PIEcasting

You probably haven’t seen his name on a placard in the august halls of investing legends, but we’re huge fans of Michael Mauboussin. More than any other bona fide investor (maybe even Buffett), he has changed the way we think about investing. Maub (we hope he won’t mind) doesn’t have Buffett’s (or Soros’s or Marks’s) track record or instincts, but his research & writings have resonated loudly at The Buylyst. Our investment process is based heavily on his idea of Expectations Investing.

If you’re feeling nerdy, check out this interview of him. His take on the art of investing is so fresh yet so logical and, above all, usable! But if you’re feeling hassled and out-of-time (who isn’t?), then here’s the TLDR:

1. Forecasting is futile. Instead, back-solve into what’s baked into the current price.
2. Maub calls baked-in “stuff” PIE: Price-Implied Expectations
3. PIE is usually in the form of revenue growth or earnings growth – something uncomplicated.
4. What does the market expect about the growth in this company – based on the latest stock price? That’s the PIE.
5. Buy low PIE; sell high PIE.

In short,…

Don’t forecast; Piecast. See below.

Funvesting

We only have one portfolio, which has most of our savings. But we tend to think of our portfolio thematically – diversified by various “threads of progress”. AI & Big Data and Media & Entertainment are the biggest thematic bets by far. The Media & Entertainment thread obviously has our fun holdings. But they also tend to be our riskier ones.

We don’t measure risk by volatility or standard deviation of stock prices or Beta or Gamma or any other Greek letter. If you asked us to define our risk metric, we’d say, “Error in Piecasting”. Our “fun” holdings tend to have a higher probability in the “error in Piecasting”. BUT, that risk is still low enough for us. We’ve bet our savings on it.

Most of these “risky” companies don’t make cash profits yet (or they’ve just started generating free cash flow). So, we need to believe that their revenue will grow at a pace that ensures sufficient free cash flow after a few years. What is sufficient? Free Cash Flow after a few years should be sufficient to justify a stock price that’s much higher than today’s level. That should happen if the company galvanizes its competitive advantage in a market that has more than enough demand headroom for growth.

So, the risk is that our belief that their competitive advantages are sticky and that they’ll keep dominating their ever-growing turf can turn out to be wrong. It’s more of a risk with these fun holdings than, say, Google or Salesforce. But we want to reiterate that the risk is still very palatable. We don’t think we’re irrationally exuberant. Rationally exuberant? Yes.

Some of these companies reported earnings last week. Here’s how we parsed through them:

1. Based on the current stock price, what revenue growth do we need to believe to keep holding the stock?
2. What has been the company’s revenue growth rate over the last 1 year?
3. What has been the company’s revenue growth rate over the last 3 years?

Here comes the fun!

Airbnb

Note: WNTH is calculated by back-solving “revenue growth we need to believe” from “free cash flow we need to believe to rationally expect a 50% upside in the stock”. We apply a multiple to Free Cash Flow – 17.5 (or midpoint of 15 and 20) in this case, and then back-solve from “desirable” Free Cash Flow to “desirable” Revenue based on conservative assumptions about the company’s cost structure. A company that does not generate free cash flow currently could generate significant free cash flow in a few years due to the inherent operating leverage in the business – these tend to be businesses that have a high-fixed/low-variable cost structure. Software businesses are the best examples.

Interesting tidbits from the earnings call:

1. Average daily rate of Airbnb bookings up to $164 per night. That’s a 40% increase over the same period in 2019 (when travel was normal).
2. Number of Nights & Experiences booked increased 25% year-on-year.
3. Long-term stays (28 days or more) now make up about 19% of total bookings – up from 13% in Q2 2029. WFA (work-from-anywhere) might have some legs.
4. Our Airbnb thesis was hinged on volume (nights and experiences booked) rather than price increases. So, the 25% year-on-year (and 24% over Q2 2019) number was good to see.

Pinterest

Note: WNTH is calculated by back-solving “revenue growth we need to believe” from “free cash flow we need to believe to rationally expect a 50% upside in the stock”. We apply a multiple to Free Cash Flow – 17.5 (or midpoint of 15 and 20) in this case, and then back-solve from “desirable” Free Cash Flow to “desirable” Revenue based on conservative assumptions about the company’s cost structure. A company that does not generate free cash flow currently could generate significant free cash flow in a few years due to the inherent operating leverage in the business – these tend to be businesses that have a high-fixed/low-variable cost structure.

Interesting tidbits from the earnings call:

1. Global Monthly Active Users (MAUs) decreased by 5% year on year, but was flat compared to last quarter.
2. Average Revenue per User (ARPU), which is basically advertising revenue, grew 17% year over year.
3. There’s a new CEO in town, Bill Ready, who’s taking the reins from founder Ben Silberman. We hope Ready is, well, ready to accelerate the momentum in ARPU, because our thesis is hinged on it. We didn’t factor in much user growth at all.

Spotify

Note: WNTH is calculated by back-solving “revenue growth we need to believe” from “free cash flow we need to believe to rationally expect a 50% upside in the stock”. We apply a multiple to Free Cash Flow – 17.5 (or midpoint of 15 and 20) in this case, and then back-solve from “desirable” Free Cash Flow to “desirable” Revenue based on conservative assumptions about the company’s cost structure. A company that does not generate free cash flow currently could generate significant free cash flow in a few years due to the inherent operating leverage in the business – these tend to be businesses that have a high-fixed/low-variable cost structure.

Interesting tidbits from the earnings call:

1. Spotify had a smashing quarter. Revenue grew by 23%.
2. MAUs grew by 19%.
3. This is just the boost our thesis needed. We assumed Spotify’s revenue would need to increase at a clip of about 14% annualized over the next 5 years to propel the stock price to about $154.
4. We assumed MAUs would grow by around 15%.

Uber

Note: WNTH is calculated by back-solving “revenue growth we need to believe” from “free cash flow we need to believe to rationally expect a 50% upside in the stock”. We apply a multiple to Free Cash Flow – 17.5 (or midpoint of 15 and 20) in this case, and then back-solve from “desirable” Free Cash Flow to “desirable” Revenue based on conservative assumptions about the company’s cost structure. A company that does not generate free cash flow currently could generate significant free cash flow in a few years due to the inherent operating leverage in the business – these tend to be businesses that have a high-fixed/low-variable cost structure.

Interesting tidbits from the earnings call:

1. Travel is back! Uber benefits!
2. Gross Bookings were up 10% from last quarter, and 33% from last year.
3. User growth was 21%.
4. No. of Trips grew by 24%.
5. Even Delivery Gross Bookings were up 43% from last year! This was a surprise.
6. Our Uber thesis believed that an 18%-ish revenue growth number would be enough to propel Uber’s stock price to our target of $54. Essentially, that meant that we believed Management’s targets for the next few years. This slide shows their progress. So far, so good.