This report delves into the remarkable ascent of Arlo Technologies, highlighting its strong financial performance and strategic market positioning. The company's impressive second-quarter results underscore its potential as a significant player in the competitive technology landscape. Arlo's success is largely fueled by its thriving subscription-based business model, which not only ensures a stable revenue stream but also fosters substantial profitability and expanding margins. Its robust growth in paid subscriptions and Annual Recurring Revenue (ARR) points towards a highly scalable and resilient enterprise. Furthermore, the firm's prudent financial management, characterized by a debt-free balance sheet and substantial cash reserves, positions it favorably for sustained expansion and future innovations. The confluence of these factors makes Arlo Technologies a noteworthy entity for investors seeking opportunities in dynamic sectors.

Arlo Technologies' Stellar Ascent in the Smart Home Security Market

In the vibrant market of smart home security, Arlo Technologies has recently garnered considerable attention with its stellar financial performance. The company's second-quarter earnings report, unveiled to the public, showcased a remarkable outperformance against prevailing market forecasts. This significant achievement was propelled by an impressive surge in paid customer accounts and a substantial boost in Annual Recurring Revenue (ARR), illustrating the burgeoning success of its subscription-focused approach.

A pivotal factor contributing to Arlo's burgeoning trajectory is the expansive market it targets, coupled with its remarkably low customer churn rate. This dual advantage not only secures its current market position but also unlocks considerable avenues for further penetration and expansion, particularly within the vast and discerning U.S. market, as well as across promising international territories.

At the core of Arlo’s financial robustness is its innovative, subscription-driven service model. This model is instrumental in generating high-profit margins and ensures consistent profitability, a testament to its efficiency and appeal. The company further benefits from achieving significant economies of scale, which enhance its operational efficiency and cost-effectiveness. A key highlight of its financial health is a pristine, debt-free balance sheet, complemented by substantial cash reserves, providing a solid foundation for strategic investments and resilient growth in an ever-evolving technological landscape.

Concurrent with these achievements, Arlo continues to invest heavily in product innovation, consistently introducing advanced solutions that cater to the evolving needs of its clientele. This commitment to cutting-edge technology and customer satisfaction solidifies its competitive edge and reinforces its market leadership.

Overall, Arlo Technologies, under the keen observation of market analysts like Gary Alexander, presents itself as an exceptionally promising small-cap investment. Its ongoing momentum, coupled with improving fundamental metrics and a relentless pursuit of product excellence, continues to warrant a strong endorsement for potential investors.

Reflections on Arlo Technologies' Market Performance: A Blueprint for Success?

As a keen observer of market trends and corporate strategies, Arlo Technologies' recent performance offers compelling insights. Their ability to not only meet but exceed expectations in a highly competitive sector speaks volumes about their business model's effectiveness and strategic foresight. It underscores a crucial lesson for other enterprises: in today's dynamic economic climate, focusing on a robust subscription model, coupled with relentless product innovation and sound financial management, can pave the way for sustained growth and market leadership, irrespective of company size. This journey by Arlo suggests that a customer-centric approach, where recurring revenue streams are prioritized and service quality is paramount, forms the bedrock of long-term success. It also reminds us that even smaller entities can achieve significant market outperformance when they strategically leverage their core strengths and adapt swiftly to market demands.

Navigating Uncertainty: A Proactive Investment Stance

Embracing Conviction in a Shifting Market Landscape

The second quarter of 2025 proved to be exceptionally turbulent, marked by pronounced swings that were largely influenced by evolving global trade narratives. While the quarter concluded on a more stable note, the initial volatility necessitated a keen understanding of both geopolitical intentions and fundamental business strengths. The firm's ability to decipher these complex signals was as critical as its traditional financial analysis. Despite the external pressures, our core investment philosophy remained consistent: a resolute commitment to our highest convictions. This steadfast approach led to a highly active quarter, involving substantial adjustments to our portfolio. We significantly bolstered two long-standing investments, divested one, witnessed another acquired by a strategic entity, and initiated three new positions. Given the detailed discussion of macro trends in our previous commentary, this review will concentrate on the micro-level decisions: our new acquisitions, recent divestitures, and valuable lessons gleaned from the past few years.

