White Falcon Capital Management, an investment fund manager, released its third quarter 2023 investor letter. A copy of the same can be downloaded here. In the third quarter, the fund returned -4.5% compared to the S&P 500 (CAD), the MSCI All Country (CAD), and the S&P TSX’s returns of -0.9%, -1.2%, and -2.2%, respectively. After a great surge in the first half of the year, the market cooled off in the third quarter, and the portfolio lost some of its gains. In addition, please check the fund’s top five holdings to know its best picks in 2023.
White Falcon Capital Management highlighted stocks like Rover Group, Inc. (NASDAQ:ROVR) in the third quarter 2023 investor letter. Headquartered in Seattle, Washington, Rover Group, Inc. (NASDAQ:ROVR) is an online marketplace for pet care. On October 16, 2023, Rover Group, Inc. (NASDAQ:ROVR) stock closed at $6.80 per share. One-month return of Rover Group, Inc. (NASDAQ:ROVR) was 8.45%, and its shares gained 71.28% of their value over the last 52 weeks. Rover Group, Inc. (NASDAQ:ROVR) has a market capitalization of $1.237 billion.
White Falcon Capital Management made the following comment about Rover Group, Inc. (NASDAQ:ROVR) in its Q3 2023 investor letter:
“Rover Group, Inc. (NASDAQ:ROVR) has surpassed Tech Resources to become a top 5 position in the portfolio. Rover, a pet care marketplace, is a prime example of a business that’s poised for success in virtually any economic environment. It reported a set of fantastic earnings due to which its stock gained 50% and has not given up much of that gain in the recent pullback. This is a position that has been in the portfolio since September 2022 but we added to the position as we gained conviction in the thesis.
Operating as a marketplace, Rover earns a “take rate” or a kind of “toll” on every transaction occurring within its platform. In the face of inflation, as pet sitters request higher prices for their services, Rover’s revenues naturally grow because its share of the transaction value increases. In addition, Rover is a category disrupter due to which its revenue growth is likely to be much higher than the average stock – it is taking share from friends and family as well as kennels. Finally, networks like Rover get more valuable over time due to which they have to spend less to attract more users on their platform. This results in operating leverage due to which its earnings are poised to grow even faster than revenues.
Rover is expected to produce $230 mn in revenues in 2023. At an average cost per share of $4.25 we bought Rover with a market capitalization of $775 million and an EV of $525 mn. Rover is currently at adj EBITDA margin of 15% and, with scale, should be able to move up to 30% in adj EBITDA margin. At that rate, it should have a ‘look-through’ adj EBITDA of $70 mn in 2023, essentially meaning that we underwrote this investment at 7.3x adj EBITDA. The stock is now ~50% higher than our cost base. However, its fundamentals are improving at an even faster pace. Next year, in 2024, according to consensus estimates, Rover is expected to do $300 mn in revenues. Due to this, Rover is now trading at 10x our estimate of $90 in ‘look-through’ adj EBITDA for 2024. We believe this is a very cheap multiple for a high quality and growing business. In Appendix A to this letter, we detail our thesis on Rover (ROVR)… ” (Click here to read the full text)
Rover Group, Inc. (NASDAQ:ROVR) is not on our list of 30 Most Popular Stocks Among Hedge Funds. As per our database, 25 hedge fund portfolios held Rover Group, Inc. (NASDAQ:ROVR) at the end of second quarter which was 18 in the previous quarter.
We discussed Rover Group, Inc. (NASDAQ:ROVR) in another article and shared the list of some of the best gig economy stocks to buy. In addition, please check out our hedge fund investor letters Q3 2023 page for more investor letters from hedge funds and other leading investors.
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Disclosure: None. This article is originally published at Insider Monkey.
