Ice77

OSTK - the furniture biz is selling at half of where it should and so we essentially get a portfolio of a couple dozen blockchain investments (w 70% carry for ListCo) basically for free. That sort of crypto exposure is rarely available in the public markets.

If you want a current horror story around VIE, read up on what's been happening with Arm China (NVDA is trying to buy Arm and Arm China issues are one of the bigger stumbling blocks). It's as crazy as they get, worthy of a thriller.

I mean prudence sneezes at the mention of leverage but which investor would not want 1.enormous amounts of 2. Limited recourse leverage 3. available for long periods of time? It’s a massive carry trade when coupled with someone who has a significant edge in profitably using the implied negative or low cost of that capital (as Buffett has been doing for 50 odd years). Mohnish may have been unsuccessful at it but atleast he tried and put himself in a position to be able to afford it.

Einhorn’s stubbornness sometimes reminds me of the flexibility of Soros strangely. When Soros would come across an approach to making money that he couldn’t do himself he would carve out a part of his capital and hand that to the specific strategy/manager. He wasn’t stubborn about it. There are many ways to make money and he didn’t have to master them himself or be fixated about only his own as if it was his sworn religion. Maybe that came from his trading mindset (even though in early 70s he started out as a value investor himself). Flexibility and open mindedness is less common than we realize.

I don’t really see a big correction right away. As Jamie Dimon says, we are entering a Goldilocks period of multiple tailwinds for the economy. There is more risk in staying out than staying in here I think. As for interest rates, I don’t see them much higher than where they are. The perennial QE and low interest rates have taken OECD debt to GDP to such a level that higher interest rates are just not an option anymore (so long as the central banks can help it). I’m sure there will be market sneezes along the way but nothing crazy. We are swimming in a sea of massive liquidity and the pro cyclical forces continue to gain ground.

Xi is the President for life now in China. Xi is CCP now. This whole exercise against Jack Ma (the more public/vocal Ma as against the reticent Pony Ma of Tencent) was I believe about reining in potential sources of power within the Chinese power structure. The anti trust is just a smoke screen. There can be any kinds of tail risks here because of that...it is not comparable to the billion dollar fines that US institutions have had to pay for subprime or for anti trust. BABA may just ride this fine but there are a wider set of possible scenarios here than what a similar asset would face in the US. And so the position should be sized accordingly.

This blog by a prominent tech VC is a good starting point. But you'd have to dig deeper into the quality of their business models to see which ones have a strong and growing moat and which ones are merely benefiting from a rising tide as software eats the world. It's not enough to just look at the numbers and make an investment as you will need qualitative insights. One name that I really like is DOCU and if there is a material correction, will be happy to add. Anyway, this thread is for Costco so no more digressing posts here. https://cloudedjudgement.substack.com

How do you get the 7% return? Help my dense brain understand the math behind that return

I see a lot of resistance among traditional value investors from paying higher revenue multiples. It would really help if some of them actually ran a DCF with say a 20% revenue CAGR for 5-8yrs, 15% FCF margin, 7% WACC, 1% terminal growth as simple assumptions to their model. There are many SaaS (and such models) that fit and well exceed this dynamic. It yields you a fair EV/revenue multiple in mid-high single digits (or higher as you adjust these assumptions up/down). Many of them are oligopolies or duopolies with strong and increasing moats (see their NPS, DBNRR, Customer churn, feature velocity etc). I believe those geiger counters that were designed in the 1930s need to be adjusted for the new economy asset light models (Less capital intensive, high LTV/CACs) with higher growth rates and impressive margins amid a lower cost of capital environment. Perennially looking for cigar-butts, asset plays and workouts and sneezing at every mention of high multiples of GARP models is not right. The world is changing, value investing fundamentals need not ... but the geiger counters still need adjusting to the altering reality. Or we become like dinosaurs.

Look at Uranium. It's been in the dumps for nearly a decade since the Fukushima disaster happened. Bill Gates has this crude mathematical model that he postulated a few years back where he argued that we just don't have sufficient energy to take care of the world - you either face the prospect of a big population collapse or need a major breakthrough in energy generation. Nuclear has to be a part of the solution despite these occasional disasters like Chernobyl and Fukushima. Who knows when that market eventually turns - bulls have been waiting for years much like the gold bulls - but the space is interesting if you have a 2-5y time horizon for an idea to workout big.

I don't have names for you but have some considerations. First of all...over a horizon that long, the returns on the stock should approximate the core returns of the business with valuation not really a big factor. That should widen the set of names that one would consider. Secondly, business life cycles have shortened materially since the 70s/80s so it ideally has to be a slowly changing industry or if not ..it has to be led by a team/executives who can keep reinventing the firm in each new cycle (e.g. Samsung of the past or the IBM of the past). Thirdly, the extent of fiat debasement that is happening in the world at present (or since the great recession) makes me really wary of anything barely generating mid single digits in core compounding. So it would have to be something able to grow better than that. Ideally, one that keeps pace with this debasement/inflation. Lastly, there has to be an element of antifragility in the business as the world has been in a state of long (relative) peace for over 70 years. Whether it is war or a super pandemic or something else that is an unknown unknown or known unknown, the business has to be able to survive an extended period of dislocation. It better have some strong cushions built in.

The Information

FB ad prices rising again in 2021 after a flatline and a dip in 2018-2020 (chart). The stock is ready to rock and roll.

It popped on my radar too because of Archegos saga. Pony Ma/Tencent do have a strong pedigree on execution and Tencent still owns 55% odd stake here which should be a big plus. Spotify is the second largest shareholder at 8%. Institutions own another 20-30% leaving a rather narrow float for a large cap (not that common). Buybacks (they just announced one) are really unusual at this stage of a story (they've barely monetised 8-9% of their massive MAUs while being a clear leader in audio genre in China). Their holdings in other media entities (Warner, Universal, Spotify) is an interesting way of dissuading these entities from aggressively courting competition in China. Paying MAUs are growing 40%+ y/y so they seem to be doing okay. The rise of Clubhouse (or Spaces) and Podcasts clearly signal a coming rise of long form audio content everywhere so this business can also benefit from that trend through their own recent acquisitions. Their margins are materially superior to that of Spotify, their MAUs are 2-3x as many, their untapped MAUs are 4-5x that of Spotify (that can change as Spotify scales globally while TME remains restricted to China). I don't like it enough to buy it here but its a worthy follow and I'll be keeping an eye. The multiple at <6x EV/revenues isn't rich for the potential it has.

It seems to be an interesting business model. CEO wants it to be the Ritz Carlton of the crafts industry. There is enormous focus on both form and function in how they design both their machines as well as the software that interacts with the user (a sort of "liquid quality" to it that is boosting unit sales, lowering average age of users, raising frequency of usage and getting rave reviews/passionate usage. Women seem to love it). The growth of Etsy is a material driver of business for them (a pull from small businesses catering to customized craft needs). They are perceived as materially superior to their closest competitors (sturdier machines, easier to use, less clunky software, much broader usage spectrum etc) and have a growing international presence (across a dozen markets). Like a mobile device, the machines get replaced in 3-4 years as newer versions come through with better functionality (they have a persistent focus on newer machines, newer tools, newer materials and newer users...a-la 3M). They have a strong subscription layer (materials, designs) that generates strong recurring revenue even if the user base does not grow by much. It's a good razor blade model. They started out with outsourcing key areas a decade back but by now software, engineering & design are virtually all done in-house. The financials look pristine and the multiple is not onerous (<25x fw PE). The penetration at 5% of their claimed TAM is not high yet leaving strong room for growth. Still trading at around IPO price.