Thread by @trengriffin

1/ The microeconomics of a software as a service (SaaS) business evolved from cable and mobile. John Malone invented what is the most common business model for SaaS.

"It’s not about earnings, it’s about wealth creation and levered cash-flow growth." 25iq.com/2014/11/02/a-d…

2/ "Businesses that invest heavily in intangible assets and have high returns on those investments often produce poor profits, or may even lose money. The income statement looks bad, the balance sheet looks better, and value creation looks great." morganstanley.com/im/publication…

3/ Some businesses have accounting losses and create value. Some business have accounting losses and destroy value. Unit economics help you understand the difference.

Never forget: free cash flow is the number to care about. Other numbers can be about ways to get free cash flow.

4/ With SaaS accounting losses created by up front CAC enables the deferral of taxes even though value is created by future cash flows from that customer over time. Like cable. This is what the tax code intentionally creates incentives for - continuing to invest in the business.

5/ "Understanding the magnitude and return on investments is crucial. [SaaS creates] intangible assets which are expensed on income statements and are typically absent on balance sheets." GAAP doesn't give you all the tools to understand value creation. You must think different.

6/ This means:

A. You can't just look at P/E ratios.

B. Revenue growth only adds value when a business earns a return on its investments above its opportunity cost of capital.

C. Investing today requires that you do a lot of hard work often using clues about missing data.

7/ The first rule of investing in stocks is: Expected long-term cash flows, discounted by the cost of capital—not reported earnings—determine stock prices. The second rule of investing is: don't forget the first rule. expectationsinvesting.com/about.shtml

8/ I'm being asked how to generate the data needed to calculate a bottoms up DCF if you can't get it from the disclosure documents or the business won't provide it? Have you read Phil Fisher's 1958 book? Have you at least read a good summary of his ideas? google.com/amp/s/25iq.com…

9/ "The business grapevine is a remarkable thing. An accurate picture of the relative points of strength and weakness can be obtained from a representative cross-section of the opinions of those who in one way or another are concerned with any particular company.” Phil Fisher

10/ Buffett: "I learned "from a Phil Fisher who wrote this great book about the scuttlebutt method."

Fisher: "Go to five companies ask them intelligent questions about the strength and weakness of the other four and a surprisingly detailed and accurate picture will emerge.“

11/ Fisher: "The rewards for proper action are so huge and the penalty for poor judgment is so great that it is hard to see why anyone would want to select a stock on the basis of superficial knowledge."

Howard Marks talks about the importance of knowing what others don't know.

12/ This is Phil Fisher describing what Charlie Munger calls a "too hard" pile:

"If way too little background is forthcoming I believe the intelligent thing to do is to go on to something else.”

If you can't use scuttlebutband other methods to do a DCF, don't buy the stock.

13/ Tweetstorm Open Book Final Exam:

1) Calculate the likely unit economics of Quibi using your scuttlebutt network and comparable businesses. Show your work.

2) How confident are you about the assumptions?

2) Does Quibi belong in your "too hard pile" given data you have?

14/ "By the third quarter of 2020, Quibi estimated, it will have spent $1 billion. The company expects it will have to raise at least $200 million of additional funding by the second half of 2021."

Bonus question: How will you estimate customer churn?

wsj.com/articles/quibi…

15/ Wait! What about terminal value?

"Since the terminal value can make up 70% or more of the enterprise value, the explicit cash flows are mostly just the path to the main event— the decision of what multiple to apply to the last year of cash flow.” bluemountaincapital.com/wp-content/upl…

16/ Mauboussin suggests a model to estimate continuing (terminal) value here: csinvesting.org/wp-content/upl…

Terminal value estimation is hard, but as Charlie Munger told Howard Marks once, "investing isn't supposed to be easy."

Damodaran: people.stern.nyu.edu/adamodar/pdfil…

17/ What is the terminal value of Netflix? I estimate that by first doing the math bottoms up and then I reconcile that with a top down model.

Every customer is potentially a quasi-annuity stream of cash. Estimate the average DCF of the quasi annuities and then add them up.

18/ I don’t strive for false precision in a DCF. I want to be approximately right rather than precisely wrong. To deal with potential mistakes I apply a margin of safety.

I hustle to acquire through scuttlebut and better models what Josh Wolfe describes as an investing "edge."

19/ "Edge can derive from informational, analytical or behavioral sources. Get better information about an asset (an entrepreneur or technology), or the same information but sooner; analyze information differently in a way that leads to a novel conclusion (a variant perception)."