Allbirds is bad value
Allbirds is having an IPO. Allbirds make knitted sneakers that are, by all accounts, very comfortable. We don’t know what their valuation for the IPO is, yet, but its last private market offering valued Allbirds at the $1.7 billion mark (USD).
Their shoes look like this:
The rest of their shoe offering looks like this:
Sometimes my observations on a company are so simple as to be at risk of sounding like a complete idiot. Here is the first observation. Of all those shoes in that line-up, how many do you recognise?
I recognise one — the ubiquitous “wool runner”. I see them on the feet of the QC who frequents the cafe I go to most mornings, when not in lock-down, and I see them on the feet of people who work in “tech”. The rest I don’t recognise — they vaguely look like Sketchers by way of Dr. Hauschka.
Now think of the shoes which Adidas, Nike and Dr. Martens profer. Off the top of my head I can visualise at like a handful of models per brand — the Superstar, the Stan Smith, the Air Force 1, the Jordans, the Yeezys. Allbirds offer one product that is readily identifiable. The rest is noise.
Allbirds also manufacture leggings and activewear in a bid to become a full-blown lifestyle company in the vein of Lululemon. These sales are negligible at present. The only product Allbirds sells in a meaningful sense are shoes, and of the shoes they market, only one is identifiable. In essence what we are asking ourselves is how much is one product worth? Is it worth a hundred million dollars? A billion? Ten billion? Single product companies are often my favourite — I’m an idiot, and they’re easy to understand. All Verisign does is offer domain name registration. That’s all it needs to do! It has a monopoly on registering your dot com or dot net or whatever. You might buy your domain from GoDaddy or whatever, but ultimately that domain gets registered with Verisign. Sometimes a company is basically a single product company, like Google — where upwards of 90% of its profit still derives from advertising, but as Peter Thiel points out, it’s much better to look like you do a lot of other things in very competitive spaces because it makes it look less like a monopoly.
Single product companies are a lot easier to value. You basically think, ok, how much of this product is going to sell until the end of time? And if the company is TiVo that number is limited because something else will supplant it. My point is how many wool shoes can Allbirds expect to sell before Nike, Adidas and so on offer a comparable product? As per Allbird’s S-1, their technology is proprietary but not patented. There is very little to protect Allbirds from the onslaught of bigger companies with bigger R&D budgets. Or to paraphrase the old gangster saying — “nice wool shoes you’ve got there, be a shame if someone were to steal ‘em”.
This is my second point, which I have said often — first-mover advantage is overrated. We use Google, not Altavista. We use an iPhone, not a Blackberry. The fact that Allbirds is the first mover is not a significant strength.
My third point is a line from Allbird’s S-1, near the top:
In 2020, consumers worldwide spent an estimated $1.8 trillion on footwear and apparel, comprised of approximately $1.5 trillion on apparel and a projected $366 billion on footwear, with the U.S. portion of this total spend reaching approximately $342 billion,
It’s under a section labelled “market opportunity”. This is typical of S-1 writing — “the market opportunity is approximately four zillion dollars because everyone uses gravity”. Suggesting broad market opportunity here is worse than meaningless. It is promising an Aladin’s Cave full of treasures. It is too broad to be meaningful. It is especially too broad when shoes and clothes are differentiated, nobody wants to wear the same shoes. Shoes are not a standardised service like Google or Verisign or trash collection. The word we use for differentiated choice is fashion, and boy, does humanity like that. Let’s consider the meaningful market opportunity to be a good deal smaller — overwhelmingly Allbird’s sales are in the US right now. Allbirds have sold eight million pairs of shoes to four million customers globally, suggesting each customer owns two pairs of shoes. To put it into context, Adidas sold 15 million pairs of “Superstars” in 2016 alone, representing almost double of Allbirds’ all-time sales figure.
A company I haven’t been shy about liking is Dr. Martens. Dr. Martens defines their total addressable market as 16 million people, which I think is on the conservative end of the spectrum, though it does better to err on the conservative side than the bordering-on-delusional end often occupied by the Nikolas of the world. Let’s say Allbirds’ market is about the same — let’s make another assumption and say that Allbirds wearers buy a new pair every two years (a good pair of Docs will last a decade, mind you). A pair of Allbirds will set you back $98 (USD). Eight million pairs of Allbirds sold every year will bring in $784 million in revenue, give or take. This represents perhaps three times current revenue growth for Allbirds — at best. There are two caveats here: i), Allbirds spends a lot on marketing (c.25% of its revenue) — an alarmingly high percentage to spend, which suggests sales are not all that organic. And ii), the ability to scale is limited here — only a limited amount of people are going to want to wear these shoes, and that first-mover advantage is ever-eroding. The issue with a technology that enjoys a first-mover advantage is that the sales have a natural end-point (that is, unless the company continues to innovate). There is an area of ascendency — think the adoption of Fitbits and Gopros, there is a plateau where the company enjoys sustained sales, and then as the first-mover advantage erodes the technology becomes less novel and sales decline. It might be expressed like this crude graph I just made:
And there are many, many competitors to Allbirds. Many. The first-mover advantage is fast eroding. They have limited opportunity to scale. They essentially sell one product. They will most likely IPO at upwards of $1.7 billion. I will pass.