Offshore
never make it to the product phase, many product companies are unable to scale up, and quite a few scaled up firms are unable to defend their businesses from competitors. In short, the corporate life cycle has far higher mortality rates as businesses age than…
lso explain why the typical twenty-first century company faces a compressed life cycle, relative to its twentieth century counterpart. In the manufacturing-centered twentieth century, it took decades for companies like GE and Ford to scale up, but they also stayed at the top for long periods, before declining over decades. The tech-centered economy that we live in is dominated by companies that can scale up quickly, but they have brief periods at the top and scale down just as fast. Yahoo! and BlackBerry soared from start ups to being worth tens of billions of dollars in a blink of an eye, had brief reigns at the top and melted down to nothing almost as quickly.
<picturehttps://substackcdn.com/image/fetch/w_1456,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fsubstack-post-media.s3.amazonaws.com%2Fpublic%2Fimages%2F6c5adb63-d7dd-4032-b532-c181ecb40bb6_1396x872.heic
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Tech companies age in dog years, and the consequences for how we manage, value and invest in them are profound. In fact, I would argue that the lessons that we teach in business school and the processes that we use in analysis need adaptation for compressed life cycle companies, and while I don't have all the answers, the discussion about changing practices is a healthy one.
Corporate Finance across the Life Cycle
Corporate finance, as a discipline, lays out the first principles that govern how to run a business, and with a focus on maximizing value, all decisions that a business makes can be categorized into investing (deciding what assets/projects to invest in), financing (choosing a mix of debt and equity, as well as debt type) and dividend decisions (determining how much, if any, cash to return to owners, and in what form):
<picturehttps://substackcdn.com/image/fetch/w_1456,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fsubstack-post-media.s3.amazonaws.com%2Fpublic%2Fimages%2F9c575530-5617-4594-9d7a-91960b29d31d_1438x690.heic
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While the first principles of corporate finance do not change as a company ages, the focus and estimation processes will shift, as shown in the picture below:
<picturehttps://substackcdn.com/image/fetch/w_1456,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fsubstack-post-media.s3.amazonaws.com%2Fpublic%2Fimages%2F2ebfa21f-09cc-4278-a655-48432d600ebb_1482x910.heic
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With young companies, where the bulk of the value lies in future growth, and earnings and cash flows are often negative, it is the investment decision that dominates; these companies cannot afford to borrow or pay dividends. With more mature companies, as investment opportunities become scarcer, at least relative to available capital, the focus not surprisingly shifts to financing mix, with a lower hurdle rate being the pay off. With declining businesses, facing shrinking revenues and margins, it is cash return or dividend policy that moves into the front seat.
Valuation across the Life Cycle
I am fascinated by valuation, and the link between the value of a business and its fundamentals - cash flows, growth and risk. I am also a realist and recognize that I live in a world, where pricing dominates, with what you pay for a company or asset being determined by w[...]
<picturehttps://substackcdn.com/image/fetch/w_1456,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fsubstack-post-media.s3.amazonaws.com%2Fpublic%2Fimages%2F6c5adb63-d7dd-4032-b532-c181ecb40bb6_1396x872.heic
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Tech companies age in dog years, and the consequences for how we manage, value and invest in them are profound. In fact, I would argue that the lessons that we teach in business school and the processes that we use in analysis need adaptation for compressed life cycle companies, and while I don't have all the answers, the discussion about changing practices is a healthy one.
