An interesting stat in the 2022 State of the Cloud report by BVP.
European B2B SaaS businesses are 5-7x more capital efficient as compared to U.S B2B SaaS. (Gross margin returns on sales and marketing spend). Almost all regions demonstrate higher efficiency, with Eastern and Southern Europe churning out 4-5x capital efficiency.
As the focus shifts on businesses and businesses models with a viable path to profitabilty and cash flow generation ability, capital efficiency could be crucial to getting there in a rising costs environment.
Tech was the name of the game in the last decade. You invested in them because they were clear winners, and the stock prices became clear winners because you invested in them.
But the rules to the game we all learnt to play seems to have changed.
The game of “Growth At Any Cost” seems to be changing into a game of “Cash Flow and Profitability”. A common theme emerged during the recent earnings results where reining in free uncontrolled spending was cheered for and the excesses of the past, where money (that cost literally nothing) was ploughed in to chase the next big thing was punished really, really bad.
But are we learning to play a different game? Adapt the way we think about investing and the world to this new environment?
In Bezos book 'invent and wander' he talks about how in the dot.com crash, Amazon share price lost 90% of its value, but the business grew 6x in the year - a total dislocation between fundamentals and share price. There will be massive opportunity in this sell off to pick up winners for the next few years. But it always comes back to cashflow...
As the markets enter "bear market" territory, we are all trying to find instances of when it happened the last time or during similar market/macro environments. I've always believed that something like investing has to be experienced yourself to be well understood.
In my very short investing career (3-4 years), I've only experienced a unidirectional market: up and to the right, as they say. Covid was probably my first experience of a recession, a crashing market and everything else that comes with it. I read and read a lot about similar instances in the past, but the expected outcomes were very different from the realised ones, to say the least. Experiencing it myself, thinking about what to do and what not to do, was probably the most useful. In hindsight, it was all over (in the markets) before you could do much so I ended up doing nothing.
But corrections like these are key to understanding the macro, the micro, the market, and the economy and how they work together but most importantly, to discover what philosophy and investing principles resonate with you the most.
This correction feels like another one of those experiences, where you are forced to go back to basics, play the game you want to play, and think for yourself. You're surrounded by (in my opinion) an over-bearish sentiment where prices for stocks on your watchlist are at levels you could only wish for in the last two years. Can you still hold enough conviction in the business and test/refine your thesis? Do the reasons you bought them or wanted to buy them still hold?
I'm still taking it all in, going back to basics, updating my core beliefs and refining what I thought I knew.
PS: Feels like there is a disconnect between the narratives that were thrown out there just a year ago and the prices you are paying for them today, like Covid never happened and didn't change a thing about business and human behavior. Are we buying?
While the numerator of the equation (the narrative) hasn't changed markedly, the denominator (the discount rate) has. I propose that many of the valuations we saw over the last two years were a mirage induced by low rates and declining risk spreads. And current prices are more in line with normality. Do you have any thoughts on this line of reasoning, Uday? It would be great to hear.
You know its that part of the economic cycle when you start seeing "value investors" getting louder. They've waited for more than 2 decades to start dunking on tech again, failing to realise that a couple quarter of inflows doesn't offset the money they've lost for 20 years, hoping that blaming the Fed would cover up their incompetance.
Make some hay while it shines, get some long overdue clicks while it lasts.
I cannot get enough of hindsight biases all over the place.
The entirety of the Fintwit and the investing enthusiast community coming out with pitches and forks at $NFLX. How it has bad unit economics, the worst content, Disney is better etc. etc. Even the audacity to call out Hastings and the decisions he took. All that is all in hindsight only my good sirs. The stock price drop is informing your false narratives. No surprise there with all the pseudo-expertise that gets thrown out every time there is a market based reaction.
It was a great business to own just a year ago. Hastings was being hailed as one of the best CEOs out there.
With the $QQQ and other large S&P names down 10-15% YTD (smaller high growth stocks even more), would you rebalance your positions and get them back up to your target/desired allocation?
The sentiment has changed, the environment has changed but the long-term secular story might still be intact.
If you have held a diversified portfolio across asset classes, you might have had some downside protection recently. Do you deploy fresh capital to bring allocations of what has worked, up? or average down on your larger positions that are down?