Weekly Notes #6

With thoughts on beautiful cars, AI, SBC and the Chinese stock rally

After a long hiatus of my weekly notes, I will start writing about what I learned in the previous week again. The last weekly notes I did was in June 2023 while I was on vacation in Portugal. Quite a lot changed and yet even more things stayed the same.

If you like this format, let me know in the comments below and share it with friends.

In case you want to re-read the previous weekly notes, here is the link

Weekly Notes #5

Without further ado, let’s start:

Checking in on Atlassian:

As somebody working in a software environment, Jira and Confluence are a common sight. Therefore I check the financials of Atlassian every now and then to see if they are finally converting this growth in bottom-line profitability. Sadly the expenses keep rising at the same pace as revenue. FCF is positive, but after you deduct the crazy high SBC there is not that much left. TEAM is currently trading at an EV/FCF-SBC of 122. Why on earth do you hand out 1bn in SBC if your revenue is 4bn?!?

So I shall wait and check again in a couple of months. The stock is rightfully stuck and at least from a fundamental perspective, there is no reason for it to rise.

Some thoughts on SBC

As you might know by now, I am not a big fan of excessive stock-based compensation (SBC). Some SBC is totally fine and a great way of incentivizing your employees to participate in the long-term success of the company. However, if SBC is used to just shovel stocks on the employees and thanks to GAAP accounting it is added to the FCF, then I have an issue.

The issue with SBC in GAAP accounting is the fact, that SBC is negative for your net income since you must account for it as operating expenses, in the cash flow calculation it is added back since it is not a cash outflow. Due to this fact, a lot of SaaS companies report great FCF and then claim to do massive share buybacks with this (inflated) FCF.

In Zoom’s example, you can see how the relatively low net income turns with the addition of stock-based compensation to a great operating cash flow.

Finally, Zoom’s management seems to realize that they can’t keep this up forever and will take steps to reduce the SBC. In 2022 SBC was 27% of revenue, which is just plain nuts.

Zoom spent $1.5bn in share repurchases in the last 2.5 years, and the number of outstanding shares is still up

The moat of Youtube

Alphabet (the holding company behind Google) is one of my favorite companies and has been one of my largest positions in all of the last years. The purchase of YouTube in 2006 for $1.65bn might be the best takeover of all time. Today Youtube generates 1.65bn in revenue every 18 days (!).

The moat around YouTube is so strong that Google can increase the prices without any major change in the number of subscribers.

Chinese stocks

The recent rally in Chinese stocks is crazy. To be fair Alibaba, JD, and Tencent are still very cheap but there is always the political risk of the Chinese government. Remember when Alibaba founder Jack Ma “disappeared” between 2020 and 2023 and was rarely seen after the criticized the Chinese government?https://www.bbc.com/news/world-asia-china-65084344

As a result of his clash with the Chinese government Alibaba could not proceed with the IPO of Ant Financial, which would have been the world’s largest IPO to date. Taken from Wikipedia:

I am happy for those who profit from the rally in Chinese stocks, but I prefer to invest in stable economies.

The rally in the last weeks has been crazy and we are talking here about multi-billion dollar companies and not some random tiny company.

If you zoom out a bit, however, you can see how badly Chinese equities have performed over the last years. The S&P500 is leading by a wide margin and the ride has been a lot smoother.

China’s legions of casual traders are stoked — and a little scared — to see what happens next in the country’s massive stock market rally.

Shares across markets in Shanghai, Shenzhen and Hong Kong soared last week after a string of stimulus measures announced by China’s top leaders, hitting their biggest weekly rise in 16 years — just in time for celebrations to mark the 75th anniversary of the People’s Republic of China.

The flurry of official announcements — which included interest rate cuts and support for the beleaguered property and stock markets — could help put the world’s second-largest economy back on track to hit the government’s 5 percent growth target for the year.

Their timing was widely interpreted as a reflection of Beijing’s desire to prevent the slowdown from undercutting the week-long anniversary holiday — a time when people often splash out on everything from travel to new homes.

https://www.washingtonpost.com/world/2024/10/02/china-stocks-market-frenzy-fiscal-stimulus/

41st ATH for the S&P500 this year

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