⁠App Economy Insights
📊 This Week in Visuals:
$WMT $BABA $BKNG $ANET $MELI $ADI $CDNS $NTES $NU $NET $XYZ $OXY $DDOG $LYV $TOST $LENOVO $GRAB $KVYO $GLBE $ETSY $LYFT $TRIP

Check out the latest earnings 👇
https://t.co/oo4QwtgVNx https://t.co/IChABqIhR5
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⁠Hidden Value Gems
great story on @JohnArnoldFndtn experience with Citadel

There are many paths to success, but all start with a niche!

Can confirm this story. As head trader at Enron when it filed for bankruptcy, I received many calls from firms that were recruiting. I was busy trying to close out the trading book and wanted to take some time to decide my future so didn’t take any meetings. But Citadel was by far the most aggressive. Other companies set up a few interviews with Enron’s senior people. Citadel interviewed seemingly everyone in the trading operation, all functions at all levels.

Citadel's team called me twice but I declined to meet. It was apparent to me that their intent was to reverse engineer the business and I wasn’t going to help them. They knew that people looking for a job, particularly if they didn’t have a fiduciary responsibility to a current employer, would be very free with info. Interview everyone and you get a 360 perspective of the industry, how the business makes money, its competitive edge, who the best employees are, etc. Citadel probably interviewed several hundred Enron employees. In the end, they maybe hired 5. Much more importantly, they built the framework for how to enter the energy business, which, as Ken notes below, has been an enormous success.

I did eventually talk with Citadel. On their third call to me, they asked if I would talk with Ken directly. I was at the airport heading to Aspen for a quick industry event. I didn’t know Ken personally but had great respect for what he’d built and so told his rep he could call me when I got back to Houston the following week. She said great, but called back a few minutes later with a question: if Ken flew to Aspen to meet me in person the next day, would I? Out of respect, I said of course. The next day I had a great meeting with him and later that week he offered me a job as head gas trader. I wanted to fully run an operation and thought there was more upside if I could have my own fund so I declined.

I ended up building my own firm starting with traders and hiring deep fundamentals expertise. Citadel started with the research (as is their DNA) and built up a trading operation around it. Both models worked fabulously well. I came away from the experience with an even deeper respect for both Ken and Citadel and remain friends with him to this day. I started with a niche, gas trading, built a niche fund and burnt out after 17 years. Ken started with a niche, convert arb, and built one of the most successful financial firms ever and has never tired.

blurb below via @ByrneHobart - John Arnold
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⁠Stock Analysis Compilation
Clearbridge Mid Cap Strategy on International Paper $IP US

Thesis: International Paper is a promising turnaround story under a new CEO focused on optimizing operations and improving pricing power amid favorable industry conditions.

(Extract from their Q4 letter) https://t.co/8RNVfiGIsk
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⁠Startup Archive
John Collison explains why it’s important for founders to be curious

John recounts a story about Magnus Carlson winning a chess trivia contest:

“He knew the most chess trivia out of anyone in this contest, and I don’t think it’s a coincidence that the world’s number one player has also studied the most about chess history.”

As the Collison brothers scaled Stripe from two people to 7,000 people, they studied how other businesses navigated similar stages:

“I think you have to be curious about what is required to run a good company at that stage… One thing we try to do is just spend a lot of time looking at all the other companies and what they’ve done. Not that you want to blindly emulate them, but you should at least understand them.”

He gives Apple and Amazon as an example:

“You cannot imagine two companies that work more differently than the two of those… Yet they’re both really successful models. And so I think it’s useful to have a framework for how that stuff works.”

John also recommends trying to learn the best mental models from various domains and industries:

“I don’t know if every founder has to do it, but I do think it’s probably effective to be able to just know the top mental models from finance, engineering, product, sales, and stuff like that. I don’t see how you could be that effective without being pretty curious on how to learn the most important mental models from this particular domain or function.”

Video source: @MillionStories (2024)
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⁠Finding Compounders
Why is calculating look-through earnings necessary ?

The second paragraph is important! https://t.co/Ji9lrRW8nq
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⁠Dimitry Nakhla | Babylon Capital®
2 months ago I stated:

“I consider $MELI a strong buy closer to $1,700💵 (~9% below today’s price) where I can reasonably expect ~14% CAGR while assuming a 36x end multiple, ensuring some margin of safety”

Since reaching my $1,700 target $MELI shares have rallied +33%✅

As I suggested in the post attached below👇🏽

“$MELI boasts an expansive growth trajectory, fueled by powerful network effects that should drive sustained momentum

Key factors contributing to its promising outlook include 🔑

1. Margin expansion

2. Unparalleled access to Latin America's burgeoning economy

3. Network effects that produce self-reinforcing dynamics ensuring long-term competitiveness, among other things

Those buying $MELI today at $1856💵 are buying it for a fair price, with little margin of safety — however, these growth rates have to be revised down substantially for $MELI to miss the mark, even if the company grows earnings at 25% CAGR over the next 5 years, shareholders will likely end up with a decent return

