Stocks in this edition: Markel (MKL), Plus500 (Plus.L), Sentinel One (S) Apple (AAPL), Taiwan Semi (TSM) Brookfield Corp (BN)
Deep Dives this week
I took me many hours to dissect Markel and arrive at a potential valuation. You can find the deep dive here: https://41investments.substack.com/p/markel-deep-dive
You can find my analysis of the CFD platform Plus500 here: https://41investments.substack.com/p/plus500-how-to-make-money-from-cfd
Sentinel One -37% after numbers
Sentinel One is one of the smaller, fast-growing cyber security vendors and looked very promising until the earnings call this week, after which the stock lost 37%.
I took a look at Sentinel One's numbers and read the earnings call transcript. Sentinel One notices the deteriorating market environment and at the same time the previous forecast was too optimistic. I am surprised that a cost reduction plan is started directly and 5% of the employees are fired.
About the numbers:
75% growth in ARR compared to Q1/22. Gross profit increased from 65% to 68%.
Sales increased by 70% to 133m, while Operating Expenses increased to 206m incl. SBC. EBIT went down from -90m to -115m. Operating cash flow was -28m compared to -49m a year ago.
Full year revenue is expected to be 590-600m with a non-GAAP margin of -29 to -25%.
Which makes me wonder a lot: On March 14th Sentinel One published the Q1 and full year forecast. With only 2 weeks left in Q1, the forecast should have been very accurate by now.
Instead, a revenue of 133m instead of 137m was achieved, the gross margin of 75% was above the planned 73.5% and the operating margin of -38% was also above the planned -41%. The low revenue was probably due to the fact that a large customer did not close the contract in Q1 as expected. In addition, the customers throttled their use of the software in order to keep the consumption based bill low.
The fact that the annual forecast was downgraded from 631-640m to 590-600m is tough to swallow
Here is another quote from the CEO:
“In the past couple of years, consumption for us was always on the up and up, and it created that overstatement of ARR, so to speak, which created an expectation for revenue for us internally as well. So, when the quarter, you know, ended, the dust settled, when we started kind of figuring out, hey, why aren't we seeing that revenue? A big part of it was the ARR was reflecting consumption that was now going down. And that impacted what we should have seen in revenue. And couple that with, again, some CRM inaccuracies that Dave mentioned as well, and that was mainly the reason for the revenue mix. Outside of that, you know, the ARR for the quarter was roughly in line with what we expected, minus, again, that consumption downsizing. So, all in all, a lot of it was cleaned and will never happen again, given that rebasing of ARR and the removal of consumption from the base.”
Sentinel One has to prove with the next quarterly numbers, if they now foretasted on a more conservative level and if they can continue to grow as expected.
Lovely Charts
Quartr builds amazing charts and you can find a collection of the best of them here:
https://twitter.com/Quartr_App/status/1663178488227024897?t=NGXFWXNlEOpTxydXlTJsxA&s=09
The chart below shows just how crazy profitable Apple is. One year of Free cash flow equals the combined market cap of Five Below, Etsy, Spotify, Ferrari and Chipotle.
The continuous rise of Taiwan Semi. While growing the revenue with a factor of 46, the EBIT grew by a multiple of 60. I am sure Taiwan Semi still has a long way to grow.
Brookfield CEO on investments
The Brookfield’s CEO summarizes my strategy perfectly:
“these businesses that we own a long term cash flow generating businesses and we look at them over a decade into the future and the fact is, recessions come and go but these businesses keep growing”
It’s from this 4 minute short interview:
Charlie Munger’s eternal wisdom
“If the business earns 6% on capital over 40 years and you hold it for that 40 years, you’re not going to make much different than a 6% return - even if you originally buy it at a huge discount. Conversely, if a business earns 18% on capital over 20 or 30 years, even if you pay an expensive looking price, you’ll end up with a fine result.”
Quality minus junk
Even though I do not agree with all aspects of the study (namely that book value is a good metric), there are some interesting takeaways from it:
It has been documented that stocks with high profitability outperform (Novy-Marx 2012, 2013), stocks that repurchase tend to do well (Baker and Wurgler 2002; Pontiff and Woodgate 2008; McLean et al. 2009), low beta is associated with high alpha for stocks, bonds, credit, and futures (Black et al. 1972; Frazzini and Pedersen 2014), firms with low leverage have high alpha (George and Hwang 2010; Penman et al. 2007), firms with high credit risk tend to underperform (Altman 1968; Ohlson 1980; Campbell et al. 2008), growing firms outperform firms with poor growth (Mohanram 2005), and firms with high accruals are more likely to suffer subsequent earnings disappointments and their stocks tend to underperform peers with low accruals (Sloan 1996; Richardson et al. 2005). While these papers are very different and appear disconnected, our framework illustrates a unifying theme, namely that all these effects are about the outperformance of high-quality stocks, and we link returns and prices.
We define quality as characteristics that investors should be willing to pay a higher price for. Theoretically, we provide a tractable valuation model that shows how stock prices should increase in their quality characteristics: profitability, growth, and safety. Empirically, we find that high-quality stocks do have higher prices on average but not by a large margin. Perhaps because of this puzzlingly modest impact of quality on price, high-quality stocks have high risk-adjusted returns. Indeed, a quality-minus-junk (QMJ) factor that goes long high-quality stocks and shorts low-quality stocks earns significant risk-adjusted returns in the United States and across 24 countries. The price of quality varies over time, reaching a low during the internet bubble, and a low price of quality predicts a high future return of QMJ. Analysts’ price targets and earnings forecasts imply systematic quality-related errors in return and earnings expectations.
You can find the full paper here
Formula 1
Monaco is a crazy tight track. To see the speed of the drivers first hand is purely ridiculously. Check out this video from the Qualifying from last week:
If you’re not following me on Twitter yet, you have the chance to do so now: https://twitter.com/41investments
Invest at your own risk, this is not financial advice! This is not a recommendation to buy or sell any securities discussed in the article.
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