Are we building enough homes?

Happy Sunday! (Unless you’re short ARM Holdings 😬)

Today’s newsletter will get you up to speed a few notable trends, earnings and a home-builder born out of the Great Financial Crisis building (literally) 2,250 more homes per year nowadays. Let’s get into it.

A busy week in the markets

💻 ARM Holdings

UK-based chip designer ARM Holdings saw its stock jump by as much as 60% following its 3rd quarter report on Wednesday.

The company, which added almost $40 billion to its market cap this week, beat wall street’s expectations and reported $824 million in revenue this quarter, up 14% from the year prior. Non-GAAP earnings, which came in at $305 million for the quarter was also well above expectations.

But it wasn’t just the impressive results that helped drive the stock. ARM, which is still 90% owned by Softbank and thinly traded, claims that it’s at the forefront of AI and stated in its earnings release “Arm is the foundational compute platform for the world’s innovations.”

ARM’s stock is now valued at ~94x its expected Non-GAAP earnings for this year.

📺 Disney 

The House of Mouse reported better than expected earnings as well helping propel the stock by ~12% this week.

While Disney+ subscribers dropped compared to last quarter, price increases helped drive 14% growth in streaming revenue.

With Bob Iger back at the helm, Disney has its sights set on getting its direct-to-consumer business to profitability. As a part of that effort, Disney stated that it’s on track to cut costs by $7.5 billion by the end of 2024.

In conjunction with their earnings announcement, Disney announced that they are investing $1.5 billion in Epic Games, the video game maker responsible for Fortnite.

🎧 Spotify

The world’s largest audio streaming company reported its 4th quarter earnings on Tuesday and saw continued improvement in profitability.

Spotify, which has seen its stock jump 240% from its lows last year, has now surpassed 600 million total monthly active users as it’s seeing rapid growth from its “Rest of World” markets.

Spotify’s revenue for the year came in just over $13 billion and its free cash flow margin improved from -2.4% a year ago to ~11% this quarter.

🚬 Phillip Morris International

The world’s largest tobacco company, Phillip Morris International, reported quarterly results that were in line with investors’ expectations.

The company, which is most known for its signature Marlboro brand, is also home to reduced-risk category leaders IQOS and Zyn. This quarter, Phillip Morris International’s reduced-risk product revenue accounted for ~40% of the company’s overall revenue. That’s up from just 20% 4 years ago.

This success within reduced-risk products has helped offset the decline in its core cigarettes business and return the company to overall product volume growth.

Phillip Morris International currently offers investors a 5.8% dividend yield.

🚗 O’Reilly Automotive

O’Reilly, which is a market leader in the US auto parts oligopoly, reported its 4th quarter earnings on Wednesday.

Sales grew 5% compared to a year ago, driven by 3.4% comp store sales growth, and earnings per share outpaced revenue growth coming in 11% higher than last year.

O’Reilly has been one of the most impressive “share cannibals” over the last decade, and this year was no exception as the company reduced its share count by 5.5% over the last 12 months.

Company Spotlight

The Fastest Growing Homebuilder in America: Dream Finders Homes

It is no secret there are housing shortages in major developed markets around the world.

Last year, it was stated that the U.S. is short 6.5 million homes. This problem might even be worse in Canada with CIBC saying that the the housing gap is underestimated by “a lot”.

Today, we are featuring the rise of a prominent and fast growing home builder.

In 2009, Dream Finders Homes (DFH) built and sold 3 houses. 

This year, they’ll build and sell ~7,000. 

Here’s the story behind the fastest growing homebuilder in America:

Founding - In 2008, 5 years after graduating from college and in the midst of the financial crisis, Patrick Zalupski took out a $200,000 loan from the Clay County Housing Finance Authority to help build affordable homes.

With the loan, Zalupski bought 3 homesites in the Jacksonville area that were selling at a 70% markdown to their pre-GFC prices. Zalupski was able to convince the developer to let him and his partner pay for the homes after they’d actually found buyers. 

This marked the beginning of DFH's asset-light "land option" model. 

Land-Option Model: In the late 1990’s, NVR pioneered a new business model in the homebuilding industry called the Land-Option Model. This meant that unlike traditional homebuilders which would acquire large plots of land and hold it on their balance sheet while they developed homes on it, NVR would instead purchase an "option" for the land. 

In exchange, NVR would pay a deposit up front that was typically worth 5%-7% of the land value. While developers were building homes on that land, NVR would go out and find buyers. Once they found buyers, they’d exercise the option and sell the home.

But if the housing market turned, NVR wasn’t left with the land as inventory on the balance sheet.

Zalupski admired NVR and replicated this model with DFH. 

Scaling Up - Once Zalupski had established his blueprint for building and selling entry-level homes, DFH expanded operations quickly in the Jacksonville area. In 2009, DFH sold 29 homes and by 2012, they were selling almost 300 homes a year. 

DFH has slowly added operation in new cities over the years, however, expanding into additional markets can be difficult as homebuilders have to cultivate new relationships and build rapport with local developers. Zalupski even said this directly during a 2020 interview: “It’s hard to grow the business organically.” 

Instead, DFH has found more success growing through acquisition. Starting with its acquisition of Village Park Homes in 2019, DFH has gone on to acquire 5 other homebuilders in total.

Zalupski’s strategy here is a bit unique. Instead of integrating the acquirees into the business, he often lets the owners continue to running their business how they like and under their own brand name. With DFH’s access to low-cost capital, they can help these acquirees supercharge growth in their local markets.

Economies of scale: An under appreciated aspect of the homebuilding business is that there can be economies of scale at the local level. 

Here’s how Zalupski describes it: “We have relationships in those markets, and developers come to us. They know the company and the product, and give us favorable terms.”

This enables DFH and other scaled players to produce homes at a lower cost than smaller competitors. 

Valuation: 

EV/EBIT: 9.2x

Meme of the Week:

Vision Pro - Workplace Edition

It’s officially been more than a week since the launch of the Apple Vision Pro and the memes are still very much alive and well.

This week, the memes extended to applications beyond just looking goofy in public, and instead jumped to the dystopian reality that VR could one day be a part of the workforce.

In this example, the cold calmness of a corporate layoff seems only amplified.