Description

*All figures are in CAD$

Overview

Tiny is a technology holding company that is the result of a merger between WeCommerce and Tiny (previous). Cofounded by Andrew Wilkinson and Chris Sparling in 2007, Tiny owns 30+ businesses that operate separately from one another while Andrew and Chris work to allocate capital and select CEOs. This decentralized model was intentionally structured to replicate Berkshire Hathaway. 

I estimate that Tiny is worth $4.50 - $5.50/share, representing an ~23x - 28x multiple on $0.20/share of 2023 earnings power. At today's price of $3.80/share, Tiny stock (TINY.V) gives investors an opportunity to buy a good business with a great management team at a fair price.

Background

In 2006, when he was 19 years old, Andrew Wilkinson started MetaLab, a web design agency. He bootstrapped and grew that business very quickly and profitably, earning him enough capital to experiment with several other entrepreneurial ventures, many of which did not go well. The largest failure was Flow, a project management software company founded in 2009. Andrew and Chris, his newly hired CFO, eventually threw in the towel after $10M in losses as they found it too difficult to compete with Asana, a far better-capitalized competitor. This served as a painful but wonderful lesson on the importance of having a profitable business. During this time, Andrew and Chris developed a good business called Pixel Union which sold themes on Tumbler and Shopify. Pixel Union was a high-margin, dominant business thriving on the quickly growing Shopify ecosystem. In 2014, burned out from experimenting with and operating so many businesses, Andrew and Chris sold 80% of Pixel Union for $7M, while the company was profiting $500k/year and growing 50%/year. With this new liquidity, Andrew decided to learn how to invest the money and came across Warren Buffett. Inspired by the Berkshire Hathaway model of buying established and profitable businesses within a decentralized holding company, Andrew and Chris created Tiny (previous) in 2016. Realizing how good a business Pixel Union was, they reacquired the other 80% of the company, which was then producing $4M/year, for $26M and began purchasing other businesses within the Shopify ecosystem with the backing of Bill Ackman, Andrew Marks (Howard Marks’s son), and other investors. To continue their acquisitions, they put these Shopify-related businesses under the WeCommerce umbrella and took WeCommerce public in December 2020 for a $252M valuation (~12x 2020 revenues of $21.3M). Meanwhile, funded by the profits of MetaLab, Tiny (previous) continued to acquire other internet companies in a decentralized structure. In early 2023, management merged WeCommerce and Tiny (previous) to create Tiny (retaining the name of the merged company). At a $5.12 consideration price, WeCommerce’s ~42M shares and Tiny’s (previous) ~135M represented a $215M equity value for WeCommerce and a $691M equity value for Tiny (previous). Of the total ~177M shares and $673M equity value in the new Tiny, Andrew and Chris own ~81%. In 2022, Tiny had $202M in revenue and $46M in adjusted EBITDA.

Businesses & Management

Tiny is comprised of 30+ majority-owned companies, 90+ minority-owned investments, 11 founded companies, 900+ global employees, and 17 people in the head office. Because Andrew and Chris own 81% of Tiny, in many ways Tiny stock looks more like an opportunity to invest in a personal portfolio filled with private companies and venture bets rather than a traditional publicly traded business with just a few revenue lines and little insider ownership. 

Tiny

When Andrew and Chris were looking to sell off some assets in the early 2010s, they noticed how long and unpleasant the process of selling a business was. Recognizing that Berkshire Hathaway was able to buy businesses without these difficulties, they decided to use the Berkshire Hathaway model to attract sellers of businesses. They implemented a 30-day closing process, a simple structure with upfront cash, a system to onboard businesses as-is with no changes to culture or operations, and provide a long-term home for these businesses. The only slight difference to the Berkshire model is that Tiny does not oppose sellers stepping down at the time of the transaction and will replace them with a new CEO with a track record of success running a similar business. Tiny leaves these businesses alone and does not look for synergies across its portfolio assets in an effort to keep things simple. Tiny looks to acquire businesses that have high margins, a sustainable competitive advantage, a simple business model, healthy profitability, a multi-year record of successful operations, a high-quality management team (or one Tiny believes it can hire), and a positive and ethical approach to business.

