MJWNY - Silver Ring Value Partners - Naked Wines: Disappointing Results But Subscribers Grew

Summary

• Naked Wines reported a moderately disappointing half-year result.
• The stock reaction – the share price was cut in half – appears to me far disproportionate to the incremental fundamental developments.
• Even in a declining scenario, NWINF is likely to generate enough cash flow to more than justify the current price.
• If NWINF fixes its top-of-funnel issues, demonstrates pricing power without affecting its value proposition and improves profitability, the stock may go higher.

The following segment was excerpted from this fund letter .

Naked Wines ( NWINF )

The company reported a moderately disappointing half-year result. Subscribers (aka “angels”) grew, which was good. However, the company is struggling to attract new customers to the top of its marketing funnel in a cost-effective way. Furthermore, repeat customer contribution margins declined, driven primarily by the U.S. business where the company has been slow to pass through inflation.

The stock reaction – the share price was cut in half – appears to me far disproportionate to the incremental fundamental developments. At the current valuation, the stock price is implying an imminent and severe decline in the business. That possibility cannot be eliminated, but there is very little evidence for that thus far.

Even in a declining scenario, which is not what I believe to be the company’s long-term trajectory, the company is likely to generate enough cash flow to more than justify the current price. Therefore, I restored the position back to a small, ~ 5%, size. With a clean balance sheet and sticky customers who are on average very happy with the service, the investment meets the criteria for “doubling down” that I outlined earlier in the letter.

Why not make it a larger, 10% or 15% position? Experience has taught me a lot of humility over the years. While my analysis suggests the opportunity here is excellent, this is still a small, niche business. There could be adverse regulatory changes out of left field that could impact the economics. Or I can simply be wrong and temporary cyclical factors are propping up demand, masking the trouble brewing beneath the surface.

If the company fixes its top-of-funnel issues, demonstrates pricing power without affecting its value proposition and improves profitability, the stock may go higher. Such a scenario would increase the likelihood of being correct in my thesis. The combination of a higher price with a much higher certainty in my value estimate being correct might then merit a larger position size.

Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.

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