Who, What, and How Much
Capital Thinking · Issue #953 · View online
Here’s the punchline: Ridesharing is toothpaste that got squeezed out of the tube, and you can’t put it back. It has forever changed our behavior, and this change will continue to snowball far into the future.
Rarely does anyone give you a peek behind the curtain, a glimpse into the methods they use, or the filters they employ to guide their investment decisions.
Vitaly does that - and more - on a regular basis.
Whether or not you agree with him as to Uber’s future is irrelevant. It’s the logic that is the real gem here. How he reached his conclusion is a masterclass in analysis.
Enjoy.
Our Analysis of UBER (Updated)
Vitaly Katsenelson | The Contrarian Edge:
Update (October 2021): Today I am going to share with you my full writeup on Uber. I have to warn you, it is very long. You can listen to it here, if you like.
Also, I want to make it very clear that I am not recommending you go out and buy Uber stock. This writeup provides a mental model of how to analyze companies that may appear expensive but have yet to reach escape velocity in their cost structure and have a large market addressable market that they’ll likely dominate.
January 2020
This had never happened before. Several clients reached out to us wondering if I had been kidnapped and someone else was making investment decisions in their accounts.
The gist of their questions was, how you can go from making conservative investments to buying a dotcom-like stock that is losing money? How can this company even be a value investment?
I was happy to get these questions, for two reasons.
First, it’s clear clients are paying attention to what is going on in their accounts. I really want IMA clients to know what they own and, most importantly, why the own it. This is why I write long quarterly letters to them about their investments.
And second, the questions have allowed me to measure the temperature of people’s opinions about the company in question.
What and Who
Let me introduce you to our What, Who, and How Much framework.
Imagine you are in 1998; this new internet thing is complete chaos; it’s the Wild West.
Wild West because there are a lot of possibly very profitable and certainly disruptive business models emerging. Chaos because it’s incredibly difficult to see which business models and which companies are going to succeed.
So in 1998 you don’t know what and don’t know who.
Fast-forward to … 2003. At this point we can clearly see that advertising and classifieds dollars will shift online.We know what will happen. But we still don’t really know who – the market is very fragmented and no obvious leader has emerged. Yahoo!, Ask, Bing, AltaVista, MySpace, and Google are still duking it out for market share.
Fast-forward again to 2010. At this point no one has any doubt that digital advertising is the future and analog (or paper, to be more accurate) is a relic of the past.
Any ambiguity is removed from what, and the who is Google (and Facebook, but I’ll ignore Facebook here for the sake of simplicity). Google has become a verb; the company dominates search – its biggest competitor at this point is Bing, which has a tiny, shrinking 2.5% market share. People are Googling, not Binging.
Google’s scale gives it an enormous competitive advantage: The more data it has from past searches, the better results it can provide for future searches.
Google made some brilliant decisions along the way. Instead of fighting Apple in its own domain, it gave away the Android operating system to hardware manufacturers. Today Android powers half of the mobile phones sold in developed countries and 80% of phones globally.
The problem is that, with the exception of a very few moments in 2010, Google has looked statistically expensive on the basis of current or next-year’ earnings. However, if you looked five or ten years out, you’d have realized that digital advertising would be taking market share from analog and thus would double and then quadruple.
Since Google was the who (its dominance was likely to grow), it would capture the bulk of the profit from growth of the search engine advertising market. If you looked at Google’s earnings power through a spyglass instead of a microscope, it was insanely cheap and significantly undervalued, though it would not show up on a single value screen.
Here is what we learned from this: When we see a tsunami of disruptive change (the what), we need to identify the who.
Photo credit: Robert Anasch on Unsplash