Investment Climate April 2022: Stay Positive!

It has been a rough ride for the stock prices of the fastest growing companies in the economy over the last several months. While the short-term market machinations are not something we try to predict, the wild swings of late have been considerable and, for many, unnerving. Interestingly, the businesses in our Income Strategy (or what we consider internally our “stable, but slower growth businesses”) have been doing well versus general market averages. Nonetheless, while we thoroughly understand the consternation that these environments can often engender, we have always said that what matters most for long-term investors is a focus on the actual businesses of the companies in which we are invested and not the daily market prices at which companies are traded. This is not to say the market prices are never a consideration, but they are far down the list compared to the analysis of the businesses themselves.

While the market values of most growing companies have dropped in recent months, albeit for reasons we believe are somewhat silly, when looking at the underlying businesses of our portfolio companies, we would be hard-pressed to explain why they are down in market value. We don’t know when this environment will turn back to focus on business fundamentals as opposed to what the Federal Reserve is going to do, or what Vladimir Putin has up his sleeve, but we do know that if they continue to do as well in their respective businesses as they are now, the market values will take care of themselves just fine! Here are a few examples:

Grid Dynamics Holdings, Inc. helps Fortune 1000 companies in “digital transformation,” which involves discussions with the client about strategy and then collaborative creation of innovative digital products and experiences and new digital platforms, delivered at enterprise scale. The company has a market capitalization of about $1 billion, with annual sales around $250 million, and has a high percentage of employees (around 45%) who were located in Ukraine. Despite the massive disruption caused by the ongoing war, Grid recently raised its revenue guidance for the most-recent quarter to $65 million-plus, up from a previous guided range of $55 to $60 million (and up from about $39 million for the same quarter a year before). This level of business growth in the midst of a conflict of this magnitude demonstrates the professionalism of the leadership that can be found in our companies. As a side note, Grid management hired buses to move Ukraine-based employees and their families to safer locations, where they rented a five-story office building where employees could house their families on three of the floors (with showers and access to kitchen facilities) and have a space to work on the other two floors of the same building.

InMode, Ltd. is a leading designer and manufacturer of medical devices used for minimally-invasive and invasive surgical procedures, primarily for aesthetics or cosmetic surgery, including procedures such as body contouring, skin resurfacing, and collagen contraction, among others. The company presently markets ten different platforms supporting a wide range of procedures, and is a leader in the aesthetic surgery space. InMode presently has a market capitalization of about $2.9 billion on annual revenues of around $400 million, and recently pre-announced first-quarter results with expected revenues of $85 million, ahead of the previously guided range of $80 to $83.9 million, which itself was well above the $65 million from the year-ago period. We believe that InMode will continue to benefit from the growth of demand for aesthetic procedures that can provide dramatic results but which are less invasive than full-scale plastic surgery (and which also have shorter recovery times than most plastic surgery).

Dutch Bros, Inc. only recently became public in September of 2021, and is a newer addition to our Core Growth Strategy. Dutch Bros operates a chain of drive-thru shops that serve high-quality beverages, including coffees, blended drinks, espressos, and energy drinks in a wide variety of flavors and creative combinations. The company is focused on providing a high-quality customer experience characterized by friendly customer service and unparalleled speed and efficiency of delivery, including innovations to help customers get their order faster and get on their way instead of staying stuck in line at the drive-thru. Dutch Bros is one of the fastest-growing drive-thru companies by store count, with 538 stores at the end of 2021 (up from 254 at the end of 2015), and operating in twelve western and southwestern U.S. states (up from seven at the end of 2015). The company believes that they can easily get to 4,000-plus stores in the U.S. over time, and external analysis by ourselves and others suggests that this number is probably conservative, and may be in the range of 6,000 potential stores, or even higher. Dutch Bros market capitalization is presently about $8.3 billion, on annual revenues of about $500 million in 2021 (likely to be above $700 million in 2022). We recommend visiting a Dutch Bros drive-thru in your area if possible: they typically have long lines throughout the day, but they are well-organized to get customers through the lines and on their way in a timely and positive fashion.

In tough markets, it is because we have conversations with companies like the above-mentioned that we stay so overwhelmingly positive on the long-term outlook.

Stay tuned for more commentary in between the quarterly Investment Climate publication either through our blog on our website (www.taylorfrigon.com), or through our new podcasts that will be coming out soon! Disclosures: Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Taylor Frigon Capital Management LLC (“Taylor Frigon”), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Taylor Frigon. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Taylor Frigon is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the Taylor Frigon’s current written disclosure Brochure discussing our advisory services and fees is available upon request. If you are a Taylor Frigon client, please remember to contact Taylor Frigon, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services.