One of the things I like most about Andrew and Chris is that they are willing to step outside of their typical checklist if they feel an opportunity makes sense. Having successfully operated and created businesses since their late teens/early twenties and invested in companies through the Tiny vehicle for the past 15 years, Andrew and Chris have developed mental models and practical experience in spotting investment opportunities. With very little external investment (they still own 81% of Tiny) and starting from $0, Andrew and Chris have grown Tiny to a $200M/year revenue business with ~$673M of equity value at today’s market price of $3.80/share. Even more impressive, Andrew is only in his late 30s and Chris is in his early 40s. 

Most importantly, Andrew and Chris are aligned with their shareholders and care deeply about treating them fairly. In fact, my understanding is that Tiny represents ~90% of Andrew and Chris’s personal net worth. Not only is their track record excellent, but Andrew and Chris also strike me as being ethical and likable. They focus deeply on surrounding themselves with high-integrity, talented individuals and structure incentive-aligning deals with them. Along with the crucial tasks at hand, they also focus on doing the small things well. For example, after buying Dribbble, Andrew released a blog post titled “Dribbble 2.0” announcing the deal and detailing the very personal journey he went through to buy the company from his friend, Dan Cederholm. That extra bit of effort and caring illustrates Andrew’s focus on doing things well. 

Tiny is comprised of 4 different groups of businesses: Beam, Dribbble, Other, and the Tiny Fund. 

Beam

Beam represents a group of digital service businesses that generated $81.0M in revenues in 2022 (~40% of Tiny’s 2022 revenues). These businesses provide strategy, brand, web and mobile design, and engineering services to their customers. 

The largest business in Beam and in Tiny is MetaLab. It is the first business Andrew started in 2006 and has grown to >$50M in revenues with no external funding. With very minimal growth or maintenance capital expenditures required, MetaLab has served as the cash flow engine to fund Tiny’s other acquisitions. Driven primarily by MetaLab’s financial success, in 2021 the digital services segment of Tiny generated $21.5M of operating profits with a 34% operating margin and $19.7M of assets. In 2020 the digital services segment of Tiny generated $18.3M of operating profits with a 42% operating margin and $12.9M of assets. MetaLab has worked with some of the largest businesses in the world including Tinder, Uber, Vice, Google, Slack, Coinbase, and Headspace. It got its initial business going by targeting venture-backed startups and has now expanded to midmarket and enterprise clients (who now comprise ~60% of its revenues). Understanding the important variables in the digital agency model, Tiny has acquired a basket of agencies that it believes have exceptional talent, the potential for strong operating margins, and the capacity to take on niche clients that its other agencies cannot. These agencies include Frosty Studio, Button, 8020, Z1 Digital Product Studio, and HappyFunCorp. Now, when MetaLab receives a request from a client to do work that doesn’t fit MetaLab’s specialty, they can refer the client down the Tiny chain of agencies to one that fits the mold. 

While MetaLab’s success may make the digital agency business sound like an easy way to earn high returns on invested capital, generally speaking, the digital agency business is a decent business because it has the following characteristics.

Pros:

• Capital-light

  • Very minimal equipment and inventory are required. Basically, all that is needed is a computer, a designer, and an office. In a work-from-home world, it’s possible to create an all-remote digital agency if one wanted to. 

• Highly free cash flow generative

  • The capital-light model makes for essentially nonexistent maintenance or growth capital expenditures. 

• Reputation is a competitive advantage

  • Because the work is project-based and each project is unique, clients can’t see or use the final product until it is completed. Therefore, they must select an agency with a reputation for producing good work. 

