This is a good thought provoking post. I'm going to take some more time to think about it, especially in the context of my current portfolios. Valuation does matter but it's worth considering their different circumstances. MSFT has a quasi-monopoly on a segment of enterprise software that needed a non-idiot CEO to evolve it with technology (cloud, mobile, gaming) and that's been successful enough to get a re-rating. NVDA developed a leadership position in a technology that was going to take over a big portion of mainstream computing thanks to gaming, crypto and other demanding applications. The wave just got bigger and they were right there. Maybe TRIP is like MSFT. Questions remain on the others for me because I wonder about switching costs and their ability to compete longer term. So far DBX has failed to come up with anything new that matters. They have all been duds. I think they might be better off figuring out an M&A strategy and executing that. I'm going to try and figure out a "lens" using your ideas here that I can use to view stocks in the portfolio and those being considered. Here's to wealth building once this market rout ends.
EBAY seems like a good candidate as well. There seems to be a decent margin of safety and the company should benefit if Amazon FBA sellers move to Ebay given lower fees. The platform just seems much more favorable to sellers than FBA. The company generates a decent amount of FCF and the share count has been going down the past couple years.
Thanks for the post. My current candidates for this include two rule of 40 companies: UPST and GLBE. Each have current year sales growth ~50%. UPST has a forward PEG ~0.3. UPST is disrupting loan loan underwriting. GLBE is in the middle of global payment processing. Recent deal with SHOP.
Based on the framework you laid out, I think a somewhat obvious "answer" would have to be Intel.
Quick numbers from Koyfin, all LTM numbers:
Intel — 9.8x P/E, 2.6x EV/Sales, 5.8x EV/EBITDA
AMD — 32.5x P/E, 8.4x EV/Sales, 35.3x EV/EBITDA
TSMC — 26.6x P/E, 10.1x EV/Sales, 14.8x EV/EBITDA
Intel's a massive cornerstone company, an institution in its industry, and people are very actively worried it's going to wither on the vine and fall away. And now there's a new, promising CEO with deep ties to the companies roots and great ambitions who's come onboard, strong possibilities of funding capex through government subsidies, etc etc...
The problem, of course, is that there are a lot of good reasons to worry about the future of Intel! If Gelsinger can't do the Nadella magic trick, maybe we get to see what it would have looked like if Ballmer was replaced by another Ballmer. And if Intel spins out its fabs as a separate foundry business (one of the more promising "upside" scenarios), it's sort of not clear how that'd play out for the shareholders of today.
The idea that RH has limited competition in lux furniture is laughable -real lux furniture prices quite a lot above what they are selling and comes from Italy. Their overseas expansion and private jet purchasing smacks of hubris -
I agree that the industry is incredibly competitive on a product level (there are so many $5,000+ couches out there) however, I believe RH has dramatically altered the buying process for this type of product to the extent that they are capturing market share (estimated to have 10% of the global luxury furniture market). Traditionally, you have to seek out an interior designer, hire them, work with them, they bring you X number of items from X different small designers, the product is ordered and then it arrives in 6 to 9 months. This process is a hassle and it is an absolute burden to the purchaser. RH simplifies the process by bringing the interior designer in-house (every customer gets their own personal designer), all products are sourced from RH (this includes EVERYTHING - most luxury furniture designers tend to specialize on certain products), and the products are shipped to your house quickly. This is why consumers love RH - it's not because the products are better (they are not), it's that the process has been made so much easier.
On the private jet, it's just a way to build the brand - who cares if it loses $10mm a year when the company's market cap is $8.5bn? Establishing the brand is far more important to the long-term success of the business.
Curious to hear why you think the overseas expansion is an act of hubris?
On the international point look at what they are building - taking over a huge country house from the 1600. Which is around 1.5 hour drive (at least on a good day) from its main customers in central London - most of whom would sooner not waste their time and let their interior designer figure it out who will continue to use their established trusted suppliers. Which adds to the fact it feels a lot like when other US retailers come over the Europe and open ridiculous loss making flagships only to close them a few years later. London has a stack of good furniture stores selling true lux furniture and no shortage of interior designers. Also think of it this way - in the US a customer wants to drive a new car off the lot the same day so everything is pre ordered and pre specified by the dealer. In Europe for premium cars that simply does not happen people spend the time to specify exactly what they want and wait for it to be built and delivered. I think there is a high chance the same holds true for furniture.
