TopGolf, Digital Ocean, and Tonal vs. Peloton

PLUS: A unique look at Toast's Q4 Earnings

February 24, 2023

Good Morning!

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!

In addition to today's newsletter, we have a Crossover first. I have typed up a 1,500 word analysis on Toast's Q4 earnings that you can unlock for absolutely free. All you have to do is refer the newsletter to one person (using the link in the first section below) and the Toast analysis will be delivered straight to your inbox!

You know that one friend or co-worker you have always wanted to share The Crossover with? Today is the day, and there is a sweet (and free!) incentive too.

Showtime!

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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%

Thesis confirmed. We crushed it. If only we had some real money on the line!

You can check out the full Peloton piece here and the full Tonal piece here.

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, and Netflix

Missed a recent edition? That's okay! Now you can just click on these links below to catch up on what you missed!

CHARTS OF THE WEEK

1. Is Cash King?

2. The Pull Forward of 2021?

3. A Change in the S&P 500 Workforce

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.

PORTFOLIO

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

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

Thanks for the read! Let me know what you thought by replying back to this email.

— Alan

Disclaimer: The Crossover is not a professional financial service. All materials released from The Crossover are for educational and entertainment purposes. The Crossover is not a replacement for a professional's opinion. Contributors to the Crossover might have positions in the equities in the The Crossover Portfolio or mentioned in the newsletter.