Invest in what you know.
This advice was popularized by Peter Lynch, a famous growth-stock manager whose top-performing Magellan fund averaged 29%-plus per year for more than a decade.
Although it’s been more than three decades since that historic streak (1977-1990), such achievements are rare… So today, we’re going to explore why the idea is so powerful… and how it applies to my favorite IPO of the year (to date).
The rationale behind “invest in what you know” relies primarily on the insight and intimate understanding of a company’s business by its dedicated customers… an insight that can give these customers an advantage over analysts—and an edge in their investments.
If you follow this rule, you’d probably skip most biotechs… or cloud software companies. But you’d likely invest in Amazon, Apple, Netflix, or similar companies with universal consumer appeal and wide reach.
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And you may have been one of the investors in a recent IPO…
Given the company’s current user base, it potentially had tens of millions of ready investors at the time of its public debut.
On February 11, Bumble (BMBL), a women-focused online dating app, went public. It’s the first dating service in which only women can make the first move. After connecting to her prospective date, a woman has 24 hours to make up her mind about whether or not she wants to go ahead.
Here’s a testimonial from my colleague Erica S.:
A former classmate recommended Bumble to me, saying she had some great dates while on it. After a few bad experiences, I was fed up with the dating app I was using… and since Bumble was free, I took a chance and created a profile.
Initially, it was terrifying! To make the first move, I really had to get out of my comfort zone… but I gained confidence. And it turns out, my friend was right—The number of potential matches was much better than on other dating sites.
I ended up matching with my now-boyfriend (we’ve been together for a year). We’d lived just 10 minutes apart… but without Bumble, we may never have found each other.
Bumble has millions of happy customers like Erica. And no doubt many of them will become investors.
Of course, you don’t need to be one of the 42 million monthly active users to invest in the stock.
But it might help that you’d be doing it alongside some “big money” managers who obviously like the business model.
Blackstone (BX), one of the world’s largest private equity firms, invested in BMBL early and now owns more than 42% of all shares outstanding. And for good reason…
Bumble is large in its reach, innovative in its approach, and its IPO, which rallied 64% on opening day, made a big splash.
I love this IPO because it has the potential to expand beyond its core business… and become a leading social networking company.
The company owns two dating apps, Bumble and Badoo, which are benefitting from the success of Match.com… and from the epidemic of loneliness that followed COVID lockdowns.
But Bumble was designed to be a gentler, friendlier dating service than Match, or another popular app, Tinder.
Bumble was designed not only to help people connect romantically, but also to network (somewhat like LinkedIn, a Microsoft-owned career network) and form platonic friendships… a valuable feature for the pandemic. Out of 12 million people that use the Bumble app monthly, some 9% use its friend feature.
The company’s second app, Badoo, is also social in mind. Larger in size (more than 28 million monthly users), Badoo looks a lot like a social network app… because that’s what it is: a social network for people who want to date.
It’s easy to chat, video chat, exchange photos and videos—and learn whether or not you have friends in common—on Badoo.
Neither of Bumble’s apps require a paid subscription to use their services, which is part of why they’re so popular, especially with the younger crowd. Only a small share (about 5% of Bumble users) are paid subscribers.
Paid services offer you more choices… more “filters” (ways to screen for your ideal match)… and more flexibility. The more the paid service (called Bumble Boost) improves upon the free version, the better.
But ultimately, it’s all about being able to match you with your ideal person. You can’t put a price on happiness… people are ready to pay up if they feel they improve the chance of a desirable result. That’s why paying for dating apps (be it Match or Bumble) is becoming more common.
In that, the algorithm Bumble uses has been a success… helping make numerous people like Erica happy, and expanding the positive word-of-the-mouth vibe.
Bumble isn’t profitable yet, but it’s been growing revenue fast. In 2019, it booked $489 million, 36% more than in 2018. For 2020, it’s expected to sell some $580 million in services. (We’ll learn more on March 10, when Bumble delivers its first-ever report as a public company).
Bumble is expected to have lost $1.52 per share in 2020… a loss that will become significantly smaller, ($0.22 per share), in 2021. 2022 isn’t expected to be a break-even year either.
Meanwhile, Bumble’s quite pricey, trading at 15 times revenue.
As the company starts its public life, I expect some of the initial excitement will fade… lowering the share price and presenting many buying opportunities for long-term investors. Facebook (FB), for example, traded below its IPO price for more than a year before taking off.
Keep in mind that the large Blackstone position could become a two-edged sword. If everything goes well, Blackstone is likely to hold on to its stake. But if Bumble delivers a disappointment or two, Blackstone could begin to sell, putting additional pressure on the shares. This will translate into extra volatility in the upcoming months.
Also note that Bumble has a dual share structure: BMBL, the class A shares sold to the public in the IPO are entitled to one vote per share… but the (non-publicly traded) class B shares hold the majority of the voting power.
I find comfort in knowing that the founder and CEO, Whitney Wolfe Herd (the youngest female self-made billionaire ever), has retained a large stake in the company and its B-class shares.
If you’re a Bumble fan and ready to weather some volatility, you can start with a small position now… then build your position as some of the initial IPO excitement wanes. This stock has a long runway for growth. And for many, it’s a great way to “invest in what you know.”
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