Furthermore unless they design an entirely new range it will not fit well in most central London homes - they are much, much smaller than the average US home and those that are not smaller are so expensive the owners would not even think of demeaning themselves by buying RH. So we will see but lavish overseas flag planting, yachts and private jets all point to me a CEO who is now over confident and riding for a fall - it won't be the first time and it won't be the last time- While the focus is on the new exciting toys the focus slips on executing on the day job. Clearly on the metrics if you believe the housing market and spending stays strong it screens cheap and it may well rally but watch the warning signs. I also think people have the wrong impression of luxury - RH is like Coach not like Hermes and should be valued accordingly
I would not bet against Friedman. When you realize, what he has been doing in the last couple of years with RH it is remarkable. From such a poor business. But ultimately it is a question if RH will create its own unique position in the industry as @Another Bored Investor mentioned. Ecosystem recognized by unique experience, increasing quality of product, huge network of in-house designers, fast delivery.
I do not see expenditures on plane and yacht as risk here, as he tries to expand the brand and is experimenting with other segments. Plus company is currently on 1 bn USD EBITDA with 20% + profit margins. But the risk here could be in managing growth where he tries to simultaneously do many different things (residential market, hospitality, furniture, restaurants).
Regarding London expansion, it will be important to follow the story here, as it will be definitely tougher than US. But with the current valuation it is more of an optionality than must.
These two cases were effectively massive underlying business accelerations.
I do not know if one could find similar cases.
Tripadvisor has the potential for a massive turnaround to multibagger, but also to be a value trap!
Spotify maybe.
In Japan, Zholdings is a leading internet portal + messaging platform and Payment method, kind of left for dead by the market on a Ebitda multiple basis, it could be the Case. Ill write it up on my substack soon.
In China Alibaba, and Baidu of course at low earnings multiples.
Adtech outside of TTD there are some interesting candidates - 4 which standout - DV and IAS on the ad fraud and OB and TBLA
The attraction of both of these pairs is that that they are duopolies with long term customer relationships differentiated technology which are still generating cash and growing fast. The ad fraud guys are mid to high 20 Ebitda multiples - put consensus a numbers against TTD there is no difference other than these are available for a sensible valuation. The other two are just dirt cheap 5x ebitda for OB is just silly - they really need to start buying back stock
Nice analogies. Reminds me of 100 baggers, a book by Chris Meyer. As a value investor, my biggest take away from 100 baggers is to buy profitable growth with a long runway & buying below a mid-teens multiple. From your picks above DBX and ASO maybe SPWH from sporting goods group fit the 100 baggers profile. Lots of interesting opportunities.
Good post! Bringing back some bad memories of owning a 10% position in MSFT for a year from 2012 to 2013 and getting scared about how bad the Windows 8 rollout was so I sold it......FML. Just absolutely brutal to lookback and read what I thought back then
But Salesforce has a chance to 10x. Clearly looks less likely on valuation at 9x sales. But they've been growing revenue at 25% per year. If that grows at 20% CAGR over the next 10 years I think you could get to a 10x. I think they could have a similar EBITDA margins as MSFT and if that happens you can get there.
Wayfair too if they really get the logistics and furniture delivery part figured out better. If they get head and shoulders above their competitors I think it could happen too.
Trading at half the valuation of its nearest comp DAVA as well as at a discount to some others EPAM, GLOB. Series of events has knocked it down. Speaking at a fireside chat a few weeks back, CEO stated that they could easily grow "25%" for the foreseeable future. For some reason, market did not like that and stock tanked. Then stock tanked again about 10 days ago on a bogus short report from Spruce Capital. It's slowly creeping back but still deeply discounted compared to peers.
Are EPAM and GLOB really comparable to TASK? I always thought EPAM and GLOB were more consulting and TASK is much more BPO. If you like TASK you should also look at TDCX, which has a better revenue mix (less content monitoring) than TASK with better margins.