Corporate Finance across the Life Cycle
Corporate finance, as a discipline, lays out the first principles that govern how to run a business, and with a focus on maximizing value, all decisions that a business makes can be categorized into investing (deciding what assets/projects to invest in), financing (choosing a mix of debt and equity, as well as debt type) and dividend decisions (determining how much, if any, cash to return to owners, and in what form):
<picturehttps://substackcdn.com/image/fetch/w_1456,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fsubstack-post-media.s3.amazonaws.com%2Fpublic%2Fimages%2F9c575530-5617-4594-9d7a-91960b29d31d_1438x690.heic
<svg<polyline<polyline<line<line
While the first principles of corporate finance do not change as a company ages, the focus and estimation processes will shift, as shown in the picture below:
<picturehttps://substackcdn.com/image/fetch/w_1456,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fsubstack-post-media.s3.amazonaws.com%2Fpublic%2Fimages%2F2ebfa21f-09cc-4278-a655-48432d600ebb_1482x910.heic
<svg<polyline<polyline<line<line
With young companies, where the bulk of the value lies in future growth, and earnings and cash flows are often negative, it is the investment decision that dominates; these companies cannot afford to borrow or pay dividends. With more mature companies, as investment opportunities become scarcer, at least relative to available capital, the focus not surprisingly shifts to financing mix, with a lower hurdle rate being the pay off. With declining businesses, facing shrinking revenues and margins, it is cash return or dividend policy that moves into the front seat.
Valuation across the Life Cycle
I am fascinated by valuation, and the link between the value of a business and its fundamentals - cash flows, growth and risk. I am also a realist and recognize that I live in a world, where pricing dominates, with what you pay for a company or asset being determined by w[...]
Offshore
lso explain why the typical twenty-first century company faces a compressed life cycle, relative to its twentieth century counterpart. In the manufacturing-centered twentieth century, it took decades for companies like GE and Ford to scale up, but they also…
hat others are paying for similar companies and assets:
<picturehttps://substackcdn.com/image/fetch/w_1456,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fsubstack-post-media.s3.amazonaws.com%2Fpublic%2Fimages%2Fc6d122b7-edac-4918-b5a1-a2beecbb5889_1452x654.heic
<svg<polyline<polyline<line<line
All companies can be both valued and priced, but the absence of history and high uncertainty about the future that characterizes young companies makes it more likely that pricing will dominate valuation more decisively than it does with more mature firms.
All businesses, no matter where they stand in the life cycle, can be valued, but there are key differences that can be off putting to some. A well done valuation is a bridge between stories and numbers, with the interplay determining how defensible the valuation is, but the balance between stories and numbers will shift, as you move through the life cycle:
<picturehttps://substackcdn.com/image/fetch/w_1456,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fsubstack-post-media.s3.amazonaws.com%2Fpublic%2Fimages%2F6993c2ce-a165-482e-bd70-1b24e1e1e35d_1520x958.heic
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With young companies, absent historical data on growth and profitability, it is your story for the company that will drive your numbers and value. As companies age, the numbers will become more important, as the stories you tell will be constrained by what you have been able to deliver in growth and margins. If your strength as an analyst or appraiser is in bounded story telling, you will be better served valuing young companies, whereas if you are a number-cruncher(comfortable with accounting ratios and elaborate spreadsheet models), you will find valuing mature companies to be your natural habitat.
The draw of pricing is strong even for those who claim to be believers in value, and pricing in its simplest form requires a standardized price (a multiple like price earnings or enterprise value to EBITDA) and a peer group. While the pricing process is the same for all companies, the pricing metrics you use and the peer groups that you compare them to will shift as companies age:
<picturehttps://substackcdn.com/image/fetch/w_1456,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fsubstack-post-media.s3.amazonaws.com%2Fpublic%2Fimages%2F2de726b2-ade2-4550-bd2f-2ca0472bb268_1536x1052.heic
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For pre-revenue and very young companies, the pricing metrics will standardize the price paid (by venture capitalists and other investors) to the number of users or subscribers that a company has or to the total market that its product is aimed at. As business models develop, and revenues come into play, you are likely to see a shift to revenue multiples, albeit often to estimated revenues in a future year (forward numbers). In the mature phase, you will see earnings multiples become more widely used, with equity versions (like PE) in peer groups where leverage is similar across companies, and enterprise value versions (EV to EBITDA) in peer groups, where leverage is different across companies. In decline, multiples of book value will become more common, with book value serving as a (poor) proxy for liquidation or break up value. In short, if you want to be open to inves[...]