• Some portion of the revenues are paid upfront

  • It is not uncommon for clients to pay a portion of the overall fee upfront. This is helpful for cash flow. 

Cons:

• Low margin

  • Although the digital agency model is capital-light, expenses tend to be high due to the large and expensive staff required to maintain the operation. 

• Low IP

  • The expertise needed to learn how to create digital products can be learned at a university and/or through widely available online resources. 

• Low barriers to entry & highly competitive

  • Because the digital agency model is capital-light and requires minimal IP, one can start a digital agency relatively easily. For this reason, this is a very competitive field. 

• Human-capital-intensive

  • Agencies need people to understand client needs, develop create solutions, and execute those solutions. This creates a large staff expense. Moreover, a large staff comes with human relations challenges. 

• Economically sensitive pipeline

  • Because the work is project-based and non-recurring, having a continuous stream of work is difficult. Moreover, having the fixed expense of a large staff makes it very important to have enough work to cover overhead. Along with this, clients often consider using a digital agency as a luxury. This makes this an economically sensitive industry. The combination of these factors makes balancing revenues and costs a tricky yet important exercise. 

• Non-recurring revenue

  • The nonessential nature of the work paired with the fact that it’s non-recurring and project-based makes driving regular business difficult. Digital agencies must work very hard to make projects happen and stay at the top of their client's minds. 

• Dangerous to scale

  • The combination of the difficulty of finding consistent work, the large fixed costs of having many employees, and the difficulties of balancing revenues and costs throughout the cycle make the digital agency model one that is dangerous to scale quickly. 

With that said, how have Andrew and Chris created a highly profitable digital agency in MetaLab? Also, why have they continued to buy other media agencies? Andrew and Chris have learned that there are a few ways to get around some of the cons of the digital agency model. These include:

• Source low-cost talent to improve margins and price competitively

  • When Andrew initially started MetaLab, he found that being located in Victoria, Canada was a competitive advantage because of his lower labor costs. This allowed Andrew to earn large margins compared to his competitors while still pricing reasonably. Andrew and Chris have used the insight to acquire other agencies with this advantage. For example, they bought Z1 digital product studio which is headquartered in Spain. 

• Build demand through having an excellent reputation (make them come to you)

  • This competitive advantage is not one that can be easily replicated. MetaLab developed its reputation by integrating itself with early Silicon Valley. Andrew realized that many of the startups of the early 2000s (like Pinterest and Tumbler) didn’t have external design agencies. Andrew capitalized on this value gap by focusing heavily on advertising toward venture-backed startups. This strategy was successful and as many of MetaLab’s clients became huge successes, MetaLab gained a stellar reputation. While other agencies have to fight for work, Tiny can funnel MetaLab’s demand down into its other agencies making the challenge of bringing in work less severe across the portfolio.

• Attract the best talent

  • The most talented designers and software engineers generally want to work for the best companies in their industry. This creates a positive feedback loop where talent drives demand, demand improves reputation, and reputation attracts talent.

Tiny’s model for design agency success makes Beam a good engine to generate cash flows for reinvestment. I suspect these agencies will be a shrinking portion of Tiny’s earnings as cash gets deployed into better businesses.

Dribbble

Founded in 2009, Dribbble is a social network and marketplace for designers and creative professionals. It has 2.5M members and is one of the largest 3,000 sites on the internet. Dribbble is where designers can showcase their work in order to get employment, feedback, inspiration, and where employers can go to contract or hire talent. Acquired in 2017, Dribbble generated $62.6M in revenue in 2022 (representing 31% of Tiny’s 2022 revenues). Together, Beam and Dribbble are responsible for 71% of Tiny’s 2022 revenues. In Tiny’s May 2023 investor presentation, they highlight Dribbble’s business quality:

“Dribbble has an incredible moat: a network effect without relying on Google, Facebook, or any other middle-man. Over time, Dribbble will be able to provide constantly evolving services and offerings to its growing user base. It is also one of the last remaining independent social networks on the internet. When times are tough, people post more on Dribbble to find freelance and full-time work or update their profiles to attract work. [Dribbble has] many growth levers of existing revenue lines: 1) Subscription model 2) Enterprise sales initiative 3) Significant traffic yet to be monetized.”