I consider $MELI a strong buy closer to $1,700💵 (~9% below today’s price) where I can reasonably expect ~14% CAGR while assuming a 36x end multiple, ensuring some margin of safety”
____

While a rapid appreciation in share price can be gratifying, it's often counterintuitive for long-term investors

Ideally, I prefer to see these high-quality businesses trade at attractive valuations for an extended period, allowing for the accumulation of shares at a more favorable price

This enables us to build a larger position in a company we believe in, ultimately increasing our potential for long-term returns

A quality valuation analysis on $MELI 🧘🏽‍♂️

•NTM P/E Ratio: 49.60x
•1-Year Mean: 48.36x

As you can see, $MELI appears to be trading near fair value

Going forward, investors can receive roughly the same in earnings per share 🧠***

Before we get into valuation, let’s take a look at why $MELI is a great business

BALANCE SHEET✅
•Cash & Short-Term Inv: $6.67B
•Long-Term Debt: $3.04B

$MELI has a strong balance sheet, an ok BB+ S&P Credit Rating & 20x FFO Interest Coverage

RETURN ON CAPITAL🆗➡️✅
•2019: (4.8%)
•2020: 3.7%
•2021: 8.1%
•2022: 14.2%
•2023: 25.3%
•LTM: 20.1%

RETURN ON EQUITY🆗➡️✅
•2019: (14.2%)
•2020: (0.1%)
•2021: 5.2%
•2022: 28.7%
•2023: 40.3%
•LTM: 42.6%

$MELI has strong and improved return metrics, highlighting the financial efficiency of the business

REVENUES✅
•2018: $1.44B
•2023: $14.47B
•CAGR: 58.64%

FREE CASH FLOW✅
•2018: $133.35M
•2023: $4.63B
•CAGR: 203.29%

NORMALIZED EPS✅
•2018: ($0.82)
•2023: $22.84

SHARE BUYBACKS❌
•2013 Shares Outstanding: 44.53M
•LTM Shares Outstanding: 51.28M

MARGINS🆗➡️✅
•LTM Gross Margins: 52.5%
•LTM Operating Margins: 11.4%
•LTM Net Income Margins: 7.8%

***NOW TO VALUATION 🧠

As stated above, investors can expect to receive roughly the same in EPS

Using Benjamin Graham’s 2G rule of thumb, $MELI has to grow earnings at a 24.80% CAGR over the next several years to justify its valuation

Today, analysts anticipate 2025 - 2026 EPS growth over the next few years to be more than the (24.80%) required growth rate:

2024E: $33.59 (47.1% YoY) *FY Dec

2025E: $45.76 (36.2% YoY)
2026E: $62.50 (36.6% YoY)

$MELI has an ok track record of meeting analyst estimates ~2 years out, but let’s assume $MELI ends 2026 with $62.50 in EPS & see its CAGR potential assuming different multiples

40x P/E: $2500💵 … ~15.5% CAGR

38x P/E: $2375💵 … ~12.7% CAGR

36x P/E: $2250💵 … ~9.7% CAGR

34x P/E: $2125💵 … ~6.7% CAGR

As you can see, $MELI appears to have attractive return potential IF we assume >38x earnings (a multiple justified by its growth rate & moat)

$MELI boasts an expansive growth traj[...]

ectory, fueled by powerful network effects that should drive sustained momentum

Key factors contributing to its promising outlook include 🔑

1. Margin expansion

2. Unparalleled access to Latin America's burgeoning economy

3. Network effects that produce self-reinforcing dynamics ensuring long-term competitiveness, among other things

Those buying $MELI today at $1856💵 are buying it for a fair price, with little margin of safety — however, these growth rates have to be revised down substantially for $MELI to miss the mark, even if the company grows earnings at 25% CAGR over the next 5 years, shareholders will likely end up with a decent return

I consider $MELI a strong buy closer to $1,700💵 (~9% below today’s price) where I can reasonably expect ~14% CAGR while assuming a 36x end multiple, ensuring some margin of safety

#stocks #investing
___

𝐃𝐈𝐒𝐂𝐋𝐎𝐒𝐔𝐑𝐄‼️: 𝐓𝐡𝐢𝐬 𝐢𝐬 𝐍𝐎𝐓 𝐈𝐧𝐯𝐞𝐬𝐭𝐦𝐞𝐧𝐭 𝐀𝐝𝐯𝐢𝐜𝐞. 𝐁𝐚𝐛𝐲𝐥𝐨𝐧 𝐂𝐚𝐩𝐢𝐭𝐚𝐥® 𝐚𝐧𝐝 𝐢𝐭𝐬 𝐫𝐞𝐩𝐫𝐞𝐬𝐞𝐧𝐭𝐚𝐭𝐢𝐯𝐞𝐬 𝐦𝐚𝐲 𝐡𝐚𝐯𝐞 𝐩𝐨𝐬𝐢𝐭𝐢𝐨𝐧𝐬 𝐢𝐧 𝐭𝐡𝐞 𝐬𝐞𝐜𝐮𝐫𝐢𝐭𝐢𝐞𝐬 𝐝𝐢𝐬𝐜𝐮𝐬𝐬𝐞𝐝 𝐢𝐧 𝐭𝐡𝐢𝐬 𝐭𝐰𝐞𝐞𝐭.

