1/ Some thoughts on SMID cap tech stocks
An often repeated mantra in the past cycle was that the bull market in tech in 2020-2021 and the resultant crash afterwards is nothing like the tech bubble of early 2000s.
An often repeated mantra in the past cycle was that the bull market in tech in 2020-2021 and the resultant crash afterwards is nothing like the tech bubble of early 2000s.
2/ Businesses were valued based on "eyeballs" and sales were at times just back scratching each other. That's not the case for almost all the current crop of tech companies. These companies sell real products for which they generate actual sales. No "eyeballs" gimmick here.
3/ In the absence of current profits, while sales is a good starting point, the value of equity ultimately depends on "Free Cash Flow (FCF) per Share".
A company's stock is ultimately worth zero if you *never* generate FCF (after deducting SBC).
A company's stock is ultimately worth zero if you *never* generate FCF (after deducting SBC).
4/ The narrative has been that many of these companies should not optimize for FCF today, rather should aggressively scale and hire fast to capture the market ASAP to eventually generate LT FCF/share.
AMZN sort of "educated" this mantra to both investors and founders.
AMZN sort of "educated" this mantra to both investors and founders.
5/ What used to be bit of an anomaly for public companies has become the norm for everyone. Every good AND bad businesses utilized the license of reinvesting their gross profit aggressively to R&D, S&M, and G&A in the last few years, leaving almost nothing for operating margin.
6/ Even the ones who do post margins, they focus on Non-GAAP margins that ignore SBC.
Tbh, investors understand SBC is a real expense, but regrettably there's always a *wink* there, meaning "I know it's a real expense, but most investors don't care about it, so does it matter?"
Tbh, investors understand SBC is a real expense, but regrettably there's always a *wink* there, meaning "I know it's a real expense, but most investors don't care about it, so does it matter?"
7/ It absolutely does matter *eventually* even if it's not what moves the stock in the next quarter or two.
Even if the bear market persists for another 1-2 (or more) years, it's unlikely comps in Silicon Valley will take a nosedive.
Google Search has ~60% operating margin.
Even if the bear market persists for another 1-2 (or more) years, it's unlikely comps in Silicon Valley will take a nosedive.
Google Search has ~60% operating margin.
8/ Meta's "Family of Apps" has ~50% operating margin.
See Microsoft's operating margin by its three reported segments in 2021:
Productivity and Business Processes: +45.2%
Intelligent Cloud: +43.5%
More Personal Computing:+35.9%
All of these are GAAP margins.
See Microsoft's operating margin by its three reported segments in 2021:
Productivity and Business Processes: +45.2%
Intelligent Cloud: +43.5%
More Personal Computing:+35.9%
All of these are GAAP margins.
9/ AWS with "market size unconstrained" TAM has 30% GAAP operating margin.
All these companies are some of the largest employers in tech.
While the big tech can slowdown hiring during downturn, total comp for tech people very likely to remain elevated.
All these companies are some of the largest employers in tech.
While the big tech can slowdown hiring during downturn, total comp for tech people very likely to remain elevated.
10/ The supply of talent to tech, despite lucrative comp and absolute dominance by world of bits in the last 10 yrs, wasn't quite gold rush.
Two potential solutions are remote work, and liberal/lax skilled immigration policy. While markets move fast, these things are rather slow
Two potential solutions are remote work, and liberal/lax skilled immigration policy. While markets move fast, these things are rather slow
End/ Overall, whatever happens to macro/inflation, I think most SMID cap tech stocks are in REALLY tough spot. For them to thrive, they need investors who will continue to believe in the magic of scale, TAM, and non-GAAP margins.
But those investors are currently in short supply
But those investors are currently in short supply
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