Red Violet (RDVT): Asset-Light Spin-off With Long Runway

Business Description: RDVT’s platform (CORE™) stores 1+ trillion data records on nearly every individual in the US. Their data sources include MVA, property, criminal, court, and employee records. The proprietary, cloud-based platform funnels all the records into one, easy-to-query database. RDVT uses this technology in two products: idiCORE (risk management, debt recovery, fraud detection) and FOREWARN (individual background checks catered to realty professionals, see our homebuilding thesis here). 

Thesis: RDVT is a fast-growing, highly scalable data fusion company delivering 1+ trillion points of data to its customers at lightning speed. Their platform allows customers to assess risk and achieve a full-scale picture of any individual and business before meeting/conducting a deal. The company sports a fixed-cost model with 90% incremental gross margins. Management has a history of building similar companies, with two sales totaling $1B in the same industry. We believe the company can reach $190M in 2024 revenue with 40% EBITDA margins, giving us nearly 300% upside from current prices. 

History & Spin-off: The current RDVT team began developing the CORE platform in 2014 under the name “The Best One” (TBO). TBO received an investment from Phil Frost, changed its name to Cogint and listed it as a public company (under ticker CGNT). In 2018, the company merged with Fluent under the ticker FLNT. That same year FLNT decided to spin-out the CORE platform company (TBO/CGNT). Here’s what’s interesting: every single executive left TBO/CGNT to work at the newly spun-off company, Red Violet (RDVT). 

Fixed-Cost Model: The most attractive aspect of the RDVT thesis is their fixed-cost business model. In short, they pay a fixed, long-term contract on their data feed. It doesn’t matter if they generate $10M in revenue or $100M. Their cost remains fixed. This allows the company to reach 90% steady-state gross margins and near 100% incremental GM. As the business scales, they won’t have to spend as much on SG&A. This ramps up EBIT margins (in some estimates, reaches 40%). 

History of Value Creation: Dan Dubner and his executives were the early founders of the data fusion industry. They’ve built two companies like RDVT that sold for a combined $1B. RDVT is a spin-off of all the things that weren’t great in prior iterations of such data fusion technologies. We have a strong belief that management knows how to build, how to price and how to create value for shareholders. They own 20% of the company so incentives are aligned. 

Valuation: We’re assuming 45% annual top-line growth over the next five years — starting with $50M in 2020 revenue. At scale the company generates 90% GM and 40% EBITDA margins (based on their two previously sold companies). Given our assumptions, we end 2024 with $190M in revenues, $76M in EBITDA and $55M in FCF. Add back our $9M in net cash and we get a market cap of $578M ($50/share). If we assume a 17x exit EBITDA multiple (in line with historical sales), we get $700M in market cap ($62/share). That’s near 3x upside.

Risks: Data supplier concentration (receives 43% of its data from one provider), competing away margins, litigation risk from competitors (CEO is lawyer by trade), Data price increase leads to reduced margins.

***Disclosure: We currently have a position in RDVT at the time of this release***

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Brandon Beylo

Value Investor

Brandon has been a professional investor focusing on value for over 13 years, spending his time in small to micro-cap companies, spin-offs, SPACs, and deep value liquidation situations. Over time, he’s developed a deeper understanding for what deep-value investing actually means, and refined his philosophy to include any business trading at a wild discount to what he thinks its worth in 3-5 years.

Brandon has a tenacious passion for investing, broad-based learning, and business. He previously worked for several leading investment firms before joining the team at Macro Ops. He lives by the famous Munger mantra of trying to get a little smarter each day.

AK

Investing & Personal Finance

AK is the founder of Macro Ops and the host of Fallible.

He started out in corporate economics for a Fortune 50 company before moving to a long/short equity investment firm.

With Macro Ops focused primarily on institutional clients, AK moved to servicing new investors just starting their journey. He takes the professional research and education produced at Macro Ops and breaks it down for beginners. The goal is to help clients find the best solution for their investing needs through effective education.

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He worked as a consultant to the family office’s in-house fund of funds in the areas of portfolio manager evaluation and capital allocation.

Certified in Quantitative Finance from the Fitch Learning Center in London, England where he studied under famous quants such as Paul Wilmott.

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Founder and head macro trader at Macro Ops. Alex joined the US Marine Corps on his 18th birthday just one month after the 9/11 terrorist attacks. He subsequently spent a decade in the military. Serving in various capacities from scout sniper to interrogator and counterintelligence specialist. Following his military service, he worked as a contract intelligence professional for a number of US agencies (from the DIA to FBI) with a focus on counterintelligence and terrorist financing. He also spent time consulting for a tech company that specialized in building analytic software for finance and intelligence analysis.

After leaving the field of intelligence he went to work at a global macro hedge fund. He’s been professionally involved in markets since 2005, has consulted with a number of the leading names in the hedge fund space, and now manages his own family office while running Macro Ops. He’s published over 300 white papers on complex financial and macroeconomic topics, writes regularly about investment/market trends, and frequently speaks at conferences on trading and investing.

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