Importantly, since 2017, approximately 90% of traffic to its websites is organic or direct. Also, Dribbble has an inherent customer-value-proposition-enhancing positive feedback loop: more designers => more content => more employers looking for designers => more incentive for designers to use Dribbble over other creative platforms => more designers. According to management's most recent circular, companies including Apple, Airbnb, IDEO, Facebook, Google, Dropbox, Slack, Shopify, and Lyft, have hired creative professionals through the site. Tiny currently owns 74.5% of Dribbble and originally invested $5.5M for that stake. Today, a single year of operating earnings is worth almost double their initial investment. Revenues have grown ~10x since the initial acquisition and grew 83.6% from 2021 ($34.1M) to 2022 ($62.6M). Andrew described Dribbble as an “airport business”. This means Dribbble is a central platform where people collect and therefore is a favorable site to add supplemental products/services for that targeted audience. Some examples of these primary supplemental businesses created for the Dribbble users include:

• Dribbble Hiring - A business segment within Dribbble that helps businesses to hire creative professionals and helps designers to find employment. 

• Dribbble Pro - A business segment within Dribbble that makes the process of creating and updating a designer's portfolio more simple. 

• Dribbble Education - A business segment within Dribbble that provides educational material for designers to improve their design skills. 

• Dribbble Advertising - A business segment within Dribbble that allows creators to advertise their work and brand on Dribbble’s content feed.

Moreover, Andrew and Chris have done bolt-on acquisitions to help ensure that Dribbble is the best end-to-end ecosystem for designers, thus deepening the moat. These include:

• Creative Market - a platform that gives designers tools and resources to complete projects and license their work. There are also resources created by other artists in over 190 countries for sale.

• Fontspring - Provides a catalog of fonts and font licensing offerings. 

• FontSquirrel - Provides a catalog of fonts and a font-identifying tool that allows users to upload an image and learn information about the font used in that image. There are over 900,000 fonts in the FontSquirrel font-identifying tool database. 

As the Tiny team works to monetize and grow Dribbble through paid advertising and the addition of supplemental businesses, I believe Tiny shareholders should see continued growth in Dribbble revenues. Also, being a platform business, Dribbble’s earnings should grow even faster because of the inherent operating leverage in the model. With very minimal maintenance or growth capital expenditures, I expect that Dribbble will continue to be a very meaningful source of cash flows that will be intelligently reallocated by Andrew and Chris. 

WeCommerce

WeCommerce is a combination of 7 businesses within the Shopify ecosystem. WeCommerce generated $48.5M in revenue in 2022 (representing 24% of Tiny’s 2022 revenues). Shopify itself has grown revenues from $24M in 2012 to $5.6B in 2022, a CAGR of 72.5%. This astonishing growth illustrates the huge tailwind that is e-commerce combined with the formidable business model and execution of Shopify. Recognizing the value that comes with having a dominant position within a quickly growing market, Andrew and Chris acquired several other businesses within the Shopify ecosystem to go along with Pixel Union. Their Shopify basket, called WeCommerce, consists of theme businesses (Pixel Union and Archetype Themes), applications (Stamped, Foursixty, KnoCommerce, and Orbit), and an agency (Knit). The primary business within WeCommerce is Stamped as it contributed 45% of WeCommerce’s revenues in 2022. Archetype Themes and Pixel Union also contributed 29% of WeCommerce’s revenues in 2022. 

