ResearchThe Weekly (9/1)

The Weekly (9/1)

Sep 1, 2023

We love businesses that, on the surface, appear to be one thing but when you get under the hood, reveal that their success comes from something completely different.

It’s a bit of magic that you have to believe stems from finding product market fit, exploring expansion that sits along the same consumer supply chain, all to realize that these new verticals may be even more profitable than the first.

Think of a car dealership that actually earns the bulk of their profits from their loan business. Or the idea that Costco isn’t a big box retailer, it’s a subscription business. Or Charles Schwab, an investment company, that actually makes more revenue when you leave your capital in cash. 

Instacart’s recent S-1 filing highlighted yet another example of these magical businesses. Underneath the surface, Instacart is an ad business that happens to sell groceries. The company did $740 million in advertising revenue in 2022 or 31% of their total revenue

Instacart is essentially shelling ‘virtual shelf space’ and big brands are buying it in bulk. 

Instead of competing against 30 different brands in the notoriously crowded chip aisle, Frito-Lay can buy the top result when you type “potato chips” into the search bar. The brand can increase conversion by double digits and Instacart can re-invest their high margin advertising profits back into the cost intensive logistics business. 

Suddenly, delivery can be the loss leader that acts as the lead gen for their advertising business. A camouflaged profitability engine for unlocking growth. 

Some might argue that many of the largest tech platforms in the world are media companies in disguise. Amazon booked $10 billion in ad revenue last quarter and Uber’s expected annual revenue for its ad business is projected to grow to over $1 billion by 2024. 

The lesson here? Brands will go where consumers take them and they will pay to play. A scaled business, with unique data, is incredibly valuable to advertisers and the business itself has real staying power.  Of course, the advertising business is only as good as the underlying transaction volume.

But it’s impossible to ignore the fact that selling digital air is a heck of a business, if done right.

Have a great weekend,

— Your Titan Team

As of writing, AMZN, SCHW, and UBER are holdings in Titan Flagship.

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