Strategic New Investments: Targeting Future Growth

CRISPR Therapeutics AG: A Pioneering Biotech Opportunity

Following the commercial approval of Casgevy, CRSP shares initially surged past $90, only to plummet to $30 during the market downturn in April—a substantial two-thirds reduction from its peak. Although the broader trade conflicts had minimal direct impact on CRSP, its stock experienced a nearly 30% decline during the spring collapse. This seemed incongruous, especially considering the robust cash reserves the company had meticulously accumulated through judicious financing. Our acquisition of CRSP shares occurred when the company's enterprise value was below $800 million, while it held over $1.8 billion in net cash. CRSP stands as a frontrunner in the Cell and Gene Therapy (CGT) sector, being the first to secure FDA approval and commercial availability for a groundbreaking gene-editing therapy. The company's leadership has demonstrated exceptional acumen in balancing capital discipline with ambitious research and development. With a commercialized product and arguably the strongest financial position in its domain, CRSP is well-positioned to aggressively pursue its pipeline development, even as competitors scale back to preserve capital. We anticipate the company will maintain over $900 million in cash by the time it achieves positive cash flow. Essentially, we view this as an opportunity to acquire Casgevy at a significant discount, with the added benefit of its promising pipeline and substantial cash reserves at no additional cost—a truly compelling asymmetric risk-reward proposition.

Peloton Interactive Inc: Reinventing a Fitness Powerhouse

Peloton is often perceived as a fleeting beneficiary of the pandemic, with its high-end exercise equipment morphing into expensive garment racks as life returned to normal. While there's an element of truth to this, Peloton has fundamentally evolved into a robust, cash-generating enterprise with $1.6 billion in recurring revenue. Although customer churn has increased since the pandemic peak, it remains at levels that many consumer businesses would find enviable. Crucially, the company's balance sheet has been successfully restructured, a testament to the efforts of former CEO Barry McCarthy. This financial stability now empowers the new CEO, Peter Stern (formerly of Apple and briefly Ford), to prioritize reigniting growth rather than managing crises. At its core, Peloton possesses an exceptionally resilient, distinct, and profitable brand and offering. The company has earned the right and the opportunity to dominate the digital fitness landscape. Many of the attributes that propelled Peloton to pandemic-era success endure today, including an extremely high Net Promoter Score (NPS), a fiercely loyal customer base, and instructors who have become revered figures to their dedicated users. While the success of its bike classes hasn't fully translated to its treadmill or rowing segments, there are promising indications that strength training could represent a significant growth avenue. The company currently engages over two million unique members in its strength vertical. Both Lululemon (Mirror) and Google/Fitbit have discontinued their efforts in strength content, effectively ceding this space to Peloton. Recently, Peloton introduced AI-powered personalized training plans that integrate users' fitness goals and preferred activities across cardio and strength, creating tailored workout regimens. While others have attempted to develop similar standalone products, none possess Peloton's inherent right to succeed, given the seamless and ubiquitous platform it has established. Beyond a mere fitness platform, Peloton instructors have cultivated user trust as comprehensive resources for exercise and nutritional guidance. This is evidenced by the independent success of prominent Peloton instructors who share recipes, cookbooks, meal plans, and general life advice on their social media channels. This position of trust and leadership presents a clear opportunity for Peloton to expand its offerings beyond its core fitness classes. Many companies struggle to achieve success through cost-cutting alone, yet Peloton is an exception. Buoyed by the surge in demand during the COVID era, management significantly expanded its fixed cost base—a decision that has required years to rectify. This not only created structural burdens but also fostered perverse incentives. Under immense balance sheet pressure, the company aggressively marketed its equipment to liquidate inventory and generate much-needed cash. With inventory now appropriately managed, Peloton has nearly halved its marketing expenditure with minimal negative impact on customer acquisition. This has restored the company to a 2:1 Lifetime Value (LTV) to Customer Acquisition Cost (CAC) ratio, indicating more favorable returns on investment for customer acquisition than before. From this stronger foundation, the company can judiciously and systematically reinvest in its budget. In the coming years, this should directly translate to improved Returns on Invested Capital (ROICs) and reduced churn. By emphasizing strength and nutrition, we envision a broader opportunity for Peloton: growth doesn't solely depend on acquiring new members. There's significant potential to deepen engagement with existing members by expanding the core value proposition. Similarly, Peloton has not increased prices since 2022, despite considerable room to do so, given the growing disparity between the value offered to passionate users and their current subscription cost. While management initially feared price hikes might lead to churn, substantial value has been added to the membership since 2022, including the expansion of the strength vertical, introduction of yoga, barre, and pilates classes, and enhanced mindfulness content. Management has clearly stated that any membership price adjustment would coincide with further enhancements to the value proposition, a mindset we commend as it prioritizes earning the right to raise prices through improved offerings. Even a modest price increase would significantly boost the bottom line and propel the company back to growth. We estimate that a $5 monthly increase in the all-access membership could generate an additional $130 million+ in EBITDA. This projection accounts for increased marketing spend to offset some anticipated churn, resulting in a historically low valuation based on proforma EBITDA (under 6x). Peloton anticipates generating $330-350 million in EBITDA and $250 million in free cash flow this year. While this year's free cash flow includes benefits from the final stages of inventory reduction and stock-based compensation—factors some might question—it still translates to a free cash flow yield of over 7%, an 11x Enterprise Value (EV) to EBITDA multiple, and a 2.25x EV to Sales multiple. We expect the quality of cash flow to materially improve next year, driven by a full year of cost savings (from ongoing showroom closures as leases expire and reduced headcount) and the gradual reduction of expensive debt as cash flow accumulates. Over the next three years, the company could realize nine-figure annual interest savings, potentially increasing free cash flow to nearly $500 million, even without business growth. Should strength training or nutrition evolve into significant business opportunities, Peloton could regain a more favorable valuation, far exceeding what is currently factored into our model.