• Stamped - A SaaS platform enabling online merchants to implement and manage customer reviews and loyalty programs through Shopify and other e-commerce platforms. Among the first 3 rankings posts that come up on Google (exluding fera’s ranking who has their own product which is ranked #1 on their ranking list), Stamped ranks in the top 3 in each ranking (#1 on Digismoothie, #2 on Hevo, and #3 on Tapita). In April 2021, WeCommerce acquired Stamped for an aggregate purchase price of ~$92.7M cash, ~$9.1M in share consideration at a $18.26/share, and $23.3 million of contingent consideration subject to Stamped meeting a minimum revenue target of $10M in 2021. Stamped hit that mark and the contingency was paid through share issuance. Stamped contributed $13.3M of revenue in FY2021. Management’s use of share issuance to pay for part of the consideration price while WeCommerce shares were pricey are indicative of management’s capital allocation skills. While the total consideration price of $125.1M may seem pricy at ~10x 2021 revenues, management felt that Stamped was a “mismanaged gem” that was meaningfully underoptimized. As described in their May 2023 investor presentation, after the acquisition was complete, they hired a best in class executive team, did a full technical architecture rebuild, repositioned the business to capture a large opportunity, and Grew ARR from $10M to $20M in 2 years while maintaining strong profitability. In 2022, Stamped contributed $21.8M (or 45% of WeCommerce’s revenues). This is a great example of management’s ability to see the diamond in the rough and execute on their vision. I expect Stamped’s management will continue to creatively grow revenues and margins over time. Importantly, Stamped’s revenue is largely recurring (along with the other businesses in the apps segment) and the need for maintenance and growth capital expenditures is minimal.

• Archetype Themes and Pixel Union - Develops and sells premium website themes on Shopify. Being a Shopify theme partner is a valuable asset as it allows Archetype Themes and Pixel Union to advertise their themes to thousands of customers on the Shopify ecosystem. In a sense, as Shopify grows, the demand for easy to apply premium themes through Shopify itself should increase. In August 2021, WeCommerce acquired Archetype Themes for an aggregate purchase price of ~$24.3M cash and contingency consideration of ~$14M. The first $3.8M of the consideration was subject to Archetype Themes meeting a an EBITDA threshold within the first 6 months ending December 31, 2021. The second $10.2M of the consideration was subject to Archetype Themes meeting a an EBITDA threshold within the 12 months ending December 31, 2022. The first contingency was met while the second contingency was not. It seems to me that management got a decent deal as they paid ~3x 2022 revenues (which were probably below normal levels) for a business that should produce decent margins with minimal capital expenditures when optimized. In 2022, excluding the Archetype Themes, Pixel Union saw its revenue decline 30%. The company sited that “the decrease is attributable to the decline in revenue after the record-breaking growth in ecommerce in response to the COVID-19 pandemic and Shopify implementing new requirements in August 2021 limiting themes to either being sold on or off-site.” While 2022 was disappointing, (and I expect 2023 to be disappointing as well), over time, premium theme revenue grow as Shopify grows. 

Other Businesses

Together, Other Businesses and the Tiny Fund comprise the remaining 5% of Tiny’s 2022 revenues.  

• WeWorkRemotely - A leading remote work job board. Andrew and Chris acquired this business from their friend, Jason Fried. Jason, who was caught up with running one of his larger businesses, offered to sell WeWorkRemotely to Tiny. The thesis was that the business had high margins, it was underoptimized, it was in a growing space, and the price was such that they were likely to make their money back. Benefiting from the huge work-from-home tailwind as a result of COVID-19, WeWorkRemotely has grown its earnings multiple times under the Tiny umbrella and has worked out well as an investment. 

• Meteor - An open-source platform for seamlessly building and deploying web, mobile, and desktop applications in Javascript or TypeScript. When Meteor was acquired, its founder and seller, Geoff Schmidt commented “Tiny moved at lightning speed, kept the terms straightforward, and didn't waste any of our time, which was very different from our experience with some other potential acquirers. We're very happy with how our partnership with Tiny has worked out." This highlights exactly why companies look to sell to Tiny. 

