Winter 2020

The thesis is based on the belief that Peloton's business model is unsustainable due to increasing competition and declining subscriber growth, leading to a potential decrease in revenue and profitability.

The long thesis is centered around Rolls-Royce's recovery potential as the aviation industry rebounds post-pandemic, alongside its strategic initiatives to improve operational efficiency and profitability.

Paul B. Kazarian highlighted his investment in Greek government bonds, which resulted in an 8.9 times multiple on capital invested at exit and a 35% IRR after about 5 years with no leverage.

Kazarian mentioned Japonica was the largest stockholder in CNW Corp. and initiated a US$1.6 billion tender offer to maximize shareholder value, achieving a 2.2 times investment multiple and 57% IRR in 1.5 years with no leverage.

As majority stockholder, Japonica led a US$1.5 billion turnaround of Sunbeam-Oster, resulting in a 5.9 times investment multiple and 104% IRR in 3 years, saving 10,000 jobs.

Kazarian's firm was the lead sponsor for a US$2.4 billion restructuring of Borden Inc., aiming to turn the company around and improve its financial management.

Japonica was the largest creditor and sole proponent of the successful bankruptcy reorganization plan for Allegheny International, achieving a 1.3 times investment multiple and 181% IRR in 7 months with no leverage.

PTON faces significant competition with no moat, particularly from SoulCycle, which is launching a connected bike product. The projected revenue for 2024 is $2.9 billion, significantly lower than the consensus of $5.2 billion, leading to a base case price target of $7, representing a 76% upside for the short position. The analysis indicates a low probability of PTON succeeding as a gym replacement, with a potential downside of 253% if it reaches 8 million subscribers.

Rolls-Royce is positioned for significant cash flow generation due to a recent investment period and expected growth in its Aftermarket division. The company is projected to multiply its free cash flow by 2.5 times, with a target price of £13.5 in 2022, representing a 100% upside. Key factors include increasing aftermarket profits, reducing losses per engine sold, and normalizing expenditures after heavy investments.

The investment thesis for Rolls-Royce is based on the expectation of significant EBIT growth from £600m to over £2,000m, driven by improvements in the Civil Aftermarket division and a reduction in engine losses. The company is also expected to normalize maintenance costs and reduce capital expenditures, leading to a compelling upside potential for the stock price, which could double by 2022.

Nuance is a leading provider of speech recognition software with a strong market position and a defensible moat. Recent changes in the company, including a transition to SaaS, a new CEO, and business rationalization, are expected to enhance future margin expansion and growth opportunities, leading to a projected price target of $31, representing a 57% upside.

The new CEO Mark Benjamin is experienced and incentivized to improve long-term stock performance. Recent business optimizations and growth opportunities, particularly in international markets and partnerships, suggest that the current EPS expectations are conservative, indicating potential upside for the stock.

Etsy's unique position as a leader in handmade e-commerce is underappreciated by the market. The company's commitment to its sellers and the introduction of Etsy Ads are expected to drive significant buyer growth, leading to a projected price target of $86, representing a 76% upside.

Peloton is an expensive add-on fitness product with a smaller total addressable market (TAM) than market expectations. The company's churn is artificially low due to legacy contracts, and it faces significant competition without a competitive moat. Therefore, it is an attractive medium-term short opportunity.

The transition from legacy transcription services to the cloud-based Dragon Medical One solution is expected to significantly enhance margins and revenue. The shift from a labor-intensive service model to a SaaS model could increase margins from mid-30% to 80%, while the subscription model is projected to double annualized revenue compared to the old license software.

We project a higher growth in the number of buyers for Etsy, estimating a low-twenties CAGR compared to the market's mid-teens CAGR. Our valuation suggests a target price of $86 based on a forward EV/EBITDA multiple of 13x, indicating a potential 76% return over four years.