This is a good thought provoking post. I'm going to take some more time to think about it, especially in the context of my current portfolios. Valuation does matter but it's worth considering their different circumstances. MSFT has a quasi-monopoly on a segment of enterprise software that needed a non-idiot CEO to evolve it with technology (cloud, mobile, gaming) and that's been successful enough to get a re-rating. NVDA developed a leadership position in a technology that was going to take over a big portion of mainstream computing thanks to gaming, crypto and other demanding applications. The wave just got bigger and they were right there. Maybe TRIP is like MSFT. Questions remain on the others for me because I wonder about switching costs and their ability to compete longer term. So far DBX has failed to come up with anything new that matters. They have all been duds. I think they might be better off figuring out an M&A strategy and executing that. I'm going to try and figure out a "lens" using your ideas here that I can use to view stocks in the portfolio and those being considered. Here's to wealth building once this market rout ends.
What about semicap ;)))
Definitely a possibility, but I rely on you to identify those for me!
EBAY seems like a good candidate as well. There seems to be a decent margin of safety and the company should benefit if Amazon FBA sellers move to Ebay given lower fees. The platform just seems much more favorable to sellers than FBA. The company generates a decent amount of FCF and the share count has been going down the past couple years.
Thanks for the post. My current candidates for this include two rule of 40 companies: UPST and GLBE. Each have current year sales growth ~50%. UPST has a forward PEG ~0.3. UPST is disrupting loan loan underwriting. GLBE is in the middle of global payment processing. Recent deal with SHOP.
Intel!!!
Exactly what I was thinking of. I have my stake!
Based on the framework you laid out, I think a somewhat obvious "answer" would have to be Intel.
Quick numbers from Koyfin, all LTM numbers:
Intel — 9.8x P/E, 2.6x EV/Sales, 5.8x EV/EBITDA
AMD — 32.5x P/E, 8.4x EV/Sales, 35.3x EV/EBITDA
TSMC — 26.6x P/E, 10.1x EV/Sales, 14.8x EV/EBITDA
Intel's a massive cornerstone company, an institution in its industry, and people are very actively worried it's going to wither on the vine and fall away. And now there's a new, promising CEO with deep ties to the companies roots and great ambitions who's come onboard, strong possibilities of funding capex through government subsidies, etc etc...
The problem, of course, is that there are a lot of good reasons to worry about the future of Intel! If Gelsinger can't do the Nadella magic trick, maybe we get to see what it would have looked like if Ballmer was replaced by another Ballmer. And if Intel spins out its fabs as a separate foundry business (one of the more promising "upside" scenarios), it's sort of not clear how that'd play out for the shareholders of today.
One to watch, though.
Big fan of Restoration Hardware's long-term growth trajectory and limited competition in the luxury hospitality market
The idea that RH has limited competition in lux furniture is laughable -real lux furniture prices quite a lot above what they are selling and comes from Italy. Their overseas expansion and private jet purchasing smacks of hubris -
I agree that the industry is incredibly competitive on a product level (there are so many $5,000+ couches out there) however, I believe RH has dramatically altered the buying process for this type of product to the extent that they are capturing market share (estimated to have 10% of the global luxury furniture market). Traditionally, you have to seek out an interior designer, hire them, work with them, they bring you X number of items from X different small designers, the product is ordered and then it arrives in 6 to 9 months. This process is a hassle and it is an absolute burden to the purchaser. RH simplifies the process by bringing the interior designer in-house (every customer gets their own personal designer), all products are sourced from RH (this includes EVERYTHING - most luxury furniture designers tend to specialize on certain products), and the products are shipped to your house quickly. This is why consumers love RH - it's not because the products are better (they are not), it's that the process has been made so much easier.
On the private jet, it's just a way to build the brand - who cares if it loses $10mm a year when the company's market cap is $8.5bn? Establishing the brand is far more important to the long-term success of the business.
Curious to hear why you think the overseas expansion is an act of hubris?
On the international point look at what they are building - taking over a huge country house from the 1600. Which is around 1.5 hour drive (at least on a good day) from its main customers in central London - most of whom would sooner not waste their time and let their interior designer figure it out who will continue to use their established trusted suppliers. Which adds to the fact it feels a lot like when other US retailers come over the Europe and open ridiculous loss making flagships only to close them a few years later. London has a stack of good furniture stores selling true lux furniture and no shortage of interior designers. Also think of it this way - in the US a customer wants to drive a new car off the lot the same day so everything is pre ordered and pre specified by the dealer. In Europe for premium cars that simply does not happen people spend the time to specify exactly what they want and wait for it to be built and delivered. I think there is a high chance the same holds true for furniture.