Tiny Fund

Tiny raised $150M USD in 2020 to purchase businesses that fit their criteria. They purposely chose to raise funding in 2020 as they anticipated that the COVID-19 pandemic would create the opportunity to buy high-quality businesses at attractive prices. This opportunistic attitude toward capital allocation makes Tiny an attractive asset to own throughout the market cycle. The fund has a 0% management fee and a 30% carry over an 8% hurdle (I imagine this fee arrangement was modeled after the Buffett Partnership fee arrangement of a 0% management fee and a 25% carry over a 6% hurdle). This arrangement aligns the incentives of the general partner and limited partner well, as performance (rather than AUM) will drive returns for both parties. Tiny currently owns a ~20% limited partner stake due to a $20M investment (the fund has only deployed $97M so far) while also owning 50% of the general partner position, further aligning limited and general partner incentives. The businesses within the Tiny Fund include:

• Tiny Fund (~20% owned by Tiny)

  • AeroPress (91.42% owned by Tiny Fund) - Maker of the AeroPress Coffee maker. Invented in 2005, AeroPress is a simple product for brewing coffee. The AeroPress product is so well known in the coffee brewing community that it is now associated with its own process of making coffee. Therefore, the AeroPress brand is very valuable and should grow as coffee consumption grows. Andrew and Chris’s thesis at the time of purchase was that while AeroPress sales were very strong in coffee shops, sales potential in the e-commerce space was still largely untapped.

  • BeFunky Inc. (84.96% owned by Tiny Fund) -  A digital media tool developer that enables people to express themselves creatively on the web without any technical knowledge.

  • Girlboss Holdings Inc. (75% owned by Tiny Fund) - Media company aimed toward a female audience. 

  • Abstract Studio Design Inc. (70% owned by Tiny Fund) - a leading design version control and collaboration tool. Being a design agency, this acquisition fits well into the Beam fold.

  • Medimap Systems Inc. (30.57% owned by Tiny Fund) - a platform to connect patients with same-day access to care in Canada. “Today over 70% of walk-in medical clinics across Canada use our platform. We have grown to 2000 partnerships with walk-in clinics and other healthcare clinics and over 12 million Canadians that use Medimap” (from Medimap website). Medimap is another example of an airport business that Tiny is looking to monetize shortly. It allows Canadians to see wait times and book health services and has no similar competitors in Canada. In my view, this business has significant potential as it has very high market penetration and is very difficult to replicate.

  • Dribbble (5.08% owned by Tiny Fund) - See above.

  • Tiny Fund GP Interest (50% owned by Tiny Fund) - Tiny owns 50% of the General Partner 30% carry.

Financial Position

As of September 2022, Tiny was moderately leveraged with $8.5M of current debt and $101.1M of non-current debt, which in total will likely cost around ~$7.4M in annual interest expense. This is offset by $46.3M in annual adjusted EBITDA in 2022 (which is likely to grow organically and inorganically in the future) and $36.0M of cash. As of May 2023, Tiny had $35.9M of cash, $64.2M of undrawn credit facilities, and $71.4M of uninvested but committed capital in the Tiny Fund. In the Q1 2023 report, management emphasized that they intend to take advantage of this difficult period in the technology industry by making acquisitions:

“As the Q1 earnings season comes to a close, the broader sentiment and trends are apparent. Technology companies are continuing to adjust to higher interest rates and lower access to capital by reducing headcount and re-focusing their offerings, extending sales cycles, and reducing marketing spend. At Tiny, we see a sustained, challenging environment as a dinner bell. Now is the time to buy solid long-term businesses with competitive moats, at great prices, because others are looking elsewhere.”

