Symmetry Invest’s Update on Naked Wines Plc

Updated on

I have received several questions about my view on Naked Wines earnings yesterday. As Naked Wines i currently our biggest position i thought i would do a little deeper dive into the numbers here:

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For those of you that dosent know a lot about Naked Wines. We did an initial writeup of the name back in April when this Covid thing was still quite new:

Symmetry's Internal Price-Target

I sometimes get the question what Symmetry does when a stock reach our internal price-target. The answer is it differs. Sometimes we sell the stock and move on to other ideas. And in other cases the business performs even better and we can raise our internal target. Since our writeup on Naked Wines the stock has gone up +60 % in 6 month and is now close to our initial target.

But we also wrote back then was that we didnt knew how Covid would effect the business. As we now have much more info into how the business is performing post-covid i feel comfortable with having a target of +1000p on the stock. As such, Symmetry has been a buyer of shares over the last 2 days.

Lets start with looking at the headline numbers:

Naked Wines

Those numbers are simply astonishing. Higher sales, more angels, better retention, higher margin, scalabily, more investments, better paybacks etc. every single KPI going in the right direction.

Amazing IRR

Look at the data to the right there. From the 23 million GBP Naked Wines invested in new angels over the last 6 months they expect a 5-year payback of 89 million GBP and a 20-year payback of 173 million GBP. Of course there is fixed expenses related to achieving it and you have to discount those cash flows to present values. But the IRR is still amazing and compared to the present enterprise value of the business of around 300 million £ its quite insane.

Naked Wines

Naked Wines have been seen a little as a Covid-play. A company with high revenue now that will decline again when the world normalise. We disagree a lot with this notion. Firstly. WINE was growing before Covid. Second, covid has accelerated a structrual trend. As we can see from the flywheel above, for every single additional Angel WINE get, they achieve more data, better margins etc. they can invest in better LTV and retention that allow to invest in getting even more Angels.

Naked Wines

Inflow Of New Angels

One topic both management and investors were uncertain about a few months back was the quality of new Angels. Naked Wines saw a big inflow of new angels during Covid lockdowns but was at that time uncertain about the quality. What they have seen is that the quality so far is at least on par and probably better than older cohorts. Early cancellations is lower and order frequency higher. This is important because it gives management confidence to invest even more in new angels.

Naked Wines

We think the picture above is probably the most important takeaway from the earnings call. What we can see is that earnings is not only growing 80 % YoY. It is actually accelerating throughout the 6 month growing +100 % YoY in september. This also shows that the growth was not due to lockdowns in march and april. Repeat growth (green line) has just kept accelerating every month also to achieve +100 % YoY growth in september.

Why is this so? Because Naked Wines in the end is a subscription business. Angels deposit money to their piggy banks every month. Even through there is some variance into when Angels ultimative use the money in the piggy bank to buy wine (and then deliver revenue to WINE) the predictability in those monthly deposits makes sure the company have high visibility into future growth.


Naked Wines' Clear Return Guidelines

Naked Wines management have clear return guidelines when they invest money into new Angels. They want a 4x LTV/CAC on their investment. Because management was uncertain about the return on new cohorts they stayed diciplined on investment during the lockdowns and targeted a 5x payback. What they now realise is that those cohorts ended up more like 6-8 x payback. In retrospect they was to conservative and should have invested more.

The good thing is, management expect Naked Wines should be able to keep investing even more into growth. You can see from the graph that even in september when they invested +4 mio. GBP the payback still stayed around 4,5x. This gives management room to push the pedal even higher now and still achieve their 4x target.

So how should we think about the future then?

At least it seems christmas is up to a good start as the website crashed down for 40 minutes due to demand being 3x of normal levels:

The company is allready achieving a standstill EBIT margin of close to 10 %. At the same time revenue is growing rapidly. Better margins and retention delivers better LTV that ensures management can keep investing and getting good returns.

I will not go to deep into questions about either competition or regulation. I have studied both topics closely and keep monitoring both. We feel really confident on both topics as of today.

We think Naked Wines is on a path to 1 billion £ in revenue over the next 3-5 years. With a 10 % EBIT margin we think WINE could get to 100 million £ in EBIT in a few years. Compared to the enterprise value of the company today at around 300 million £ we still think there is plenty of upside in this name.

Disclaimer: Pleese read our normal disclaimer in our reports. We currently own shares in Naked Wine and is actively buying more the last few days. This is not investment advice but our own personal opinions. Our opinions can change at any time without further notifications about it.