<picturehttps://substackcdn.com/image/fetch/w_1456,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fsubstack-post-media.s3.amazonaws.com%2Fpublic%2Fimages%2Fc6d122b7-edac-4918-b5a1-a2beecbb5889_1452x654.heic
<svg<polyline<polyline<line<line
All companies can be both valued and priced, but the absence of history and high uncertainty about the future that characterizes young companies makes it more likely that pricing will dominate valuation more decisively than it does with more mature firms.
All businesses, no matter where they stand in the life cycle, can be valued, but there are key differences that can be off putting to some. A well done valuation is a bridge between stories and numbers, with the interplay determining how defensible the valuation is, but the balance between stories and numbers will shift, as you move through the life cycle:
<picturehttps://substackcdn.com/image/fetch/w_1456,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fsubstack-post-media.s3.amazonaws.com%2Fpublic%2Fimages%2F6993c2ce-a165-482e-bd70-1b24e1e1e35d_1520x958.heic
<svg<polyline<polyline<line<line
With young companies, absent historical data on growth and profitability, it is your story for the company that will drive your numbers and value. As companies age, the numbers will become more important, as the stories you tell will be constrained by what you have been able to deliver in growth and margins. If your strength as an analyst or appraiser is in bounded story telling, you will be better served valuing young companies, whereas if you are a number-cruncher(comfortable with accounting ratios and elaborate spreadsheet models), you will find valuing mature companies to be your natural habitat.
The draw of pricing is strong even for those who claim to be believers in value, and pricing in its simplest form requires a standardized price (a multiple like price earnings or enterprise value to EBITDA) and a peer group. While the pricing process is the same for all companies, the pricing metrics you use and the peer groups that you compare them to will shift as companies age:
<picturehttps://substackcdn.com/image/fetch/w_1456,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fsubstack-post-media.s3.amazonaws.com%2Fpublic%2Fimages%2F2de726b2-ade2-4550-bd2f-2ca0472bb268_1536x1052.heic
<svg<polyline<polyline<line<line
For pre-revenue and very young companies, the pricing metrics will standardize the price paid (by venture capitalists and other investors) to the number of users or subscribers that a company has or to the total market that its product is aimed at. As business models develop, and revenues come into play, you are likely to see a shift to revenue multiples, albeit often to estimated revenues in a future year (forward numbers). In the mature phase, you will see earnings multiples become more widely used, with equity versions (like PE) in peer groups where leverage is similar across companies, and enterprise value versions (EV to EBITDA) in peer groups, where leverage is different across companies. In decline, multiples of book value will become more common, with book value serving as a (poor) proxy for liquidation or break up value. In short, if you want to be open to inves[...]
Offshore
hat others are paying for similar companies and assets: <picturehttps://substackcdn.com/image/fetch/w_1456,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fsubstack-post-media.s3.amazonaws.com%2Fpublic%2Fimages%2Fc6d122b7-edac-4918-b5a1-a2b…
ting in companies across the life cycle, it behooves you to become comfortable with different pricing ratios, since no one pricing multiple will work on all firms.
Investing across the Life Cycle
In my class (and book) on investment philosophies, I start by noting that every investment philosophy is rooted in a belief about markets making (and correcting) mistakes, and that there is no one best philosophy for all investors. I use the investment process, starting with asset allocation, moving to stock/asset selection and ending with execution to show the range of views that investors bring to the game:
<picturehttps://substackcdn.com/image/fetch/w_1456,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fsubstack-post-media.s3.amazonaws.com%2Fpublic%2Fimages%2F0e347d03-692f-42c8-b99a-0a8832a0ce7c_1708x602.heic
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Market timing, whether it be based on charts/technical indicators or fundamentals, is primarily focused on the asset allocation phase of investing, with cheaper (based upon your market timing measures) asset classes being over weighted and more expensive asset classes being under weighted. Within the stock selection phase, there are a whole host of investment philosophies, often holding contradictory views of market behavior. Among stock traders, for instance, there are those who believe that markets learn slowly (and go with momentum) and those who believe that markets over react (and bet on reversals). On the investing side, you have the classic divide between value and growth investors, both claiming the high ground. I view the differences between these two groups through the prism of a financial balance sheet:
<picturehttps://substackcdn.com/image/fetch/w_1456,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fsubstack-post-media.s3.amazonaws.com%2Fpublic%2Fimages%2Ff58a41bb-cb32-44b9-8127-eebc95997122_1172x606.heic
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Value investors believe that the best investment bargains are in mature companies, where assets in place (investments already made) are being underpriced by the market, whereas growth investors build their investment theses around the idea that it is growth assets where markets make mistakes. Finally, there are market players who try to make money from market frictions, by locking in market mispricing (with pure or near arbitrage).
