, 6 tweets, 2 min read Read on Twitter
"Companies can lose a lot of money in their early years but be wonderful businesses if they are acquiring customers with long lives and strong variable margins."

But some businesses just do the losing money part. A critical skill is knowing the difference between the two types.
Customer-based corporate valuation (CBCV) = valuing a business on a "bottoms up" basis by valuing the customers. In a subscription business especially, this is an essential process if you want to understand if real value is being created despite a lack of current GAAP earnings.
"CBCV isn’t about being profitable from day one. It’s about variable profitability in net present value terms (while still being mindful of fixed cost overhead of course!)" Determining whether a specific business is a delicious cheesecake or a turd requires detective work.
Any investor who says "I don't need to do this detective work and can rely on GAAP earnings" is bonkers. It isn't possible to measure whether value creation is happening just using GAAP. Many businesses are no longer the widget factory that GAAP assumes. There's alpha to harvest.
Because the economy has shifted to subscriptions investors who do valuations just using siren call ratios like price/earnings are navigating markets using a broken system. Many hang on to the old system since looking up a P/E ratio is easy! Sleuthing out a churn rate is hard!
The hardest part about valuing a subscription business is that the data needed to do the computation often isn't revealed by the business because GAAP is archaic. So detective work is required. People generally hate work which is an opportunity if you are willing to do the work!
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