Optimist Fund: ThredUp ($TDUP) Investment Case
Introduction In their Q4 2024 quarterly letter, Optimist Fund highlights ThredUp as a compelling asymmetric investment opportunity despite its challenging 2024 performance. The fund significantly increased its investment in the company, making it one of their top 10 holdings as of December 31, 2024. Optimist Fund, which achieved approximately 67% returns in 2024 and 15% annualized returns since inception, presents ThredUp as an undervalued opportunity poised for substantial free cash flow growth in the coming years.
Investment Highlight: ThredUp ($TDUP)
Business Overview
- Leading second-hand managed marketplace in the United States
- Distinctive full-service approach where ThredUp manages the entire selling process
- Sellers receive 20-80% of proceeds depending on item value
Market Position
- Only U.S. second-hand mass-market managed marketplace
- Complex operational model creates strong competitive moat
- Positioned in a large, rapidly expanding second-hand clothing market
Performance Analysis
- Recent Challenges:
- European business divestiture after determining FCF positivity was unachievable
- Marketing strategy experimentation disrupting growth in Q2 and Q3 2024
- Stock declined 97% from peak following 2021 IPO
- Turnaround Indicators:
- Q4 2024 preannouncement significantly exceeded guidance
- Achieved 9% revenue growth vs projected -4% decline
- 6.5% adjusted EBITDA margins vs projected 1%
- Exited 2024 with high-teens to low-twenties revenue growth
Growth Runway
- Expected high-teens revenue growth over next five years
- 25-30% incremental adjusted EBITDA margins
- Projected ~$100 million ($0.75 per share) annual free cash flow by 2030
Valuation and Potential
- Current market valuation of approximately ~$250 million
- Five-year price target of $19 (25x 2030 free cash flow)
- Share price increased ~80% following Q4 preannouncement
Strategic Pivot
- Shifted from growth-first mindset to prioritizing free cash flow generation
- Improved gross profit by 10% while reducing expenses by 11% from 2022 to Q1 2024
- Successfully transitioned from cash burn to free cash flow inflection
Outlook
- 2025 expected to be a pivotal year for growth and free cash flow generation
- CEO stated commitment to “sustaining this momentum” into 2025
- Fund believes current share price has yet to fully reflect company momentum
- Optimist Fund expresses excitement about the risk/reward profile
