -$0.27 (actual) vs. -$0.16 (expected)
So a top line beat and a bottom line miss. However, there was a lot to love regarding $MODG's earnings, specifically their 2023 guidance and progress at TopGolf.
For 2023, the company raised their revenue guidance to be between $4.415-$4.470B, which would represent more than 10% growth to the $3.996B figure for 2022. They also raised adj. EBITDA projections to $620-$640M vs. the originally announced ~$600M. With $558M in adj. EBITDA in '23, this means that the company sees around ~15% growth in adj. EBITDA.
TopGolf had another great year by growing revenue by ~25% from $1.2B to $1.5B and almost doubling adj. EBITDA YoY from $40M to $77M. In FY '22, TopGolf posted 7% same venue sale growth YoY, a trend that accelerated to 11% in Q4. TopGolf also opened 11 new stores in 2022, and 6 in Q4.
Finally, one of the hidden gems in TopGolf Callaway Brands, TravisMathew, posted another great year growing revenue to over $300M and profits of $50M in adj. EBITDA. If you recall, Callaway purchased TravisMathew for $125M in 2017 @ a 11.8x adj. EBITDA.
A grand slam acquisition and the best part is TravisMathew is just getting started.
I continue to be confident in $MODG, and feel great with my money invested with Chip Brewer & Co. We are not picking up any more or definitely not selling any as we feel comfortable with the valuation of just under 7x EBITDA. I think there is definitely some upside there, but it is not cheap enough to warrant increasing our position.
Here are some links below if you want to look deeper into $MODG's earnings:
The Crossover Archive
Toast & BVP, Penn, Netflix,
Missed a recent edition? That's okay! Now you can just click on these links below to catch up on what you missed!
02/07 - Penn Entertainment: A Solid Q4
The Crossover Portfolio
Note: The Crossover Portfolio is a mock portfolio of how I would be investing and not with real money. All trades are shared publicly @ The Crossover Twitter as they are recognized.
Moves: Zero moves. Just how we like it. Again!
The Zone: The Zone announced that they have become the official Mental Wellness Partner of The Big East. What a big accomplishment for Ivan & Co.
RocketVR: RocketVR was featured in the Boston Business Journal
Charts of the Day
1. Is Cash King?
2. The Pull Forward of 2021
Venture Capital
The Rundown: Carta released their "State of the Markets" Q4 '22 Venture Capital report that is jam packed with information on the state of venture that you can read here
Key Points:
While valuations at the earlier stages only dropped slightly, Series E valuations and later dropped by over 72% representing the biggest drop since 2010
Total cash raised in 2022 decreased by over 50% from 2021 from $217B to $107B. The $107B still represents an increase from 2020 where $93B was raised
Bridge rounds continued to grow in popularity hitting 35% of Series As, 30% of Series Bs, 23% of Series Cs, and 31% Series Ds
Alan's Angle:
I really enjoyed looking through the report and learned a lot. There is also an addendum with industry specific data to check out when you visit the report's site.
Overall, much of the data presented is in line with you would expect. Looking at the chart above specifically, I think it is clear that 2021 was much more of a "pull forward" year for venture funding and $107B raised in 2022. Interestingly, even with such an increase in funds raised in 2021, the 2022 figure is in line with the historical trend line.
In my eyes, the really interesting figure will come at the end of the year for 2023.
Memes of the Day
Golden Nuggets
This cameraman at the NBA All-Star Game is so talented
Kendrick Perkins 11 year old son is big time on the court!
Phenomenal tweet on AI adoption by Alexandr Wang
Cleveland Fed Chair was pro 50 BPS hike at the last FOMC meeting
Seinfeld predicting the Cavs vs. Spurs score in 2 out of the last 4 seasons is just crazy
Disclaimer: The Crossover Daily is not a professional financial service. All materials released from The Crossover Daily are for educational and entertainment purposes. The Crossover Daily is not a replacement for a professional's opinion. Contributors to The Crossover Daily might have positions in the equities in the The Crossover Portfolio or mentioned in the newsletter.