Benjamin Tan's avatar
$6.1m follower assets
When does a Company become "Too Big to Fail", therefore Safer to Invest?
Escape Velocity”: lowest velocity which a body must have in order to escape the gravitational attraction of a particular planet or other object.

Does the concept of “Escape Velocity” exist for companies?

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The book “Crossing the Chasm” by Geoffrey A. Moore talks about high growth companies that have crossed into mainstream to become rock-solid enterprises. Costco ($COST) comes to mind as a modern day retail giant that continues to grow its largely bricks-and-mortar business in the face of competition from online shopping. I am a fan of Costco and count myself as one of the 123mn cardholders. Most of us renew our membership religiously every year, drawn to its low-priced (but curated) merchandise and motivated by the thrills of discovering new, unexpected bargains while shopping.

The stock, however, is no bargain. Despite slower revenue growth in the single digits and thin margins (albeit intentionally), Costco trades almost 20x forward EV/2023e EBITDA with a dividend yield of less than 1%. There are valid justifications for its valuation, and they are predicated on Costco’s almost intransigent place in the world of consumer retail. The company, currently the 6th largest global retailer in the world, grosses more than $200bn per year. It has a footprint of over 800 warehouses and counts 68mn households as members. Despite competition from online shopping, Costco has held its own and continues to grow its largely bricks-and-mortar business. In other words, Costco has more than crossed the chasm, and accordingly, its stock commands a high price. There is safety in numbers and a price to pay for that safety.

On the other end of the retail spectrum, emerging names are risky investments that may or may not work out. Take Allbirds ($BIRD) as an example: the company was recently in the news for reporting underwhelming financial results and guiding for first quarter 2023 topline to fall by 20% to 28%. The decline in sales is unexpected for a company so early on its expansion track, and a stark contrast to its high-flying days when revenue grew by 30% per annum (on average) between 2018 and 2021. For fiscal year 2022, Allbirds earned almost $300mn in revenue, but it is already looking like a late-stage Jenga. Survival odds are deemed to be low, as reflected in its current market valuation of less than $200mn.

Is there a revenue threshold that connotes “Escape Velocity”? That is, a company being large enough to free itself of existential crisis and cruise into the stratosphere? Click on the link below to read on, including a discussion of emerging SaaS player Snowflake ($SNOW) and technology stalwarts like Microsoft ($MSFT) and Salesforce ($CRM).

Do subscribe to my weekly blog, Consume Your Own Tech Investing too - I would appreciate your support.

Jazzi Young's avatar
Fun read !
We're finally getting a Costco in our neck of the woods in the Gold Coast of Australia.
Opening date is set for June this year. We've never been to a Costco.
I'm sure we'll join the club and I'm sure it'll be just a sticky as our Amazon Prime membership.
There's plenty of expansion opportunities for Costco in Australia, it's definitely underserved here. For example, there's 6 million people in Sydney and only 4 Costcos. With the new Gold Coast warehouse, there'll be only be 3 in Queensland for a population of 5 million.
On the Allbirds front, I wonder if they'll be a target for acquisition? You could argue their footwear category doesn't really have much of a moat, but the goodwill on their branding definitely has value and stickability.
Maybe Lululemon? They mostly have an athletic shoe line. Allbirds are looking to get back to their roots with their casual, comfort line: "We haven’t had the selection, color or style enhancement on our core products" - Joey Zwillinger
A takeover/merger could be complimentary, and ensure survival at the same time.

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Benjamin Tan's avatar
@jazziyoung I am sure you will enjoy shopping at Costco - their merchandize is very well curated. $BIRD is looking more like a target these days: if they cannot eke out enough capital to grow the brand, then someone else with a larger balance sheet will do a better job at that. $LULU does look fit for the job.
Dave Ahern's avatar
Great article! Thanks for sharing
Benjamin Tan's avatar
@ifb_podcast cheers Dave - thank you for reading !
Porchester ✳️'s avatar
Will add this book to my reading list!
Nathan Worden's avatar
The last five days have been rough for Allbirds. Market cap is already down to $158M
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Benjamin Tan's avatar
@nathanworden yeah - trading like it is going to go bankrupt, which is insane
Dissecting the Markets's avatar
Thanks for the book suggestion!
Benjamin Tan's avatar
@dissectmarkets thanks for reading the post !!
Rihard Jarc's avatar
thx for the idea for the next book, added to the reading list :)



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