Thread by @trengriffin

1/ Cash flow rather than reported earnings is what determines value for an investor. You can't spend someone's opinion that a business generated an accounting profit. Earnings are only a clue about future cash flows. That and other clues about cash flow can be misleading or not.

2/ "Real businesses, even the best ones, are unfortunately not annuities. Few businesses occupy impenetrable market niches and generate consistently high returns, and most are subject to intense competition." Seth Klarman

The future is always uncertain.

3/ "A bond has a coupon and maturity date that define future cash flows; but in the case of equities, the investor must estimate the future 'coupons.'" Warren Buffett.

This estimation of future cash flows of a real business given uncertainty is what makes investing hard.

4/ SaaS and recurring revenue businesses (e.g., subscriptions) are different since revenue comes over an extended period of time (i.e., the customer lifetime). These businesses often face losses in the early years if growing since they must spend upfront to acquire a customer.

5/ After cash is spent acquiring a customer, cash coming in often arrives over a long period of time. The faster a business grows the worse current earnings may appear. Some business create value acquiring subscription cusomers and some do not. Knowing the difference is critical.

6/ While the appearance of anticipated future cash flows from customers is uncertain, businesses creating recurring revenue relationships can use modern data science (e.g., machine learning) as a competitive differentiator. Cash flow probability and magnitude can be increased.

7/ Modern methods of communicating value creation to investors in a business with recurring revenue over time were created by John Malone 25iq.com/2014/11/02/a-d… and copied by others in the cable TV and mobile phone businesses. Modern SaaS businesses use Malone's model too.

John Malone: “It’s not about earnings; it’s about wealth creation and levered cash-flow growth. Make sure you have enough [cash] to survive and you don’t have any credit issues that are going to bite you in the near term. Take an asset, leverage it up, and operate it tightly."

9/ What if a business wants to retain a transactional business like the widget factory used in college accounting classes? If competitors establish a connected and recurring revenue relationship with customers the data generated will produce a better product/service. Game over.

10/ Businesses that survive in a connected and recurring revenue era must have systems that use telemetry to optimize factors like churn. If investors can't understand and track outcomes of these new operating models it is game over for them. Uncertainty higher; returns higher.