Workday Inc: Enterprise Software with Untapped Potential

Workday is a company we have closely monitored for a considerable period. It provides essential software for human capital management, effectively powering the HR departments of numerous Fortune 500 companies and an expanding roster of small businesses. The company has been steadily broadening its offerings to include finance functions, gaining traction incrementally. Despite a recent slowdown in growth, revenues continue to increase at double-digit rates, propelled by a combination of new client acquisitions and successful expansion within its existing customer base. Our primary reservations about Workday in the past were its valuation and concerns regarding the company's commitment to improving profit margins. In early 2024, Carl Eschenbach was appointed sole CEO, having previously shared the role with one of the co-founders. Eschenbach appears significantly more focused on streamlining operations and boosting margin progress, as evidenced by the early 2025 restructuring and ongoing advancements in profitability. This strategic shift should enable double-digit revenue growth to translate into substantially higher earnings growth. SaaS companies have seen a decline in favor since the advent of AI, leading to continuous multiple compression across the sector, and Workday is no exception. At the time of our acquisition, shares were trading at 25x this year's projected EPS, 18x EBITDA, and 17x free cash flow, all projected to grow around 20%. At these valuations, our base case anticipates returns mirroring the growth in free cash flow (i.e., a 20% CAGR), with potential for a more favorable multiple re-rating as Workday demonstrates its resilience to AI disruptions. Even greater upside is possible if Workday reaccelerates growth, which we consider more likely than not, though not a prerequisite for strong returns in our base scenario.