Drawing on the earlier discussion of value versus price, you can classify market players into investors (who value companies, and try to buy them at a lower price, while hoping that the gap closes) and traders (who make them money on the pricing game, buying at a low price and selling at a higher one). While investors and traders are part of the market in every company, you are likely to see the balance between the two groups shift as companies move through the life cycle:
<picturehttps://substackcdn.com/image/fetch/w_1456,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fsubstack-post-media.s3.amazonaws.com%2Fpublic%2Fimages%2F62d051e8-0146-40a3-8d8c-df8d947c5911_1606x1228.heic
<svg<polyline<polyline<line<line
Early in the life cycle, it is undeniable that traders dominate, and for investors in these companies, even if they are right in their value assessments, winning will require much longer time h[...]
Investing across the Life Cycle
In my class (and book) on investment philosophies, I start by noting that every investment philosophy is rooted in a belief about markets making (and correcting) mistakes, and that there is no one best philosophy for all investors. I use the investment process, starting with asset allocation, moving to stock/asset selection and ending with execution to show the range of views that investors bring to the game:
<picturehttps://substackcdn.com/image/fetch/w_1456,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fsubstack-post-media.s3.amazonaws.com%2Fpublic%2Fimages%2F0e347d03-692f-42c8-b99a-0a8832a0ce7c_1708x602.heic
<svg<polyline<polyline<line<line
Market timing, whether it be based on charts/technical indicators or fundamentals, is primarily focused on the asset allocation phase of investing, with cheaper (based upon your market timing measures) asset classes being over weighted and more expensive asset classes being under weighted. Within the stock selection phase, there are a whole host of investment philosophies, often holding contradictory views of market behavior. Among stock traders, for instance, there are those who believe that markets learn slowly (and go with momentum) and those who believe that markets over react (and bet on reversals). On the investing side, you have the classic divide between value and growth investors, both claiming the high ground. I view the differences between these two groups through the prism of a financial balance sheet:
<picturehttps://substackcdn.com/image/fetch/w_1456,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fsubstack-post-media.s3.amazonaws.com%2Fpublic%2Fimages%2Ff58a41bb-cb32-44b9-8127-eebc95997122_1172x606.heic
<svg<polyline<polyline<line<line
Value investors believe that the best investment bargains are in mature companies, where assets in place (investments already made) are being underpriced by the market, whereas growth investors build their investment theses around the idea that it is growth assets where markets make mistakes. Finally, there are market players who try to make money from market frictions, by locking in market mispricing (with pure or near arbitrage).
Drawing on the earlier discussion of value versus price, you can classify market players into investors (who value companies, and try to buy them at a lower price, while hoping that the gap closes) and traders (who make them money on the pricing game, buying at a low price and selling at a higher one). While investors and traders are part of the market in every company, you are likely to see the balance between the two groups shift as companies move through the life cycle:
<picturehttps://substackcdn.com/image/fetch/w_1456,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fsubstack-post-media.s3.amazonaws.com%2Fpublic%2Fimages%2F62d051e8-0146-40a3-8d8c-df8d947c5911_1606x1228.heic
<svg<polyline<polyline<line<line
Early in the life cycle, it is undeniable that traders dominate, and for investors in these companies, even if they are right in their value assessments, winning will require much longer time h[...]
