Authored by Louis Stevens
On L.A. Stevens' most recent podcast, I discussed "Three Constructs."
They were:
- Companies performing well, and being duly rewarded for doing well, e.g., CAVA, Chipotle, Crowdstrike, and Palantir
- Companies performing poorly, and being duly punished for performing poorly, e.g., Asana, Twilio, and Tesla (though Tesla is mostly a byproduct of higher rates pushing down on total vehicle sales)
- Companies performing well, and being unjustifiably punished for performing well, e.g., Coupang, SentinelOne, Sea Ltd., and Snowflake.
The third is, of course, the most exciting because it creates an investment setup in which risk/return is skewed in our favor. That is, risk has actually gotten lower due to the aforementioned best quarters ever, but return has increased (all else being equal, lower starting valuation, which is usually caused by lower stock prices = higher forward returns. That is, there is an inverse correlation between a company's return profile and its starting valuation, all else being equal).
To this end, let's explore these recent Best Quarters Ever, in response to which the market has either continued to hold these companies' share prices mostly static, in something of a malaise, or outright sold them off with great vigor, as in the case of SentinelOne.
- Coupang
- Five consecutive quarters of accelerating growth
- 20%+ sales growth atop sustained free cash flow generation
- Increased WOW membership fee 58% while making it an even more comprehensive multi-product platform
- Negligible dilution, alongside sustained 20%+ growth atop free cash flow generation, alongside best version of embedding/switching costs moat in company's history (via WOW membership); greatest position of strength ever in the company's history
- A recent antitrust inquiry illustrating its market dominance
- Response? Sell the stock because it's accelerated growth and is too strong competitively
- SentinelOne
- Grew sales at 40% while generating an 18% free cash flow margin in Q1'24. Best quarter ever.
- For the first time in the company's history, it generated free cash flow. Watershed moment for the company. CAVA, as an aside, also generated free cash flow for the first time in Q1'24. Watershed moment for both companies.
- 40% of net new revenue booked came from its products adjacent to its endpoint product illustrating that it now is more diversified than ever before and benefits from being a multi-product platform.
- This bolded point is the most important aspect of the thesis and represents S1 becoming its greatest, most diversified, most durable version of itself.
- I mean an unbelievably great Q1'24. Best ever. Market's response? Sell it off 30%
- What's most striking to me is that, irrespective of S1's future, this was the quarter the market requested from the company for the last three years; then, when it arrived, with hyper growth, free cash flow generation, and a multi-product platform structure defined by concrete math, the market threw a fit. Mind boggling, but, also, to some degree, to be expected. Peter Lynch articulated this boggling dynamic in writing:
SentinelOne reduced its full year 2024 guidance by four tenths of a percent, and this caused the market to overlook its watershed moment report, selling the stock off by 30%+. Again, though, this is a market behavior that is to be expected, and share price is usually an awful guide as the the underlying prospects of a business, especially in periods such as the 1970s, 2000s, and today, in which rates have risen precipitously.
- Hims & Hers Health
- Hims reported its best quarter in its corporate history indisputably.
- The delta between gross profit and sales & marketing was never higher than in Q1'24, and this is a concrete representation of the company's solid execution in expanding the LTV of each of its consumers relative to the CAC necessary to acquire those consumers, which is the fundamental basis of all companies' value. It represents essentially a discounted cash flow model in which there's an initial capital outlay [CAC] followed by future cash flows produced by that outlay [Customer Lifetime Value, or CLTV, or just LTV for short].
- Moreover, it had one of its largest quarterly customer additions ever.
- And all of this equated to its highest adjusted EBITDA margin in the company's history.
- Genuinely its best quarter ever after 12 consecutive quarters of perfect execution, in response to which the market has mostly traded its shares downward quite notably and ironically.
- And, still today, even with no GLP-1 business, the stock would still be undervalued. With a successful GLP-1 business, the stock should trade over $40/share.
- Hims' Gross Profit Margin Vs S&M Margin
- Above-mentioned "expanding delta between gross profit margin and S&M as a % of sales by way of a multi-product strategy that expands CLTV/CAC" depicted in a chart I understand it's wordy and jargony but it's what's happening and is the entire thesis so worth noting
- Grab
- Grab just reported its best quarter ever and guided for accelerating growth atop its current 20%+ growth in H2'24 and 2025.
- SE Asia is still in its very early innings of digital industrialization, with just 50-60% of its citizens having adopted digital products, according to a recent report from Bain, Google, and Temasek.
- It's now, for the first time in its company history, growing at 20%+ while sustainably generating free cash flow.
- And, naturally, as is and has been the case for all names listed in this section, as it operates from its greatest position of strength, it's now trading at its most depressed valuation in its history.
- I mean we can't make this stuff up for any of these companies. 1970s/2000s redux 101.
- Sea Ltd.
- I've discussed Sea Ltd. ad nauseam with you. Its Q1'24 was indisputably its best quarter in its corporate history, with all three lines of its business growing double digits while the overall conglomerate generated free cash flow.
- Today, Garena has ~600M users (roughly most ever; most in years, at the very least), and the line of business generates ~$1.2B in annualized free cash flow, and this now grows double digits. Should Free Fire India relaunch, this could grow 20%+. If Garena were growing 20%+ with 600M users, I believe it could be argued that this business line alone would be worth $30B in enterprise value. Today, Sea is valued at ajust about $30B-$32B in enterprise value, depending on where it trades today, and it's selling off pre-market.
- Shopee has returned to hypergrowth while operating about breakeven. Notably, Shopee's competitors are feeble. It is set to bulldoze its competition further from here. This is also worth noting in that there's about 30% market share in SE Asia that's still up for grabs. Lazada and Toko have lost enormous quantities of market share over the last decade, and this is a trend that's likely set to continue.
- SeaMoney continues to grow at 25% at $2B in sales scale while generating healthy free cash flow. Note the 50-60% digital adoption stat above. Huge runway for growth here.
- Fulfillment by Shopee [FBS] will likely become a huge driver of growth in the years ahead. Amazon's Fulfillment business generates $130B+ in sales and analysts have estimated that it has 20% net margins.
- Sea now has $8.6B in cash and about $2.5B in true net debt (it's been buying back its debt, like Affirm and Okta) at 82 cents on the dollar.
- Indisputably, Sea operates from its greatest position of strength in its history, meanwhile its stock has mostly traded down for three years now after being absolute adored for a decade+ (including the private markets' adoration).
- Snowflake officially traded at its lowest valuation in its company history last week, while operating from its greatest position of strength ever. It's truly been mind boggling to witness for a company the market called (rightfully so) The Data Super Cloud™ for the last four years.
- Today, the business has its highest free cash flow margins ever.
- It has a giant cash hoard of $4.75B and no debt.
- It's more multi-product than it's ever been.
- It's closer to its transition to Iceberg Tables, which was always destined to happen, and it and risks like it should have been factored into the valuation in preceding years, in a truly efficient market.
- Snowpark, native apps, data sharing, AI/ML tools, and its legacy warehouse product are all more robust than they've ever been.
- Strongest version of itself ever, and it recently hit its lowest valuation ever. It's, as Mr. Lynch would say, mind boggling.
Disclosures:
L.A. Stevens has rated Sea, Grab, Hims & Hers Health, Coupang, and S1 "buys."
L.A. Stevens has not rated Snowflake.