Furthermore unless they design an entirely new range it will not fit well in most central London homes - they are much, much smaller than the average US home and those that are not smaller are so expensive the owners would not even think of demeaning themselves by buying RH. So we will see but lavish overseas flag planting, yachts and private jets all point to me a CEO who is now over confident and riding for a fall - it won't be the first time and it won't be the last time- While the focus is on the new exciting toys the focus slips on executing on the day job. Clearly on the metrics if you believe the housing market and spending stays strong it screens cheap and it may well rally but watch the warning signs. I also think people have the wrong impression of luxury - RH is like Coach not like Hermes and should be valued accordingly
I would not bet against Friedman. When you realize, what he has been doing in the last couple of years with RH it is remarkable. From such a poor business. But ultimately it is a question if RH will create its own unique position in the industry as @Another Bored Investor mentioned. Ecosystem recognized by unique experience, increasing quality of product, huge network of in-house designers, fast delivery.
I do not see expenditures on plane and yacht as risk here, as he tries to expand the brand and is experimenting with other segments. Plus company is currently on 1 bn USD EBITDA with 20% + profit margins. But the risk here could be in managing growth where he tries to simultaneously do many different things (residential market, hospitality, furniture, restaurants).
Regarding London expansion, it will be important to follow the story here, as it will be definitely tougher than US. But with the current valuation it is more of an optionality than must.
These two cases were effectively massive underlying business accelerations.
I do not know if one could find similar cases.
Tripadvisor has the potential for a massive turnaround to multibagger, but also to be a value trap!
Spotify maybe.
In Japan, Zholdings is a leading internet portal + messaging platform and Payment method, kind of left for dead by the market on a Ebitda multiple basis, it could be the Case. Ill write it up on my substack soon.
In China Alibaba, and Baidu of course at low earnings multiples.
Adtech outside of TTD there are some interesting candidates - 4 which standout - DV and IAS on the ad fraud and OB and TBLA
The attraction of both of these pairs is that that they are duopolies with long term customer relationships differentiated technology which are still generating cash and growing fast. The ad fraud guys are mid to high 20 Ebitda multiples - put consensus a numbers against TTD there is no difference other than these are available for a sensible valuation. The other two are just dirt cheap 5x ebitda for OB is just silly - they really need to start buying back stock
Oscar health and pubmatic are mine choices
Nice analogies. Reminds me of 100 baggers, a book by Chris Meyer. As a value investor, my biggest take away from 100 baggers is to buy profitable growth with a long runway & buying below a mid-teens multiple. From your picks above DBX and ASO maybe SPWH from sporting goods group fit the 100 baggers profile. Lots of interesting opportunities.
MU... Similar tailwinds as NVDA!
I'm eyeing up SPWH a sporting goods chain.
I also have shares of GOED, online appliance and some furniture sales. Please do an OSTK, GOED.
Good post! Bringing back some bad memories of owning a 10% position in MSFT for a year from 2012 to 2013 and getting scared about how bad the Windows 8 rollout was so I sold it......FML. Just absolutely brutal to lookback and read what I thought back then
But Salesforce has a chance to 10x. Clearly looks less likely on valuation at 9x sales. But they've been growing revenue at 25% per year. If that grows at 20% CAGR over the next 10 years I think you could get to a 10x. I think they could have a similar EBITDA margins as MSFT and if that happens you can get there.
Wayfair too if they really get the logistics and furniture delivery part figured out better. If they get head and shoulders above their competitors I think it could happen too.
AZO WCC
FOUR RBLX TASK BRLT VWE JD
The valuation on Task is interesting. 4x sales, profitable. What gives?
Trading at half the valuation of its nearest comp DAVA as well as at a discount to some others EPAM, GLOB. Series of events has knocked it down. Speaking at a fireside chat a few weeks back, CEO stated that they could easily grow "25%" for the foreseeable future. For some reason, market did not like that and stock tanked. Then stock tanked again about 10 days ago on a bogus short report from Spruce Capital. It's slowly creeping back but still deeply discounted compared to peers.
Are EPAM and GLOB really comparable to TASK? I always thought EPAM and GLOB were more consulting and TASK is much more BPO. If you like TASK you should also look at TDCX, which has a better revenue mix (less content monitoring) than TASK with better margins.