$MWK - Mohawk Group
Just a little housekeeping before we get started…
As some of you know I’m launching two new projects in January:
@AddingAlphaTV is a daily live streaming show where I’ll be doing exclusive interviews with some of the best investors, analysts, fund managers and public company CEO’s. Signup for updates at AddingAlpha.tv
$MWK -- Mohawk Group
Current stock price: $12.50
Market cap: $280 million
Enterprise value: $265 million
2019 revenues: $115 million
2020 revenues (est): $185 million
2021 revenues (est): $325 million
2022 revenues (est): $520 million
Investor Presentation, December 2020 [click here]
I’ve been looking into $MWK for the past few weeks and I’ve been very impressed with what they are building. This is certainly a small cap growth stock but I believe the upside is massive for this type of forward-thinking, AI-powered, multi-platform e-commerce focused business strategy.
$MWK’s core business model is predicated on using large amounts of data and an agile supply chain to efficiently launch and manage consumer products on marketplaces such as Amazon and Walmart (the two largest third-party ecommerce platforms in the US).
Over the past 6 years years $MWK has invested in building their own e-commerce platform called AImee. This platform provides proprietary tech allowing them to automate various aspects of their supply chain including market research, forecasting, logistics, sales and marketing, fulfilment and customer service. A big part of their strategy and competitive advantage is keeping fixed costs low through AI and automation while increasing revenues and margins. In the last three years, $MWK’s headcount has remained flat while revenues and profits have increased significantly.
Currently $MWK has 280+ SKU’s across 11 brands all being sold across major ecommerce marketplaces. Several of these brands came through a recent acquisition of Acquired Brands which you can read about here [link to press release]. $MWK paid approximately 4x trailing twelve month operating income which was $13.1 million on $77.5 million of revenues. This acquisition is a glimpse into the company’s strategy going forward which includes gobbling up more and more of these smaller consumer product companies and then scaling them through their existing e-commerce focused strategy. Below is an example of a past acquisition…
By using AI and data to identify emerging product trends across ecommerce platforms then analyzing customer reviews, feedback scores, etc. it allows $MWK to figure out where there might be an opportunity in the market to create a superior product or make an acquisition to fill that void. Working with their design and manufacturing partners they can expedite the process and get a new product designed, developed, manufactured and stocked in 6-8 months which is much faster than the typical product development life cycle for larger companies. This is where $MWK has a competitive advantage.
When I reached out to the team at $MWK they told me “We are buying the assets (products, brands, inventory) of smaller consumer products companies and adding them to our platform at EBITDA multiples of 2x to 5x which is very accretive even with our current equity valuation. They also told me “We are seeing the very early stages of consolidation in the fragmented world of e-commerce consumer product brands. We strongly believe that our operational processes and proprietary technology infrastructure are years ahead of the competition and most importantly we are (to our knowledge) the only company executing on this particular M&A strategy. Below is an image that illustrates their discipline with regards to doing deals and why it’s so important to find the right company at the right price so they are not only adding revenues but also keeping gross/operating margins strong and adding free cash flow to keep fueling the growth engine they are creating.
With regards to their current brands, their portfolio is quite diverse from home appliances to kitchen appliances to special cookware to hair styling products to really cool home office furniture to products to improve your health and back posture. I would encourage everyone to check out their portfolio at https://mohawkgp.com/brands
As you’ll notice from the brand page, each of their individual brands has their own really nice looking Shopify store like these...
In terms of financials I definitely love the tremendous revenue growth and I don’t see any reason why it’s going to slow down in the near term especially if the company remains smart and diligent with their well-formulated business strategy.
Current estimates have YoY revenue growth for 2021 and 2022 at 60-65% but I think that number is too low. I believe the company has the ability to put up 80% or better revenue growth over the next few years in which case the current stock price and market cap is way too low.
If I had to pick out one negative about the company and their financials it’s definitely their gross margins, they need to come up, but the company assures me this is a big priority for this coming year and should happen as they continue to improve operational efficiencies.
Between their AI-powered product development process, product mix, strong management team, multi-ecommerce-platform business model and accretive M&A strategy I’m super bullish on this company.
In full disclosure, I went into this past weekend with a 2% position in $MWK however after spending the weekend digging into the finer details I have increased that position to 3.5% as of this morning.
For my own model, I’m assuming $MWK finishes 2020 in the range of $185 million in revenues and grows that number by 75-80% in 2021 which would put next year’s revenues somewhere around $330 million (although I still think that’s conservative).
Taking into consideration their expected gross margins, operating income margins, balance sheet, business model and everything else I know...I believe $MWK could and should be trading at 10x 2021 sales (at a minimum). This would put the market cap at $3.3 billion by the end of 2021 which would be approximately 10x from current prices.
Before you start laughing at 10x upside, I’ve been investing long enough to know that predicting 10x moves is both controversial and ludicrous so I’m definitely not saying it’s likely but it’s definitely possible. We’ve seen plenty of stocks rip 10x higher in the past year and with so much capital flooding the equity markets and ecommerce continuing to gain more market share...anything is possible especially with $250M market caps, proprietary technology and 60-80% revenue growth.
I can also get to a 10x return over the next 3 years using a DCF model including 30% stock dilution from any secondary offerings the company does to support their growth initiatives.
Sometimes these small cap companies are doing remarkable things but just don’t have the attention of investors however that can change quickly and I’m betting it does. Unless you’ve been living in a cave the past few years you know that ecommerce is gaining enormous momentum…
Many investors already own the big US ecommerce platforms like $AMZN $SHOP $ETSY or the international platforms like $FTCH $BABA $SE $PDD $JD $MELI $OZON $JMIA etc but I think there’s reasonably justification why it also makes sense to own a smaller company like $MWK that is benefiting from the same ecommerce trends as the larger companies at a much more reasonable valuation with bigger growth potential. Over the next few years it’s unlikely any of the ecommerce platforms I just mentioned will go 10x higher from here but I think $MWK has a shot to do just that.
With a $250-300M market cap the big mutual funds and hedge funds can’t invest in $MWK (it’s too small) but retail investors and small cap funds certainly can. Right now it’s easy to ride the stocks that have done well over the past year and I suspect many of them will continue to do well in the coming year but the best growth investors are always looking for that next big breakout company and I think $MWK could be one of them.
I’d be shocked if we don’t see $MWK up 100% over the next 6 months and I’m not just saying that for fun, I’m putting my money where my mouth is given my 3% portfolio position. As I continue adding to my investment account in the coming weeks I will definitely keep adding to $MWK because this is going to a big winner over the next few years.
If you’re interested in $MWK here’s a great interview from Sean Emory with the founder & CEO, Yaniv Sarig. [click here to watch]. Below is the rest of the $MWK management team.
Disclaimer: The stocks mentioned in my newsletters are not intended to be a list of buy recommendations but rather some ideas for your watchlist. Perhaps they end up in your own portfolio after you conduct your own research and due diligence. Some of the stocks mentioned in my newsletters have smaller market capitalizations and therefore can be more volatile. I always encourage everyone to do their own research and due diligence before buying any stocks mentioned in my newsletters. Please manage your portfolio and position sizing in accordance with your own risk tolerance and investment objectives.