Finding ‘the next Afterpay’

Opportunities for exponential growth don’t come along very often. As we learned recently, it requires the right product, the right team, great timing, and a little bit of luck. But in today’s globalised and interconnected world, when the stars do align, the explosion in growth can surprise even the most bullish of investors.

We recently reached out to three contributors to ask them which undiscovered stock has the same attributes they see in Afterpay, and in this article, we learn about two of those stocks. The other contributor to this series, Emanuel Datt from Datt Capital, told us that he hadn’t yet found another undiscovered stock with the same attributes as Afterpay – a testament to how rare a company like Afterpay really is.

Responses come from Michael Frazis, Frazis Capital Partners and Dean Fergie, Cyan Investment Management.

Ignore where they are, focus on where they’re going

Michael Frazis, Frazis Capital Partners

In May 2018 the United States deregulated sports gambling, opening an incredible greenfield opportunity.

On the back of this, the Aussie stock most likely to give Afterpay-like returns, in my view, is Pointsbet (PBH), which has several similarities to Afterpay. The scale of the opportunity relative to their enterprise value (A$250 million) is way out of whack.

For some insight into Pointsbet’s execution, the first state to legalise sports betting was New Jersey in June 2018. Pointsbet launched there in January this year, and by June 2019 had taken 5.4% of the state’s online turnover.

The key to investing in Afterpay was ignoring where they were and calculating where they were going. The customer acquisition run rate was key. From a standing start, the firm quickly started adding hundreds of thousands of new customers, and those customers were spending more and more with every update. There was no clue to Afterpay’s future in the historic financials, which showed a small, albeit very fast growing, company. But the rate of customer acquisition was clear from the start.

Pointsbet has similar characteristics. From June 2018 to June 2019 the firm increased their customer base from 34k to 123k and won 5% market share in their first state in which they began operations. If they achieve anything like this across the United States, their market cap could be an order of magnitude higher than the current ~$300m.

Pointsbet grew revenues over 170% to $26m for the year to 30 June 2019, but in the first few weeks of 2020 this has accelerated to over 240% annualised, on higher margin too. This is substantially ahead of broker estimates.

As with Afterpay, you can track web traffic to see progress in real time. Estimates from Similarweb suggest August traffic was up 100% from the end of last reporting period in June, only two months before, and estimates for September are coming in higher still.

As more and more states legalise sports betting, Pointsbet will be able to roll out its proven model to larger and larger markets, and they have a pipeline ready to go.

This is no spivvy operation either. The CEO was head of risk at William Hill, the President of Product and Technology was CTO of Aristocrat Leisure, the VP of strategy was the US BDM for William Hill, and the COO was head of IT and product at Pokerstars and tomwaterhouse.com. Directors were buying after the last results, and so were we.

If you want to short this because it looks expensive, I’d be happy to lend you my shares.

This microcap could be a $1.5b stock in a few years

Dean Fergie, Cyan Investment Management

Let me start by saying a 30x bagger might come along once every 5-10 years. So, what do we need to look for? Scalability; a product that offers something of obvious value; an offering that is unique; and a business that can operate at a global scale.

The one stock in our Fund that potentially can fulfil all these criteria is Jaxsta (JXT).

Jaxtsta is an Australian business that is compiling the only comprehensive database of official music credits. The simplest way to think of the Jaxsta platform is as a cross between IMDB for the music industry and LinkedIn for the workforce. Jaxtsa is hoping to monetise their unique warehouse of music data by both selling subscriptions to music professionals to help showcase their talents and achievements (the LinkedIn side of the equation); and providing their Big Music Data to the subscription based music providers such as Spotify, Apple Music, Google Play, and YouTube (the IMDB side). Jaxtsta is pre-revenue and has a market capitalisation of less than $50m. If they can monetise their unique database globally, there is every chance this unique global business could be worth in excess of $1.5bn in a few years.

In conclusion

The chance of big returns can be alluring, but they don't come without risks. There are countless ways that an early-stage company can fail, but if everything does go to plan, the rewards for shareholders may be bountiful. And as the saying goes, do your own research.

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