Hedge Fund Investment Thesis: The Business Model. February, 2016

Transcription

1 Hedge Fund Investment Thesis: The Business Model February, 2016

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4 Introduction 4 Started on Wall Street in 1999 at a bulge bracket Investment Bank Ended career as a Managing Director at a NY bulge bracket, managing a team of people, running one of their institutional sales businesses Since 2014 I have been managing money for a billionaire across bonds and equities.

5 Core Parts Of A Stock Thesis 5 This session is going to follow on some of the ideas we discussed at the last session We are going to continue review the filters we discussed last time As a reminder at the last session we reviewed what makes a good business and discussed how to understand an industry.

6 Investigating an idea 6 How do we develop an idea? As a reminder, we use progressive filters Industry model - how does the industry? Business model - how does the business work? Financial model - what do their finances look like? Valuation model - can you value the company, is it cheap This session is going to cover business models and understanding how a business actually works

7 What makes a business great? 7 Think in your minds about what a good business to own would be What characteristics would it have? What industry would it be in? What would the company do? Investing is about first understanding the kind of business you want to own, than searching madly for something that looks like that. As Yogi Berra said: "If you don't know where you are going, you will wind up somewhere else."

8 My opinions on a good business 8 This is what I think a business should look like: Produce a lot of cash flow Not require a lot of investment Be stable and not sensitive to external factors Should be hard to displace / strong moat Create value for its customers Video to watch:

9 What is a business model 9 A business model is how a business creates operates and creates value It really has two parts Part A - how it designs and creates the products or services it provides Part B - how it distributes and monetizes the products or services Why are business models important:

10 Types of business models 10 Brokerage Crowdsourcing Disintermediation Freemium Negative operating cycle Product to Service Razor / Blades Subscription

11 An overview of different models 1/3 11 Brokerage - bring together buyers and sellers, charge a fee per transaction For example: MasterCard, Goldman Sachs, ebay, Orbitz Crowdsourcing -get a group of people to contribute content for free, in exchange for access to other people s content For example: Google, Facebook, Wikipedia Disintermediation: Sell direct to the customer, cutting the middle man For example: Dell

12 An overview of different models 2/3 12 Freemium: Offer a basic service for free, charge for premium service For example: LinkedIn, Amazon Prime Negative Operating Cycle: Offer lower prices by being paid by customers before ordering product For example: Amazon Product to Service: Sell the service a product provides rather than the product itself For example: Zip Car, U-Haul

13 An overview of different models 3/3 13 Razor / Blades: Offer low margin razor for below cost to increase sales of high margin blades For example: Gillette, Kindle, itunes / ipod Subscription: Charge a subscription fee to get access to a service For example: Netflix, Internet Radio, Cable TV

14 What to look for in a business 14 Ideas that make a business model stronger: Switching Costs: A good business model has high switching costs. Ask yourself how easy is it for you to switch product or services for something you use right now Recurring Revenues: A good business model has high % of recurring revenues. Recurring revenues usually have higher margins than having to generate new sales on your own. Operating cycle: A good business model has a negative operating cycle, where by you get to change your clients before you pay your suppliers. Think Dell or Amazon.

15 What to look for in a business 15 Cost structure: A good business model has a revolutionized cost structure. Think what Skype did to phone calls, or what Uber did to taxi companies. Both Skype and Uber have much lower cost structures leading to a structural advantage. Outsourcing labor: We all know about offshoring, but outsourcing your production to your customers is even more interesting. Think about Facebook. They are a content company which doesn t produce any of its own content. Or think about IKEA not actually selling you furniture.

16 What to look for in a business 16 Scalability: A business model that can be easily scaled will grow much faster than one that cannot. Think about What s App, there is nothing about their business that limits them to 1mm, 1bn or 10bn users. While something like McDonalds or KFC is hard to scale beyond a certain point. Moats: Is there a barrier that protects your business from competition. Think about Apple s ecosystem - its a closed ecosystem, with little room for competition to enter.

17 What can we learn from Peter Thiel about business 17 People s think capitalism is about competition - it isn't A good capitalist doesn t look for competition - she looks for a monopoly Competition destroys profit - look for business models without competition We live in a world where power laws, also known as Pareto s 80/20 distribution rain supreme So look for businesses that dominate their market - they will generate a lot of profit

18 Some monopolies of our time 18 If a company s name becomes a verb, its probably a monopoly Uber Xerox Netflix Google Facebook Amazon MasterCard / Visa Intel Tell me some more

19 Business Models - further study 19 If you want to go deeper into business models, read: Peter Drucker s stuff Competitive Strategy by Michael Porter Seeing what s next by Clayton Christensen

20 How do you actually understand a business 20 Once you have understood the big picture business model, you still have to understand the nuances. So where do you start: 1. Read Annual Reports 2. Talk to customers, try their products and services 3. Talk to suppliers 4. Talk to current employees / ex-employees 5. Talk to other shareholders 6. Talk to competition

21 Questions?