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.
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
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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On the 25th of September, the S&P500 hit its 41st all-time high for this year. What a beautiful number and this year’s performance is far from normal. The stock market keeps rallying. If you still have some positions in your portfolio that you don’t intend to hold for the long term, now is a great time to sell them and either build up cash or invest in great companies.
This is also a beautiful reminder that you should not just listen to an expert and sell your stocks if he believes a crash is about to come. Michael Burry who predicted the housing crash in 2008 and was one of the main characters in the great book (and movie) The Big Short made this statement in January 2023. Since then the S&P500 has been up a smooth 42%
Micron’s earnings
Micron posted stellar earnings and the DRAM and NAND space (flash memory) is recovering. Together with Samsung and SK Hynix Micron dominates this market. With the rise of AI and ever-increasing computing power, we will need more and more GPU, CPU, and flash memory. This in turn is great for the companies who provide the tools to build these chips. I love ASML as a company and I am a very happy shareholder. TSMC is the major foundry player and also smaller niche players like Axcelis profit from this trend.
You can find my deep dive on Axcelis here:
AI and the need for computing power
Mark Zuckerberg, the CEO, and founder of Facebook, now Meta, summarized in this short clip why companies such as Amazon, Microsoft, Alphabet, and Meta keep spending an unprecedented amount of Capex on computing hardware.
You can watch the video here: https://x.com/41investments/status/1839949173229002806
As mentioned above, ASML, Taiwan Semiconductor, etc will profit big time from this trend. As the old saying goes: In a gold rush you will make the most money by selling the shovels, not by searching for the gold itself.
The decline of Western car manufacturers
It seems like most major (western) car manufacturers issued profit warnings in the last two weeks. Starting with Volkswagen, followed by BMW and Mercedes, and now even the darling of the car stocks, Stellantis (the holding company behind Fiat, Dodge, Chrysler, Jeep, Peugeot, Opel, RAM, and many more). Investing in car manufacturers is just not a good idea. It is a very capital-intensive industry with constant investments required. At the same time, we are going through the biggest change since the change from horses to cars by replacing the internal combustion engine with an electric power train.
It is no surprise that the stocks of the before-mentioned companies are not doing well.
And here come the Chinese. Not only are Chinese companies far ahead with the switch to battery vehicles but also the subsidies and the crazy price war are hurting the legacy western car makes. To add insult to injury, China is the biggest market for all major German luxury car makers, and that very market is weak right now. Mercedes sold 36% of all cars in China last year.
As a side note: Aston Martin joined the club by issuing a profit warning.
If I had the financial resources, I would love to help them out by buying one of the new Aston Martin Vantage which looks just gorgeous and reminds me of the Aston Martin One-77
Roman Podcast
As a nice finishing touch I can highly recommend you listen to this amazing podcast from Lex Friedman and Gregory Aldrete. Gregory is one of these historians to whom you can listen for hours. If you are even slightly interested in the Roman Empire, this is a must-listen.
Enjoy your week and keep investing in great companies.
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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