TIP837: Adobe, Lululemon, PayPal – Are our Biggest Losers a Buy Now? w/ Daniel Mahncke & Shawn O’Malley

Shawn O'Malley and Daniel Mahncke reviewed three positions that declined sharply after being covered, examining what went wrong and whether any merit a fresh look at current prices.

Lululemon was entered at roughly 200 dollars per share and exited at 116 dollars, a loss exceeding 40 percent. The original thesis rested on 35 percent returns on invested capital, roughly 20 percent historical revenue growth, industry-leading margins, a valuation near 15 times earnings, and meaningful buybacks. The thesis broke down as the North American business decelerated faster than expected, competition from Alo and Viori intensified, and Amazon knockoffs pressured the brand. The most damaging signal was a shift toward heavy discounting, which Daniel described as a leading indicator of retail deterioration because it conditions customers to wait for sales and erodes perceived brand value before headline numbers reflect the damage. Lululemon had previously been distinguished by industry-leading full-price sell-through rates, making the shift especially meaningful. Leadership instability compounded the concern, with founder Chip Wilson publicly criticizing the board, CEO Calvin McDonald departing, and interim co-CEOs now running the company. The announced replacement CEO is Heidi O'Neill from Nike, which Daniel described as disappointing given Nike's own recent struggles. Shawn has not fully abandoned a turnaround thesis and notes China recently posted 30 to 40 percent year-over-year growth, but said he would only consider buying again at roughly five or six times free cash flow. Daniel expressed lower conviction, arguing that most retail brands see exceptional economics while niche and in a growth phase but lose premium perception as they go mainstream, and views the transition as structural rather than temporary.

PayPal was sold after February earnings following the firing of CEO Alex Chriss, which Daniel interpreted as an admission that new initiatives were not working. The original thesis under Chriss included cutting low-margin business, restoring profitability to Braintree, Venmo, and checkout, building an advertising business, and becoming the first payment provider integrated into large language models through deals with Perplexity and OpenAI. Buybacks were running at 10 to 15 percent of shares annually when the stock traded in the 70 to 80 dollar range. A positive third-quarter print was followed by a negative fourth-quarter surprise, and management went quiet on the advertising business and other initiatives they had previously promoted. Daniel also noted that PayPal's CFO repeatedly cited poor macro conditions while competitors reported no comparable headwinds, suggesting company-specific problems. A 60 dollar per share acquisition offer from Stripe and PE firm Advent was declined by PayPal, and Daniel sold rather than wait for a potentially higher deal, viewing the acquisition scenario as a speculative gamble after the original thesis had deteriorated.

Adobe was added to the intrinsic value portfolio four times between roughly 380 and 315 dollars per share. Daniel distinguishes Adobe from the other two because revenue has grown at approximately 10 percent annually over four years while the stock is up about 70 percent over that period, with no comparable fundamental disruption. The damage came from multiple compression, with the market price-to-earnings ratio falling from roughly 22 times to 11 times, approximately halving the position value. The bull case is that enterprise customers need full control over creative output that only Adobe tools can guarantee because AI output is always probabilistic. The bear concern is that non-enterprise customers such as ad agencies may switch to cheaper AI tools, and if Adobe loses the top of the funnel of young professionals trained on its software, that would be a significant blow to its moat. Adobe's AI native revenue has tripled year over year and its Firefly AI Creative App is nearing 300 million dollars in annual recurring revenue. The CEO recently retired after two decades with no named successor, and the CFO departed weeks later. Daniel views the absence of insider purchases from the broader management team as more meaningful than the departures themselves, noting management has used the corporate treasury for buybacks but not their own money. Adobe trades at approximately eight times forward earnings. Daniel retains it in the portfolio but sold it from his personal account due to opportunity cost.

Across all three companies, management changes preceded deterioration in the reported numbers, which Shawn identified as a pattern. Daniel cautioned that acting on management departures as a leading indicator is difficult because executives may leave due to already-deteriorating conditions not yet visible to investors.

CoStar, down roughly 25 percent since being added to the portfolio three months ago, prompted the team to increase their position from 1.5 percent to approximately 3 percent. Shawn describes it as the Bloomberg terminal of commercial real estate, built over 40 years and carrying approximately 50 percent margins, a net cash balance sheet, and roughly 60 consecutive quarters of double-digit revenue growth. The market cap fell from 40 billion dollars to 11 billion dollars, a decline Shawn argues far exceeds the actual financial damage from the homes.com investment, which he estimates cost 3 to 5 billion dollars in total. CoStar is reducing net investment in homes.com from 850 million dollars last year to approximately 300 million this year, with a further reduction planned by 2030. Daniel noted that to justify the full market cap decline purely on homes.com losses, the market would have to ascribe tens of billions in negative value to that business alone, which he views as irrational.