Why This Opportunity Exits

After the merger, TINY.V stock floated around the mid to high $4/share range for a couple of months before falling to $3.60/share on Q1 2023 earnings that didn’t impress. For Tiny (previous), adjusted for one-time changes, QoQ revenues fell ~12% and adjusted EBITDA margins fell from 38% to 8%. Management described that the headwinds were primarily driven by agency-related businesses (which are in the midst of transitioning to larger enterprise clients in an effort to smooth revenues over time) and slowdowns on their hiring websites (probably WeWorkRemote and Dribbble Hiring). They expect these issues to be short-term in nature and highlighted that acquisitions are likely to pick up in difficult periods like this as demand for businesses increases and Tiny is prepared with ample liquidity. I agree with management in thinking that the present issues are temporary in nature and expect strong growth and margins should continue as acquisitions are made and the economy recovers. Also, management is beginning to monetize unoptimized businesses like Dribbble, Stamped, and Medimap; this should improve organic growth and margins over time. 

Along with the worse-than-expected Q1 2023 results, I believe this opportunity exists because (1) WeCommerce and Tiny have limited publically available financial data, therefore the market is struggling to see what normal margins and growth rates look like, (2) the combined figures post-merger have yet to be released (they will be released in Q2 2023), (3) Tiny is a very unique asset with limited comparable businesses, (4) there are so many businesses within Tiny that it’s difficult to get specific company-level data, and (5) majority of the businesses within Tiny have yet to mature. 

I believe that many of these concerns will go away as more information is released and time goes on. 

Valuation

Valuing Tiny is fairly tricky because of the limited amount of publicly available financial data and the number of businesses and business models tucked under the Tiny umbrella. For this reason, I think it's reasonable to have a somewhat wide range of fair values. To account for the complexity, I think it’s important to look at WeCommerce and Tiny (previous) separately to get a sense of their independent financial results 

WeCommerce

2022 was a difficult year for WeCommerce. Excluding the inorganic growth from the acquisitions of Stamped and Archetype Themes, revenues would have decreased 17% (from $21.8M in 2021 to $18.0M in 2022) in 2022. At the same time, operating costs continued to increase as costs related to WeCommerce being a listed entity and increasing staffing costs kicked in. 

Although 2022 was a disappointing year for WeCommerce, I believe the staff-related expenses will begin to plateau while revenues will continue to grow. Also, I expect the macroeconomic headwinds experienced during 2022 to normalize over the next few years. Overall, I think a normalized owner earnings margin should be somewhere between 5% and 15% over time. 

When it was publicly traded, WeCommerce’s valuation fluctuated wildly. In early 2021, WeCommerce hit a peak valuation of ~$1B and drifted down to a trough valuation of ~$80M around the end of 2022 as market sentiment toward technology companies went from euphoric to pessimistic. The poor results in 2022 also contributed to the worsening sentiment toward WeCommerce stock. 

Tiny (previous)

While revenues grew at 35% CAGR from 2020 to 2022, owner earnings stayed roughly flat as the owner earnings margin fell from 26% to 15%. This decline is primarily attributable to the poor results of the digital agencies and hiring websites which were adversely affected by the weakening of the overall tech sector in response to tightening interest rates and weakening consumer sentiment. Dribbble’s dramatic increase in revenues from $34.1M to $62.6M counteracted some of this weakness. This is an excellent example of the benefits of having a diversified holding company. Moreover, it's important to note that even during a difficult period like 2022, Tiny still earned a 15% owner earnings margin and grew revenues by 39%. As of September 2022, Tiny (previous) had an exceptional ROIC of 50%+. 

Tiny’s margin should continue to remain strong and potentially improve as management works toward increasing monetization for unoptimized assets like Dribbble, Stamped, and Medimap. In a normalized period, I expect the owner earnings margin to be around 20%.

