The following segment was excerpted from this fund letter.
We initiated a position in Ibotta, Inc. (NYSE:IBTA) in its April IPO.
Ibotta offers cashback rewards on various purchases through its Ibotta Performance Network (‘IPN;) and direct-to-consumer app. Ibotta partners with retailers (e.g., Family Dollar and Kroger) who want to offer loyalty programs, and earns money from brands (e.g., Nestle and Unilever) who want to offer digital cashback rewards on their products.
For example, brands find these cashback rewards useful as a measurable way to attract customers away from private label brands and launch new items. Ibotta gets paid on a measurable basis, averaging $0.80 per cashback redemption.
In total, Ibotta serves over 2,400 brands, and through its third-party retailer network, reaches over 200 million potential end consumers (“redeemers”). Given the scalability of offering online rewards across its platform, Ibotta has a highly profitable and cash flow generative model, with 70% incremental margins in its third-party business.
Ibotta was founded in 2011 as a direct-to-consumer app in a highly competitive space. In 2021, Ibotta began powering cashback rewards programs with the IPN for large third-party retailers, which is a much faster growing space and is already half of Ibotta’s revenue today. To date, Ibotta has credited American consumers with $1.8 billion in cash rewards through its network. With the IPN, Ibotta competes in a very large, digital total addressable market, and we believe that Ibotta, which enables effective return on brand spending, has significant room to grow from a base of $320 million in revenue in 2023.
Competitively, Ibotta is the clear leader in providing consumer rewards/ incentives for large retailers, with more meaningful scale, better technology, and sharper focus than legacy competitors. We believe it would be very difficult to replicate Ibotta’s relationships with 2,400 brands and 85 retailer point-of-sale integrations offering item-level transaction data.
We also believe this is a market where there should be a winner that takes most/all, and we believe Ibotta is on track to be that winner. While this shift will take time, Ibotta’s deep partnership with Walmart should be a catalyst. Ibotta has signed an exclusive multi-year deal to power all cashback rewards for Walmart, which we believe will expand its redeemer base substantially and attract other retailers who look to follow Walmart’s lead.
At the end of May, Ibotta reported their first quarter as a public company: revenue grew 52% year-over-year to $82 million and adjusted EBITDA 28%. However, Ibotta’s second quarter guidance was a bit soft (versus expectations), which we believe is because Walmart and other retailers are still ramping and remain far from maturity. With the stock trading down, we find Ibotta’s valuation attractive and added to our initial position.
Investors should consider the investment objectives, risks, and charges and expenses of the investment carefully before investing. The prospectus and summary prospectus contain this and other information about the Funds. You may obtain them from the Funds’ distributor, Baron Capital, Inc., by calling 1-800-99-BARON or visiting BaronCapitalGroup.com. Please read them carefully before investing. Risks: Specific risks associated with investing in smaller companies include that the securities may be thinly traded and more difficult to sell during market downturns. Even though the Fund is diversified, it may establish significant positions where the Adviser has the greatest conviction. This could increase volatility of the Fund’s returns. The Fund may not achieve its objectives. Portfolio holdings are subject to change. Current and future portfolio holdings are subject to risk. The discussions of the companies herein are not intended as advice to any person regarding the advisability of investing in any particular security. The views expressed in this report reflect those of the respective portfolio manager only through the end of the period stated in this report. The portfolio manager’s views are not intended as recommendations or investment advice to any person reading this report and are subject to change at any time based on market and other conditions and Baron has no obligation to update them. This report does not constitute an offer to sell or a solicitation of any offer to buy securities of Baron Small Cap Fund by anyone in any jurisdiction where it would be unlawful under the laws of that jurisdiction to make such offer or solicitation. Upside Capture explains how well a fund performs in time periods where the benchmark’s returns are greater than zero. Downside Capture measures how well a fund performs in time periods where the benchmark’s returns are less than zero. Free cash flow (‘FCF’) represents the cash that a company generates after accounting for cash outflows to support operations and maintain its capital assets. BAMCO, Inc. is an investment adviser registered with the U.S. Securities and Exchange Commission (SEC). Baron Capital, Inc. is a broker-dealer registered with the SEC and member of the Financial Industry Regulatory Authority, Inc. (FINRA). |
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