An under-the-radar 20-bagger

What's next?

In October of 2021, I had an idea, probably as a result of the COVID shenanigans and some cash on hand.

I wanted to automate my entire house. You know, lighting, home cinema, central control pad, the works. I get these spurts of mania sometimes. The idea comes up, I go all in, and then when months go by, I pass on to something else.

What do you do when you want to automate your house? Right, you go online and search for a home automation forum.

When looking around at the time and what I should use, one name always came up in this enthusiastic community: Shelly

A Shelly? What the hell is a Shelly?

From distributor website

You install this in your electrical cabinet, behind an interrupter or a power socket, and voila. You’ve made your home intelligent as it can be controlled through wifi or Bluetooth.

It doesn’t look like much, but the company behind this has been able to sell millions of these kind of devices over the past decade. And when you sell millions, and you’re profitable, the price of the stock tends to follow.

Welcome to another multi-bagger breakdown. The Shelly Group. (Ticker: SLYG) trading on the Bulgarian and Frankfurt stock exchanges.

Rest assured. This isn’t another, ”darn, I missed this one” like our previous breakdown.

I missed a 10-bagger in 6 months (IRR = 9900%)

I’ll explain later. We’ll go back 5 years in the past to see what the company looked like. Then we’ll go to the present and run some numbers to see if we should jump on this train.

But first, where did the 20-bagger come from?

• Multiple expansion from a P/E of 6 to 30 at the moment (X5)

• EPS growth at a 30%+ CAGR (X4)

Let’s dig in⬇️

Do you own Shelly? If yes, do you still think it is a buy?

The past

It’s 2019.

You might remember China and the US heating their trade wars, Europe and the UK heading for a Brexit, and of course in November the first recorded cases of COVID.

And under all these events, a tiny Bulgarian company was doing its thing, making the Internet of Things devices that can make your house intelligent.

They had a limited array of products, and the company was not shelly yet, it was named Allterco:

From the Waybackmachine.org

Their slogan said it all: “Transform your home for less.” In 2021, the people on the home automation fora were unanimous:

• It works

• It’s cheap

• It’s easy to install

So let’s take a look at what the financial statements looked like:

The Income

There was growth, but in 2019 they experienced a pretty big drop. Gross margins are pretty good, and bottom line margins were low, however, they did receive a bump upwards in 2019 despite the revenue decline. Nothing special.

The balance

Stable cash position until a sudden rise in 2019. No PP&E at the end and goodwill was written down. In 2019, the debt was manageable.

➡️On to the cash flows.

Cash is king

Free cash flow gradually increased due to increased cash from operations. 2019 was a year of investments in the company.

The ratio’s

Rising return on equity which is great. Low CAPEX to OCF in 2019. The cost structure is pretty stable over those 5 years.

One last thing we need to look at: The cash conversion cycle

Unlocking 633 Billion USD - The cash conversion cycle and why you should care as an investor

Cash conversion

Accounts receivables and payables decreased. Inventory gradually increased. The overall cash conversion cycle increased which is not the most positive of things, but nothing dramatic.

Overall conclusion

Based on past financials, there’s nothing extraordinary about this company. The noticeable thing is that although revenue dropped by 30% in 2019, their cash position and net income increased.

However, if we take into account the number of devices sold, we have the following data:

• 2016: Launch of "She" home automation product

• 2017: ~100,000 devices sold

• 2018: ~500,000 devices sold

• 2019: ~1 million devices sold

Now that paints a different picture. I was not on the automation forums at that time, but if people were raving about their products as they did in 2021, you might have been on to something. In addition, there has been and still is very high insider ownership in the company (60%+)

So you have a profitable company, with an increasing popularity of its flagship product, but somehow in a short-term downturn. How was the market pricing the company in 2019?

Here’s the result of a reverse DCF scenario analysis:

You can find the template for the reverse DCF below.

Tools

The goal here is to look for 100% (a combination of factors that align with the enterprise value). As we can see, growth was anywhere between 0 to 10%.

➡️The market didn’t think much of the future growth of this company.

It was wrong.

Fast forward to 2024

First off, the company has significantly expanded its product offering. An image from their current black friday sale:

Since an image is worth more than 1000 words. Here’s a quick look at the current situation:

From finchat.io updated by the author

This company has been firing on all cylinders. And of course, the market has taken notice. Since the end of 2021, the company has been listed on the Frankfurt Stock Exchange.

Its growth mainly comes from Western Europe, specifically from the DACH region (Germany, Austria, and Switzerland), but Shelly wants more. They are expanding into the rest of Europe, the USA and Australia. But growth has been slower there.

And to make it simpler, if we start in 2019, and continue their number of devices sold:

• 2019: ~1 million devices sold

• 2020: ~2 million devices sold

• 2021: ~3.5 million devices sold

• 2022: ~6 million devices sold

• 2023: ~8.5 million devices sold

• 2024: ~10 million devices sold

These are mind-boggling numbers for a product company (they have recently released an app that could bring in recurring revenue at very high gross margins, but the impact on revenue at the moment is minimal)

One last thing I wanted to take a look at was the cash conversion cycle since it was increasing from 2014 to 2019

It has continued to increase with a high level of inventory based on the trailing twelve months and a high level of accounts payable.

Now this might not be a problem per se because the company is growing so fast, so it needs to rotate a lot of inventory. But it is a factor that needs to be tracked.

Is there juice left?

Without a doubt, there is still a big part of the market that Shelly has not covered. However, there might be increased competition in the US and Asian markets.

And when looking at the forward 2-year consensus estimates, it seems the analysts agree that the company keeps growing with a projected 2 years of 30%+ EPS growth (although we should take these numbers with a grain of salt).

The biggest opportunity I see, but this might be the most competitive one, is to expand into the professional market and sell their products B2B (but I could not find any segmentation data on this in their annual report, which I guess means their penetration here is still low).

The biggest risk is of course the current price. A PEG below 1 might seem attractive, and in the short term, you might get away with it and nail that additional EPS growth as a return. But in the medium to long term, a slight dip or miss on growth guidance will have a sharp impact on the multiple.

If we redo the reverse DCF for today's numbers:

Bear in mind I took NOPAT numbers instead of true FCF as the NOPAT is more stable. Even with an opportunistic NOPAT, they would need between 30 and 40% growth for the next decade to return a 15% yield every year. That’s a lot of growth.

If the company truly conquers the world with its devices, it might become a reality, but to me, the downside risk is too large.

If I’m paying a P/E of 30, then I want a company with an obvious moat. And the moat for Shelly is not that obvious.

Lessons learned

When we look at the financials and the company up until 2019, you couldn’t have guessed what was about to come.

However, when I think about how people were raving about the shelly devices within the home automation community, I think it’s a typical Lynch signal that should require further investigation.

In addition, when looking at the unit volume sold, their growth was massive from 2014 to 2019.

So when researching any company:

• Always look at the unit economics and volume sold

• Scuttlebutt when you can uncover information beyond the annual report

• If an annual report is not available in English, it might be a good thing. Google translate is your friend

It seems all the future growth is priced in, so there’s no sufficient margin of safety for me to justify a position.

I would have liked to go deeper, but I’m a bit under the weather this week, so I had to make this article shorter.

I wish you all a happy holiday!

May the markets be with you, always!

Kevin