Bolstering Existing Positions: Strategic Increases

Roku Inc: Capitalizing on Streaming Evolution

Roku has presented a tumultuous journey for us. We initially acquired shares in late 2018, engaged in some selective selling over time, yet maintained a significant position throughout its volatile trajectory. We certainly gleaned valuable insights about our own tolerance for high valuations and the inclination to defer substantial tax liabilities over several years (a lesson learned: we will no longer allow tax considerations to compel us to hold positions through valuation declines, as the market possesses a formidable capacity to reduce tax obligations while one waits). During the recent trade conflict downturn, we substantially increased our stake once more. Throughout Roku's ascent, skeptics argued that it would rapidly lose market share to formidable, well-funded competitors like Amazon and Google. These critics were accurate in their prediction of market share shifts, but for the wrong reasons. Roku has, in fact, expanded its device and household penetration, now reaching over half of all U.S. households. However, the company struggled to boost Average Revenue Per User (ARPU) due to a convergence of factors, many of which stemmed from a strategic, yet reversible, decision. Roku had been striving to create a proprietary ecosystem, leveraging its unique customer data to attract advertisers to its own Demand-Side Platform (DSP). Unfortunately for Roku, advertisers found alternative routes to reach Roku's audience without engaging its DSP. For instance, an advertiser could purchase ads on Hulu through a third-party DSP like The Trade Desk, thereby avoiding any revenue sharing with Roku. This occurred concurrently with a reduction in advertising spend by content companies seeking new audiences. During the pandemic, Roku's largest advertising segment—Media and Entertainment (M&E)—saw a collapse in ad dollars as streaming companies rationalized their own customer acquisition and engagement costs. While Roku's overall ad revenue continued to grow, its pace was significantly slower than before and coincided with an expanding cost base. Today, these challenges have largely dissipated, and the company is once again on an accelerating growth trajectory. M&E revenue now constitutes a smaller portion of Roku's overall revenue and has stabilized at lower levels. Management has been committed to monetizing the platform more effectively, integrating more content into the highly valuable Roku Channel and developing more robust content recommendation engines. Concurrently, the company abandoned its walled-garden ambitions and embraced programmatic advertising from The Trade Desk, FreeWheel, and then Amazon (collectively representing the vast majority of non-Google TV advertising). Moreover, Roku began sharing data in these partnerships, a strategy to capture a greater share of the economics from each ad sold through a DSP in exchange for delivering superior returns to advertisers. Ultimately, this is a win-win scenario. We remain confident that U.S.-based ARPUs will eventually exceed $100 as Roku enhances its fill rates and viewing time continues to migrate from traditional linear television to Connected TV (CTV). This positive trend was evident in a strong Q4 report released in mid-February; however, the stock experienced daily declines as investors worried about the escalating trade war's potential impact. While markets perceived Roku as particularly vulnerable due to its reliance on China for TV manufacturing, we found reassurance in the strength of its installed base. A price shock that curbs new TV purchases also raises entry barriers for competitors seeking to penetrate Roku households—an often-overlooked silver lining. This dynamic, while a double-edged sword, leaned more favorably than markets acknowledged. At the time we increased our position, nearly 25% of Roku's market capitalization was held in net cash, and the stock was trading at a high-teens multiple of 2026 EBITDA, with platform revenue growth poised to accelerate into the high teens. Importantly, the company has committed to generating GAAP operating profit in 2026, demonstrating both an understanding of the need to create shareholder value and a significant acceleration in incremental profit margins moving forward.

Fever-Tree Drinks PLC: Dominating the Premium Mixer Market

Fever-Tree is recognized as the global leader in premium mixers. Earlier this year, Fever-Tree announced a collaboration with Molson Coors, establishing a 50/50 partnership for Fever-Tree’s U.S. operations. Through this agreement, Molson Coors has committed to profit guarantees for 2026-2030, based on shared expectations for the business plan, which forecasts a growth CAGR of approximately 20% for 2025-2030. In conjunction with the partnership, Molson acquired an 8.5% stake in Fever-Tree, valuing the company at £835 million, and paid $23.9 million in cash for Fever-Tree’s U.S. assets. With these proceeds, Fever-Tree initiated a share repurchase program set to continue through the end of the year. This underlying support for the shares provides invaluable reassurance to investors, knowing that a portion of the traded shares will be absorbed by the company itself. More significantly, Molson Coors represents an exceptional partner for Fever-Tree, poised to address the primary challenges the company has recently faced. Fever-Tree has successfully built a substantial mixer business in the U.S., but its greater potential has been constrained by supply chain and logistical hurdles. We had long speculated that Fever-Tree would thrive more effectively under the stewardship of a global beverage company, and this partnership offers the optimal solution. Molson will assume responsibility for all supply chain, logistics, and distribution within the U.S., with both companies sharing all profits. Fever-Tree grew its U.S. business by approximately 2.7 times its pre-pandemic size; however, we believe the company generated minimal profit in this crucial geography, despite group-wide operating margins slightly exceeding 10%. Prior to the pandemic, group-wide operating margins were slightly above 30%. With the Molson deal, synergies are evident, and a sharp inflection point in margins is imminent. The company has prudently projected a year of disruption during the onboarding of its product onto Molson’s distribution network, and it will take a year to relocate manufacturing to Molson’s facilities in the U.S. However, once these key steps are completed, even with profit sharing with Molson, Fever-Tree should be able to restore group-wide operating margins to the 20% range, potentially even reaching 30%. When we increased our position, Fever-Tree was trading at a mid-teens multiple of this year’s EBIT. Assuming margins can double simply as a result of the Molson partnership, our implied multiple reduces to the high single digits. This valuation is remarkably low for an industry-defining and leading brand in a product with fairly consistent consumption patterns. Furthermore, we believe there is a very real opportunity for Molson to significantly accelerate U.S. sales growth. Our review of historical partnerships between large and small beverage companies (including other initiatives within Molson’s Beyond Beer division) indicates that in many cases, sales double relatively quickly. While the companies are jointly projecting a 20% CAGR following a slow start in 2025, real-world growth is rarely linear, and we believe there is a strong probability of a step-function change in sales, from which the U.S. business can continue to expand. In summary, we are acquiring a highly unique asset at a very attractive valuation, with the potential for exceptional outcomes.

