Some Things That Are Growing

Authored By Louis Stevens

On X this morning, I shared the idea that every software company that has been a darling in the eyes of the market over the last 10-15 years has experienced its "crucifixion." Each one has gone from king to criminal in the eyes of the market at some point in their lifecycles, and many have experienced this in recent years. For some, they've resurrected and regained their thrones, such as Palo Alto Networks, while others, such as Okta, continue to languish, lying dormant in their tombs after being nailed to the proverbial cross.

This idea of company crucifixions is interesting insofar as it sheds light on the nature of the market, and, equipped with this understanding, we can have greater equanimity when one of our companies, or even our entire portfolio, goes through a harrowing or generally uncomfortable period, i.e., experiences its own crucifixion. Additionally, we can learn to focus on what matters, irrespective of the cacophony of noise that will reach a deafening and disorienting pitch while our companies get nailed to a cross.

This crucifixion idea is interesting in that:

1. Obviously, it relates to the Christian tradition, and the idea that the man on whom the tradition is based experienced a challenging period, culminating in his crucifixion, after which he ascended into heaven, or at the very least founded one of the most successful religions in the history of mankind. This religion has resonated with humans well because it represents an experience that we all share: our own little life crucifixions that arise at various points on our journey, e.g., major failures, plain bad luck, betrayals, health crises, etc.
2. It's further interesting in that it represents the philosophy of "The Matrix Attacking" our companies, which could also be communicated as "The Matrix Building" our companies. That is, this process of experiencing failures, bad luck, betrayals, health crises, etc., is part and parcel of the evolutionary process of our reality and specifically the human species. As I've noted in past Briefs, new ideas, new businesses, new portfolios (which is a business of owning businesses), new religions; new anything must be first tested, i.e., crucified, via which its mettle and worthiness as a thread in the fabric of society is determined. Survive and overcome, and you ascend into your own kingdom of heaven. Capitulate and lie dormant, and "The Matrix" rightfully sifted you from the mixture of society.
3. Transitioning this equity investing, "The Market" is essentially synonymous with "The Matrix" in that The Market is an evolutionary mechanism that transfers assets from weak hands to strong hands via volatility, scary narratives (fear), and the host of tools that we've all experienced that have conspired to get us to sell what would ultimately become successful investments long term. If we all, as humans, experience our own mini-crucifixions at times, and if each business we own will experience its own mini-crucifixion, then we can be fairly sure that our portfolio (business of owning businesses) will too experience its own mini-crucifixion, and it may not be so mini when it comes, to be sure. To this end, it's important to focus on the key elements of any business that are trending in the right direction. It's important to sift what matters from what does not matter so as to persist through the challenging periods that invariably will come in the future.

Some Things That Are Growing

In this section, we will examine some interesting "things that are growing."

These are the important elements of these businesses: These are the things that matter because they are growing. These are the elements of each business discussed below that are driving free cash flow per share growth for each business, and, as we know, free cash flow per share is the basis of all equity value.

At any given point, there will be a cacophony of noise for each of these businesses, and, sometimes, that noise will reach a deafening pitch, but we must remind ourselves of these key elements that continue to grow and continue to drive free cash flow per share higher.

Stock Prices Always Follow Free Cash Flow Per Share Over Time (CMG)

Amazon's AWS Is Growing

AWS now generates $100B+ in annualized revenue, and, in its Q1'24 report, it shared that it generated ~38% operating margins, poising it to generate 27.5%+ free cash flow margins.

This line of business is growing and driving free cash flow per share higher for Amazon.

Similarly....

Google Cloud Is Growing

In the decades ahead, Google Cloud will be a key component of the growth of Aphabet's free cash flow per share, and, by extension the apprecation of its share price.

Palantir's U.S. Commercial Customer Count Is Growing

Palantir is a quintessential example of an attractive setup in that it operates a profitable and durable legacy business (its government accounts) atop of which it's layered the above illustrated rapidly growing commercial business.

Similarly, Sea Ltd. did the same in layering on its Shopee business atop its profitable and durable legacy Garena business.

Sea Ltd.'s Shopee Is Growing

The same could be said for Axon, which started with a collection of hardware products that fit within one ecosystem, atop of which it has layered on a rapidly growing, high margin software business.

Axon's Software Business Is Growing

Monday.com's revenue has grown at meteoric rates over the last decade, and its customer base has been no different, recently reaching 225k total customers. Incredible.

Monday.com's Total Customers Is Growing

Monday.com's Revenue Is Growing

Adyen and Snowflake were once two of the most adored businesses in the world, not just in the community of investors investing in growing things.

You may not have guessed this when giving a cursory look at the companies' share prices as they've done nothing but decline for years now.

However, in the face of these declines, the companies' profits have been growing rapidly.

Adyen's Net Income Is Growing

Snowflake's Free Cash Flow Per Share Is Growing

Both Adyen and Snowflake are multi-product platforms that grow at exceptional rates, generate robust free cash flow, hold massive cash hoards alongside no long term debt, and are still led by the Founder-CEOs (Snowflake's founders are still leading product).

They were both doted on and adored for the last decade, and, only in the last 6 months have they entirely fallen out of favor.

Hims & Hers Health has been growing rapidly as a business, with its revenues, subscribers, and free cash flow soaring in recent quarters.

That growth has been accompanied by market share gains, which we can see in the chart below.

Hims & Hers Health's Market Share Is Growing

Hims & Hers Health's Subscriber Count Is Growing

Tesla's sales may be stagnating, but, within those sales, a new line of business has emerged that is growing 100% presently and contributing a greater and greater portion of revenue to its overall sales with each passing quarter.

Tesla Energy Is Growing (Yellow)

Tesla Energy Is Growing (Total GWh Deployments)

Tesla isn't the only highly recognized brand that is growing.

Chipotle and CAVA, the top dogs in the fast casual restaurant space, have experienced meteoric location growth over the last decade and in recent quarters.

Chipotle's Location Count Is Growing

Chipotle's Locations Across The U.S.

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CAVA's Location Count Is Growing

To close, while negativity and disorienting noise may surround these businesses, the reality is that things are growing for them, and rapidly so.

Disclosures:

L.A. Stevens has rated Tesla, Sea Ltd., Monday.com, Hims & Hers Health, and Adyen a "buy."

L.A. Stevens has not rated Chipotle, CAVA, Snowflake, Amazon, Alphabet, Axon, nor Palantir.