📮The Sunday Newsletter archive

Making legal departments less boring

We’re in the middle of summer, but with so many companies going public, the Wall St folks are just too busy for a vacation. Next week another 17 companies will start trading while 43 have debuted so far this month. 👀 Let’s see the coolest names that will get listed.

The cloud-based tool for lawers

When you think of AI models, cloud-native architecture and stuff, you don’t usually think about law firms and legal departments, but DISCO ($LAW) was founded to change that. DISCO is a cloud-based software platform used by governments, companies and law firms to simplify and automate legal processes.

It uses AI 🤖 to simplify legal document review, case management and ediscovery. Ediscovery is the legal practice of identifying electronic information that can be used as evidence in legal cases. Instead of letting lawyers do manual work or use other conventional tools, DISCO automatically identifies legally relevant documents and improves the accuracy and speed of document review. Its AI models also continuously learn from past legal works that can be reused across legal cases.

DISCO has a usage-based business model, which will make financials quite volatile in the future. But now that the company is in high growth phase this is now an issue. In 2020, revenue grew 41% y/y to $68 million and in the first quarter of 2021, it rose 35% y/y to $21 million. DISCO is not profitable yet but is moving in the right direction, fast. Operating margin improved from -62% in 2019 to -33% in 2020 and to -13.5% in Q1 2021. The sharp reduction in losses is due to the company’s relatively low operating costs. DISCO is a niche platform and its marketing strategy is very targeted — you’re not gonna see DISCO ads in IG feed. In fact, in Q1 its marketing costs fell 24% y/y while revenue increased 35%. Word of mouth marketing 🗣 helps the company grow organically.

Commentary: While there are already other conventional ediscovery tools, DISCO was founded to offer a modern, integrated tech-focused solution. Since its inception in 2013, the company has launched several new features that make its platform more sticky. In fact, its net retention rate of 122% in the most recent quarter shows that DISCO is sticky and useful as customers increase usage over time. DISCO is also used by 49 out of the 50 largest law firms in the US, proving the company’s strong market position. As companies digitize their operation, DISCO is the platform to help them digitize the legal departments.

It has priced its IPO at a midpoint price of $27.50 per share that translates into a market value of $1.5 billion. At this price, its P/S ratio will stand at 21x sales which is not cheap but is justified given the company’s market position and future potential. Shares start trading on Wednesday.

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The platform always wins
Dog gambler

Being a platform automatically increases a company’s chances of success. Instead of selling products and competing with others, platforms win by making it easier for others to win; see Shopify ($SHOP), Etsy ($ETSY), Facebook ($FB) or Amazon ($AMZN). Regardless of the performance of individual merchants, these companies win because their users succeed overall.

Gambling.com ($GAMB) is a similar platform but for online casinos, and sports betting operators. It owns 32 different websites in six languages comparing local online gambling services. It’s essentially an affiliate marketing company; it makes money by referring online gamblers to online gambling operations. Its revenue model is based on revenue sharing, cost per acquisition, or a combination of the two. In other words, GAMB always makes money regardless of the gambling company that wins 😎.

Thanks to this asset light business model, GAMB is growing very fast and is already deeply profitable. In the first quarter of the year, revenue surged 180% y/y to $11.5 million and reported a super high operating margin of 45%.

Commentary: Online gambling is one of the fastest growing industries due to the increased legalization in the US. It was an estimated $53.7 billion market in 2019 and is forecast to reach $128 billion by 2027. Based on this strong growth trajectory GAMB’s comparison sites can also benefit significantly.

GAMB is a relatively small company– it reported revenue of just $28 million last year — which means both the risks and the potential rewards are bigger.

The company has priced its IPO at a midpoint price of $12 apiece which translates into a market cap of $405 million. At this price, its P/S ratio will be 11.5x sales, which is reasonable considering its future potential. Its newly listed competitor GAN Limited ($GAN) is cheaper, trading at 9x sales, but is also growing at lower rates; fair enough. We don’t know yet the exact date of the IPO.

Ranking next week’s IPOs:


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