Strategic Divestitures: Optimizing Portfolio and Mitigating Risks

PayPal Holdings Inc: Reassessing Security as a Core Thesis

Based solely on PayPal’s fundamentals, as presented in financial reports and earnings calls, our inclination would have been to acquire rather than divest. However, a significant incident impacted our decision. An individual within our circle became the victim of a sophisticated financial hack leveraging AI voice mimicry to compromise several personal accounts, despite the presence of two-factor authentication on each. Our fundamental investment thesis for PayPal hinged on security as a formidable moat. The systems originally developed by Max Levchin and continuously enhanced over the years were believed to make PayPal one of the most secure platforms for online transactions. We subscribed to the "single point of failure" thesis, trusting that even if security breaches occurred, PayPal would learn and evolve from them. Unfortunately, the revelations regarding PayPal’s security were concerning, leading us to question the company’s capacity to adapt and maintain its position as the safest online transaction platform. Given the critical role of security in our qualitative thesis, we could no longer maintain conviction in the stock.

Alphawave Semi: Lessons in Stress and Opportunity Cost

On the morning of "Liberation Day," we anticipated a strong start to the quarter for our portfolios as news circulated that Arm had approached Alphawave regarding a takeover, soon followed by Qualcomm formalizing its acquisition interest with UK regulators. The path to the deal was at times volatile, marked by numerous deadline extensions (as per UK takeover law), but ultimately, on June 9th, Qualcomm agreed to acquire Alphawave for $2.4 billion, or approximately 183 Pence per share at the time of the agreement. While the outcome was favorable, the process was arduous. During our holding period, Alphawave experienced several days with stock declines exceeding 20%, including one instance where it was down nearly 50% for a portion of the day. More alarmingly, there was a nearly three-week period in 2023 during which shares were suspended from trading entirely due to the company's inability to complete its audit on schedule. This proved to be a highly volatile holding, yielding poor returns relative to the stress endured. We realized there was a far more effective way to capitalize on the broader trend we sought exposure to: simply investing in Broadcom. In essence, why settle for an asset that might become great when you can own one that already is, offering similar macro exposure and a fair valuation?

Vail Resorts Inc: Operational Missteps and Future Reconsideration

Had we foreseen Rob Katz’s return to Vail’s leadership, we likely would not have divested our shares when we did. Nevertheless, we do not entirely regret this decision and maintain our belief that we will once again be shareholders of Vail in the future. This past ski season was particularly challenging for Vail, marked by a self-inflicted, poorly managed public relations crisis surrounding the Park City Ski Patrol strike. We had not acquired Vail with the expectation of a turnaround, yet that is what transpired. Our exit reflected an opportunity cost assessment and a desire to disengage while the company addressed its reputational and operational issues. With Katz, the visionary behind the multi-mountain pass strategy, now back at the helm, we are closely monitoring the situation and remain open to re-entering our position in the future.

Concluding Thoughts: A Disciplined Approach to Dynamic Markets

As we cross the midpoint of 2025, we are invigorated by the current composition of our portfolio. Life sciences, a sector that has faced recent headwinds, is beginning to exhibit early signs of resurgence. Our investments in large-cap technology companies remain stable, and we have successfully identified new opportunities presenting asymmetric return profiles. The current balance between value and growth within our portfolio feels appropriate, and we are intensifying our convictions where the risk-reward dynamic strongly favors us. Our underwriting remains rigorously disciplined, focusing exclusively on businesses that possess enduring competitive advantages and robust balance sheets. The market environment continues to evolve, and while volatility persists, it also creates fertile ground for active managers who are prepared to delve deeper and act decisively when favorable odds emerge.