Overall Value

Taking into account the past performance of WeCommerce and Tiny (previous), I think its reasonable to expect a 12% - 18% owner’s earnings margin on Tiny’s overall headline revenue number and then grow that figure by 15% - 25%/year (my expectation of average growth through the economic cycle), apply a 10-15x terminal multiple in year 6, and use a 10% discount rate. While this may not be the most sophisticated valuation method, I feel that given the limited amount of publicly available financial data and the diversified nature of Tiny, being roughly right is appropriate in this situation. My growth rate assumption of 15% - 25%/year may seem low relative to the historical ~39% revenue growth from 2020-2022 for Tiny but I’d like to be conservative as I believe some of the organic growth may have been pulled forward as a result of COVID-19 related stimulus and the macroeconomic difficulties that caused poorer margins in FY 2022 and Q1 2023, which may stretch into mid-2024. However, I think one could also argue that the more difficult economic environment should set the stage for more inorganic growth through intelligent acquisitions. 

In 2023 or 2024, Tiny’s revenue is likely to be $230M - $260M and its adjusted EBITDA margin should be 20% - 25% (or $46M - $65M). Applying a 15% owner earnings margin on $230M of 2023/2024 revenues yields ~$35M of 2023/2024 owner earnings. To value Tiny, I used this $35M estimate of 2023/2024 owner earnings and applied the assumptions from the previous paragraph in a DCF model. The below sensitivity table shows the analysis results on a per-share basis. The average value from the table is $4.87/share or $861M equity value. My view is that its likely fair value lies somewhere between $4.50 - $5.50/share or $797M - $974M equity value. It’s worth noting that the consideration share price used during the merger was $5.12/share and in February 2023 Tiny completed a non-brokered private placement offering at a resulting issuer share price of $4.90/share. 

Another check that I find to be useful is looking at what WeCommerce’s publicly traded value just before the merger means for Tiny as a whole. At its trough value of ~$80M, WeCommerce would be worth around $0.45/share of Tiny’s current $3.80/share price. That implies Tiny (previous) would be worth $3.35/share or $593M equity value. This value of 25x near somewhat depressed 2022 owner earnings for Tiny (previous) seems low considering it’s grown at 35%/year, it has a ~20% normalized owner’s earnings margin, 50%+ ROIC, and run by very good capital allocators. It’s also worth noting that this analysis uses WeCommerce’s trough value which was somewhat undervalued in my view.

Risks

• Andrew and Chris hold this thesis together. Tiny is still in its early stages and I suspect that it will evolve very meaningfully over the next couple of decades as new businesses are created and current businesses grow or deteriorate. In my view, their capital allocation decisions are what will form and fortify this business in the decades ahead. Because of their strong track record, I am assuming that as long as Andrew and Chris are at the helm, the investments should work out reasonably over time. 

• MetaLab and Dribbble are the crown jewel assets of the Tiny empire. Their cash flows will be used to fund many of the investments Tiny will make over the next few years. While I believe MetaLab and Dribbble are durable assets with long runways, if they were to run into permanent headwinds (possibly due to increasing competition), one should reevaluate the earnings power, growth expectations, and the prospects as they relate to capital allocation results into the future for Tiny. 

Seeing the Forest from the Trees

Tiny strikes me as the type of investment that could sit in someone’s portfolio and compound on its own for a very long time. In the long term, a few major factors drive this thesis: (1) Andrew and Chris are exceptional capital allocators with a track record to show it, (2) they tend to buy high-quality businesses with long runways for growth ahead at reasonable prices, (3) they tend to use reasonable amounts of leverage, thus mitigating blowup risks, (4) and they have a profitable, asset-light base of businesses which will generate cash for Andrew and Christ to invest. At its root, this is a bet on jockeys who have a very good horse. I wouldn’t be surprised if some of the businesses currently in their portfolio grow to be worth more than their current market cap in a decade or so. Also, Andrew and Chris have the capacity to dream up businesses that could potentially add meaningful value in the long term. 

Disclaimer

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Catalyst

• Release of combined entity audited financials in Q2 2023

• News of further acquisitions.