𝐓𝐡𝐞 𝐢𝐧𝐟𝐨𝐫𝐦𝐚𝐭𝐢𝐨𝐧 𝐜𝐨𝐧𝐭𝐚𝐢𝐧𝐞𝐝 𝐢𝐧 𝐭𝐡𝐢𝐬 𝐭𝐰𝐞𝐞𝐭 𝐢𝐬 𝐢𝐧𝐭𝐞𝐧𝐝𝐞𝐝 𝐟𝐨𝐫 𝐢𝐧𝐟𝐨𝐫𝐦𝐚𝐭𝐢𝐨𝐧𝐚𝐥 𝐩𝐮𝐫𝐩𝐨𝐬𝐞𝐬 𝐨𝐧𝐥𝐲 𝐚𝐧𝐝 𝐬𝐡𝐨𝐮𝐥𝐝 𝐧𝐨𝐭 𝐛𝐞 𝐜𝐨𝐧𝐬𝐭𝐫𝐮𝐞𝐝 𝐚𝐬 𝐢𝐧𝐯𝐞𝐬𝐭𝐦𝐞𝐧𝐭 𝐚𝐝𝐯𝐢𝐜𝐞 𝐭𝐨 𝐦𝐞𝐞𝐭 𝐭𝐡𝐞 𝐬𝐩𝐞𝐜𝐢𝐟𝐢𝐜 𝐧𝐞𝐞𝐝𝐬 𝐨𝐟 𝐚𝐧𝐲 𝐢𝐧𝐝𝐢𝐯𝐢𝐝𝐮𝐚𝐥 𝐨𝐫 𝐬𝐢𝐭𝐮𝐚𝐭𝐢𝐨𝐧. 𝐏𝐚𝐬𝐭 𝐩𝐞𝐫𝐟𝐨𝐫𝐦𝐚𝐧𝐜𝐞 𝐢𝐬 𝐧𝐨 𝐠𝐮𝐚𝐫𝐚𝐧𝐭𝐞𝐞 𝐨𝐟 𝐟𝐮𝐭𝐮𝐫𝐞 𝐫𝐞𝐬𝐮𝐥𝐭𝐬.

𝐈𝐧𝐟𝐨𝐫𝐦𝐚𝐭𝐢𝐨𝐧 𝐜𝐨𝐧𝐭𝐚𝐢𝐧𝐞𝐝 𝐢𝐧 𝐭𝐡𝐢𝐬 𝐭𝐰𝐞𝐞𝐭 𝐡𝐚𝐬 𝐛𝐞𝐞𝐧 𝐨𝐛𝐭𝐚𝐢𝐧𝐞𝐝 𝐟𝐫𝐨𝐦 𝐬𝐨𝐮𝐫𝐜𝐞𝐬 𝐛𝐞𝐥𝐢𝐞𝐯𝐞𝐝 𝐭𝐨 𝐛𝐞 𝐫𝐞𝐥𝐢𝐚𝐛𝐥𝐞, 𝐛𝐮𝐭 𝐢𝐬 𝐧𝐨𝐭 𝐠𝐮𝐚𝐫𝐚𝐧𝐭𝐞𝐞𝐝 𝐚𝐬 𝐭𝐨 𝐜𝐨𝐦𝐩𝐥𝐞𝐭𝐞𝐧𝐞𝐬𝐬 𝐨𝐫 𝐚𝐜𝐜𝐮𝐫𝐚𝐜𝐲. - Dimitry Nakhla | Babylon Capital® tweet

⁠Stock Analysis Compilation
Clearbridge Small Cap Strategy on First Watch Restaurant $FWRG US

Thesis: First Watch Restaurant is an attractive growth opportunity in casual dining, focusing on breakfast and lunch to maintain low labor costs and high margins.

(Extract from their Q4 letter) https://t.co/kZ8aO6bBQS
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⁠Investing visuals
I'm no expert on $NU, but their customer growth over the past 5 years is impressive to say the least👌 https://t.co/SLTZbVRwc3
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⁠Dimitry Nakhla | Babylon Capital®
RT @DimitryNakhla: As an investor, it’s exciting to find companies where profits and stock prices rise together over time

Here are 10 high-quality compounders, businesses that keep growing steadily, still trading near their valuations from 5 years ago, plus their impressive returns 🧵
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