YB new stock pitches (Wed, Sep 2)

AppLovin’s setup at $300 resembles summer 2024, with valuation the first reason: after selling its low-quality, shrinking Apps division, the advertising/software business trades at about 14x 2027 FCF per share, assuming net cash and interim FCF are used for buybacks at today’s price. The second similarity is skepticism around medium-term growth. Organic growth exceeded expectations from Q4 2024 through Q2 2026, ranging from 77% to 53%, but is decelerating and likely to slow further. Management nevertheless believes continued gaming improvements and consumer expansion can support roughly 30% annual compounding, versus consensus growth of 27% in 2027, 24% in 2028 and 8% in 2029. TTM metrics remain exceptional at a 78% EBIT margin, 66% FCF margin, roughly 55% revenue growth and 133% ROIC. At the current multiple, buybacks alone support 5-6% annual EPS and FCF-per-share growth; more visible consumer/e-commerce traction could change perceptions and enable substantial re-rating. The central risk is that current growth or margins prove unsustainable.

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Watsco is North America’s largest HVAC/R distributor, linking major manufacturers with more than 120,000 independent contractors and technicians. Its model benefits from 70%-80% of sales coming from emergency replacements and repairs, where speed and parts availability matter more than price. Digital platforms help contractors find parts, create quotes and complete more jobs; e-commerce now generates one-third of revenue. Watsco also has room to consolidate a fragmented market of 2,000+ regional distributors, sells roughly one in five residential systems and does not yet operate in every state. The business is asset-light, carries little debt and consistently generates 15%+ ROIC. Shares have fallen more than 45% as revenue and net income declined following pandemic demand pull-forward, the A2L refrigerant transition and normalization of OEM pricing. Management targets $10B of revenue and 30% gross margins; assuming an 8% net margin and 25x forward earnings implies a $20B value, or 56% upside. The case depends on those headwinds proving temporary and the long-term targets being reached.

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Copart is the dominant member of a US salvage-auction duopoly, supported by a largely owned network of permitted land and a liquid platform whose international buyers influence prices on more than 90% of vehicles. The shares have fallen roughly 50% to 22.5x unlevered FCF, the ninth percentile of their 10-year range, while trailing revenue and operating income are roughly flat, reported FCF is $1.34B, and cash is $4.2B with no financial debt. The central view is that declining US insurance units are mostly cyclical: Copart lost 5.1 points ex-catastrophes, but the industry wreck pool shrank an estimated 2.7 points and unfavorable insurer mix explains another 1.2-1.9 points, leaving only 0.5-1.2 points for account loss and other factors. Stabilizing insurance prices and improving unit trends support a recovery, with international insurance adding medium-term growth. Capital allocation has also shifted: Copart repurchased $1.6B of stock in nine months, and management says future M&A across international insurance, domestic whole car and technology services will involve material investments, although the valuation model assumes no buybacks or acquisitions. The five-year model produces a 20.7% probability-weighted IRR, primarily through multiple normalization. The main risk is that total-loss frequency, auction prices and accident counts turn structurally unfavorable; failure of US insurance units to grow by the first half of FY28 would invalidate the thesis.

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