Description

Home24 was written up by SpringLafayette in December 2020.  Mobly has since been spun-out and its shares are currently trading slightly below the R$21 IPO price, having previously risen to over R$28 before falling to the current price.

Thesis Summary

Mobly offers the opportunity to invest in the number two online home and furniture specialist in a large Brazilian market that is now undergoing a shift from offline to online shopping.  While smaller than leader MadeiraMaderia, Mobly is arguably the superior consumer offering.  The IPO and partial separation from Home24 will free the founding team to invest more aggressively in the business and potentially allow it to become the number one specialist player in the next several years.  As has been seen around the world, a bulky delivery business like Mobly ought to be able to withstand the competitive pressures of large marketplaces if it continues to invest aggressively in product assortment and logistics.  A potential mid-twenties IRR (in local currency) from current prices for the next decade seems possible and is attractive relative to the risks.

Business Overview

The Brazilian home and furniture category is a low relative per capita spending category (at most 25% of the per capita spend in developed countries) that is growing at mid-single digits.  Online penetration is currently low at 8-10% (vs. 21% in the US), but is growing rapidly.  Mobly and MadeiraMadeira are the clear online DNA leaders dedicated to the category. 

Business Notes

• GMV growth was 58% in 2020 and 36% in Q4

• GMV growth accelerated through Q1 exiting at a 50% plus rate

• Revenue growth (not GMV) averaged 31% in the 3 years through 2019

• EBITDA was positive in 2020 and consensus expects that to remain the case in 2021

• Mobly continues to operate with a positive first order profit – 1.4x in 2020 (contribution margin divided by CAC for new customers) – while it ought to remain positive, Mobly expects to push first order profitability down (as it ought to) given the company is now free to invest more aggressively post IPO

• Nearly 46% of GMV utilized Moblylog (the company’s own logistics)

• Mobly does operate multiple physical store concepts as part of its omni-channel strategy – 9.3% of GMV was in store in 2020 – this is expected to grow as percent of GMV

• Private label is a key piece of the strategy and represented 42% of net revenue in 2020

• Just 7% of GMV was through the company’s pure marketplace offering in 2020

• Approximately 25% of GMV is sold via other marketplaces in Brazil like MercadoLivre

What is a Leader?

MadeiraMadeira (backed by Softbank in large scale) is generating more revenue (perhaps 100% plus more GMV), technically making it the “leader”.  Based on our work so far, the better consumer offer at the moment is Mobly and given MadeiraMaderia’s strategic priorities, it seems it is trying to become more like Mobly, not the other way around.  Additionally, assuming MadeiraMadeira is 3x larger on the marketplaces and 100% bigger overall, then MadeiraMadeira website sales are probably only 60-75% bigger… and these are the most critical sales.  It should also be noted that MadeiraMadeira is 2 years older than Mobly.

There is plenty of evidence for arguing Mobly is a better consumer proposition – (1) it has a strong app presence on both Apple and Android producing 15% of sales already vs. no app for MadeiraMaderia, (2) it has respectable 3D and in-room placement technology capability (far in advance of MadeiraMadeira), (3) it has better last mile logistics service given operating control, (4) it demonstrates what appears to be remarkably higher website conversion (3-4x the web traffic vs. 60-75% higher when looking at website sales) and other superior relevant statistics, (5) it likely demonstrates a higher repeat rate and (6) multiple experts including former MadeiraMaderia executives confirm the same.

Recent Website Traffic Trends

Even before the recent IPO traffic trends seemed positive.  Additional marketing firepower post-IPO ought to continue to be supportive of further improvements.

           Online – MaderiaMadeira, Mobly and Westwing

           Total Furniture – (also) MercadoLivre, MagazineLuiza, Casas Bahia, Pontofrio, Extra and Tok&Stok

Wayfair IPO Comparison

Management

Mobly is led by a founder management team (Victor Noda – CEO, Marcelo Marques – CFO and Mario Fernandes – COO) that has done a commendable job in its first decade.  I suspect the biggest mistake the team made was joining with Home24 / Rocket when they did.  The ownership structure consistently created constraints on capital during a period in which the business ought to have been sufficiently funded by traditional VC.  Currently, the founding team owns less than 10% of the shares – which is admittedly low.  If the team has indeed built the foundations of a superior customer offer and is leading the market with their strategic vision, it seems a good team to back. 

Return Potential

Key Base Case Inputs

• 30% compounded revenue growth the next decade – 4.1% terminal year total market share

• 14% terminal EBITDA margin

• 20x EBITDA multiple

• Share count grows 1.25% / year

By our math that gets you to a 26% IRR.  Deducting 5% per year for FX a return in USD of 21% seems possible in a base case. 

Risks

• Home24 remains a majority owner with substantial control

• MadeiraMaderia is a well-respected business - using the substantial proceeds of multiple Softbank investments it may quickly catch Mobly with its consumer proposition and outspend Mobly in customer acquisition

• The Brazilian marketplaces invest aggressively behind bulky delivery and prevent the development of a viable home and furnishing business specialist.

• FX in Brazil

• COVID – including the impact on Mobly’s emerging multi-channel in-store offerings and ongoing panic induced pressure on the local supply chain

• Mobly fails to adequately invest in logistics

Catalyst

• Ongoing revenue growth
• Eventual sell-down by Home24
• Improved EM sentiment - particularly for Brazil
• Improved awareness