Offshore
Photo
PitchDeckGuy
Tesla continues to dominate the EV market
Here’s their investor deck: https://t.co/Z5G1qAkABv
tweet
Tesla continues to dominate the EV market
Here’s their investor deck: https://t.co/Z5G1qAkABv
tweet
Offshore
Photo
Stock Analysis Compilation
Polen Capital on AAON $AAON US
Thesis: AAON is set to capture long-term growth in the HVAC market, driven by decarbonization trends and strategic acquisitions
(Extract from their Q2 letter) https://t.co/0wbGBjt8GK
tweet
Polen Capital on AAON $AAON US
Thesis: AAON is set to capture long-term growth in the HVAC market, driven by decarbonization trends and strategic acquisitions
(Extract from their Q2 letter) https://t.co/0wbGBjt8GK
tweet
Offshore
Photo
PitchDeckGuy
He dropped out of college, battled music piracy, and built Spotify into a $4.8 billion empire.
Meet Daniel Ek 👇 https://t.co/WEy2nEsAVI
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He dropped out of college, battled music piracy, and built Spotify into a $4.8 billion empire.
Meet Daniel Ek 👇 https://t.co/WEy2nEsAVI
tweet
Offshore
Photo
Quiver Quantitative
Nancy Pelosi might have done it again.
$PANW stock has now risen 41% since she bought up to $250K in call options in late February.
She perfectly timed the dip with her second $PANW options purchase this year.
Look at this graph from the Quiver site: https://t.co/9QFhNwrCjS
tweet
Nancy Pelosi might have done it again.
$PANW stock has now risen 41% since she bought up to $250K in call options in late February.
She perfectly timed the dip with her second $PANW options purchase this year.
Look at this graph from the Quiver site: https://t.co/9QFhNwrCjS
tweet
Offshore
Photo
Stock Analysis Compilation
Aristotle on Broadcom $AVGO US
Thesis: Broadcom's strategic focus on AI, cloud computing, and critical infrastructure software sets the stage for strong, sustained growth
(Extract from their Q2 letter) https://t.co/LprfjMTRHZ
tweet
Aristotle on Broadcom $AVGO US
Thesis: Broadcom's strategic focus on AI, cloud computing, and critical infrastructure software sets the stage for strong, sustained growth
(Extract from their Q2 letter) https://t.co/LprfjMTRHZ
tweet
Offshore
Photo
Quiver Quantitative
RT @InsiderRadar: 🚨Insider Trading Alert
Yum China, $YUMA, the largest restaurant chain in China, sees major buys:
🔹General Manager, KFC: ~$128,266 purchase on Aug 16
🔹CTO: ~$133,429 purchase on Aug 15
Largest insider purchases in 5 years. https://t.co/UOJHgafoAL
tweet
RT @InsiderRadar: 🚨Insider Trading Alert
Yum China, $YUMA, the largest restaurant chain in China, sees major buys:
🔹General Manager, KFC: ~$128,266 purchase on Aug 16
🔹CTO: ~$133,429 purchase on Aug 15
Largest insider purchases in 5 years. https://t.co/UOJHgafoAL
tweet
Offshore
Photo
Hidden Value Gems
RT @HiddenValueGems: Energy consumption at the big tech has outpaced sales growth. As a result, Microsoft, for example, requires 63% more energy to generate one dollar of revenue today than six years ago.
$MSFT $GOOG $META https://t.co/uKMW9kddMl
tweet
RT @HiddenValueGems: Energy consumption at the big tech has outpaced sales growth. As a result, Microsoft, for example, requires 63% more energy to generate one dollar of revenue today than six years ago.
$MSFT $GOOG $META https://t.co/uKMW9kddMl
Just published a piece on the electricity sector with a particular focus on the demand factors and the growing investments into the grid. A few companies stand to benefit from this long-term trend, which I will discuss in Part II.
Link in bio. https://t.co/biKKtZLA7J tweet