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Musings about technology, food, venture capital and fitness

Latest posts from heymarket

• capital cycles thoughts #1

  Jan 15 ⎯ Chapter 1 Reflections Definitions and Key Tenets Capital cycles (and the performance of individual companies/industries) are much more tied to the supply side equation rather than demand side. These changes in supply side lead to dramatic shifts in profitability, pricing power and performance. Management capital allocation skills are critical to navigating capital cycles Capital cycles - which is sometimes ambiguous, refers to the amount of investment into the supply side (capex, inventory etc.) that would impact the overall level of competition and performance of an industry per the above. Cod Fishing Industry The first chapter on the cod fishing industry timelines the rise and fall of the cod fishing industry profits through advance in technology. In the early 16th century, cod was extremely prized for its high protein and pleasant texture. The cod fishing industry required Europeans to sail all the way to Newfoundland to catch cod for the Basque market in Spain. As time went on, fishing, processing and storage practices improved which led to massive increases in yield and supply to the market with subsequent over-fishing. This sucked the supernormal profits out of the previous parts of the supply chain (fishing, ports, processors etc.). Shifting the value to consumers ultimately. Similiarities in current Software Cycles Similar transfer of economic value dynamics have played out in technology cycles.Think about the winners in the internet revolution.. the layers of substantive economic profits were competed out of the telecom poles and wires which became more commodity assets, the producers of computer equipment had their margins compressed over time as greater capabilities came through (with things like memory chips and the like depleting to commodity values). The different layers of the software stack also get commoditised over time. Think about email - which is now free - is that because excess profits flowed out or because someone kickstarted a loss leadership strategy to gain distribution? Possibly a bit of both? It became really cheap to deliver email services and also the dollar profits from email decoupled from the equivalent labor costs of delivering mail. An argument that technology never ties fully to labor cost for long. Growth Durability Article 1.8 discusses growth durability and how sources of durable growth can include barriers to entry, size of market opportunities and overall quality of management. Barrier to entry are obvious in that they help companies retain high efficiency rates in unit economics and accelerate effect of brand. Large market sizes help companies sustain large and increasing volume of sales over time. Particularly where the number of customers is high and there is a pricing model which is in-line with value delivered.

• the cyclical economy and consumer

  Dec 06 ⎯ Digesting content from EPB research Changes in the economy stem from a few select categories that contribute to GDP. EPB argues that these three components are the most sensitive to change and other areas of the economy tend to be more sticky/stable. Durable Goods Consumption Residential Investment Business Equipment Investment The consumer spend patterns worth keeping an eye on are just durable goods. The cyclical GDP components swing the most. 80% of the non-cyclical GDP items never contract. It makes some sense to me that these categories are most flexible to change in spending ability of the market. Durable goods like vehicles, refrigerators and long-term items tend to be higher ticket (in dollar value) and consumers are ready to delay this spend in a down-turn. This also applies in a business context where capex items - like heavy machinery, functional equipment and other pp&e is delayed during weakening business conditions. Where to look for signals Financial performance and balance sheet of large cap companies selling durable goods ABS data - housing, autos and capex in general Where are we at today on the consumer? Durable goods spending is flattening through 2025. BNPL purchase volume surges in America as Affirm and Klarna’s U.S. GMV both jump 43%, with consumers turning to installments amid financial strain. Klarna recently secured a $6.5B loan to expand further. Chipotle, Dominos, other QSR restaurants hurt in recent earnings - citing consumer issues in younger demographics. We believe that this guest with household income below $100,000 represents about 40% of our total sales and, based on our data, is dining out less often due to concerns about the economy and inflation. A particularly challenged cohort is the 25 to 35-year-old age group. We believe that this trend is not unique to Chipotle Mexican Grill, Inc. and is occurring across all restaurants as well as many discretionary categories. This group is facing several headwinds, including unemployment, increased student loan repayment, and slower real wage growth. We tend to skew younger and slightly over-indexed to this group relative to the broader restaurant industry. “There’s also a little bit still that bifurcation of the U.S. consumer economy. We have been speaking about it for several quarters now that the top end does much better than the lower end income segments in the U.S. So that’s overall, I think, the picture.” – Booking (BKNG 3.11%↑) CFO Ewout Steenbergen

  

• weekly snippets #1

  Nov 16 ⎯ Metrics https://www.thetwentyminutevc.com/everett-randle - Ev makes some good points around performance measurement in the AI era. COGs: The common frame from SaaS era investing is to see companies with high gross margins of c.80% as an indicator of health. AI companies are seeing much lower GM % (c.50% or less) as the inference spend is still high on a relative basis. Doesn’t mean it’s a bad business. The second order benefits of lower GM is potentially higher gross profit dollar per customer - simply AI companies command greater spend. He argues that this is visible in the cloud spend line items as well. I agree the desire around high COGs is a blunt tool - consider the enterprise software company that has onboarding charges, the incremental (year 2,3,4+) gross margin per customer is far higher once you strip out the initial loaded implementation. Doesn’t mean that a static one-year GM% <60% is a cause for concern. Revenue Retention - This week we looked at an investment where there was a stark difference between the overall annual view of NRR vs monthly cohorted view. We were seeing monthly cohorts churn to c.85% NRR after 12 months despite showing annual net retained numbers north of 100%. It’s a good reminder to consider the differences of each methodology. Annual snowballs measure the over time diminishment (or expansion) of your revenue base with a starting number that contains many old vintages of customers. What happens over time to show this difference is - if you have an incredibly sticky set of long term customers, those might eventually become healthy expansion cohorts. You may be signing on a large batch of new customers. The monthly cohorts lifted over a 24 month period, suggesting that early batches had segmentation and ICP mix problems. The other issue in this business was that new customers weren’t growing fast enough for there to be enough of a drag on churn or downsell - vs the expansion from old customers coming through. Zoetis Bullish ZTS at current price levels. Trading at all time low PE c.19 and EV/fwd EBITDA of c.15x (10Y average is c.23x) High quality business. 40% margins that have always grown in spite of competition ROIC >20% Number 1 player across multiple categories Underlying fundamentals are strong. US pet adoption is already high but there are growth in product categories like Dermatology and Pain to drive revenue. Continue to see underlying market growth rates at c.6% (driven by the humanisation of pets and general shift towards pet ownership in developed economies). Brazil, China and Europe are all very large markets with more companion animals than the U.S. and are very early in ZTS penetration. Market seems to be worried about macro and competition. My view is that it’s all short term headwinds that are temporary and ZTS has levers to play with to drive growth/compete Macro: consumer discretionary health might impact new revenue growth slightly due to vet visits but overall demand is sticky (healthcare) and will tick up agaain. Competition: my view is that short-term pain can be competed against, Elanco is operating on 57% vs 70% gp margins and 20% EBITDA vs 40% EBITDA margins which suggests to be that Zoetis is nowhere near a scenario where they can’t defend their share. Reflections Where I want to be in 3 years time - inverting from the top to plug gaps in my skillset. Areas to work on: 1) Network 2) Dealflow and 3) Leadership.

• My first post

  Nov 11 ⎯ hello world