“The amount was big enough that I had to think about it carefully”
– Roger Federer
Athletic footwear.
It is a highly competitive global market with lots of competition and an undisputed market leader – Nike.
But in 2010, three crazy Swiss guys with a big dream had the courage to enter this market and build something to last – On Holding AG. The idea was to combine their activities in the running segment with a competitive advantage in their patented cushioned platform technology called CloudTec. Developed by an ETH engineer.
In 2019, building on its success, the best possible ambassador in the big wide world joined the company as an anchor investor. He wanted to support young entrepreneurs with a big “Batzen” – 50-100 million, it is said, from none other than our beloved Roger Federer.
In 2020, continuing the tale, the highest-paid actor in the world wore Swiss On shoes during the much-publicized Super Bowl intro – Dwayne “The Rock” Johnson (Chart 1).
Apparently, they did not know about it and were just “blown away” by the fact that he liked the shoes so much that he wore them at an event where the ad spend is usually $5 million for 30 seconds.
Mmm…
Anyway, the newfound publicity sent sales soaring. Whether it was an act of marketing genius or just “luck” remains a mystery.
In 2021, they went public.
Excellent timing.
Chart 1: Shoe Brand On Can Hardly Believe its Super Bowl Luck
IPO – Initial Public Offering
Are IPOs relevant?
An IPO is the first placement of a company’s shares on the stock exchange. It is important to track them because 80% of the most successful stocks are usually companies that have gone public within the last 10 years.
Why?
- The strongest growth phase takes place in the first years after the IPO
- Capital gained through the IPO enables expansion
- Management is on fire and shows its entrepreneurial excellence
- Economies of scale are utilized.
Navigating this landscape requires caution. Keep in mind that the goal is to price the IPO as high as possible so that the company and founders raise as much money as possible and have to give up as few shares as possible.
Thus, a key risk is that most IPOs are happening during very strong risk-on periods, such as 2020/2021, when investors were willing to both pay very high valuations and take a lot of risk, respectively (chart 2).
Then they are maliciously labeled with another name.
“It’s Probably Overpriced”.
Chart 2: Timing is everything: The IPO class of 2020/21 has struggled since going public
Swissness meets non-Swissness
On Holding AG’s IPO was a great success (Chart 3).
Although it is a Swiss company and the marketing professionals played the Swissness card, they listed their shares on the NYSE – New York Stock Exchange. The question of why not in Switzerland was answered by the fact that they wanted to concentrate on their currently most important regional sales area, the US (60% of sales).
I think another not insignificant fact is that you can achieve a much higher valuation in the US due to the more pronounced “the sky is the limit” mentality than in “conservative” Switzerland, where Mr. Müller is more likely to say “Hold your horses”.
Swissness meets non-Swissness by turning their backs on Switzerland.
But who can blame them?
After a decade of sleepless nights, a lot of blood, sweat and tears, it was time to finally cash out. The shares of the three co-founders were worth at least half a billion each on the day of the IPO.
In Switzerland, it would probably only have been half as much.
How would you have decided?
Chart 3: On Holding AG’s IPO Day on Wall Street, 15th of September 2021
Key region missing
A small sports shoe manufacturer from Zurich has developed into a global sporting goods brand in just a few years, taking on the world market leaders.
The probability of making strategic mistakes during this rapid growth is high, as can be seen from Tuesday’s earnings announcement. In addition to expanding its product range, the company, like every global player, must now also conquer the most important market for sportswear – China.
The brand is still virtually unknown there. This is a great opportunity that is now being exploited by opening new stores and expanding the workforce.
The direction is right and gives hope for a happy ending.
Keep running on clouds!
Chart 4: On Holding AG since IPO versus selected peers
arvy’s takeaway: The young running shoe brand based in Zurich is developing into a broadly diversified sporting goods group that is challenging the global top dogs. The expansion of the product range and geographical presence opens opportunities to continue the success story. On Holding has arrived in this lucrative billion-dollar business and is here to stay. We are keeping an eye on it but are leaving it on the sidelines for the time being, as only Nike has made it into our investable universe so far.
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