Let’s get right into it!

Nu

Nu reported earnings after the bell yesterday. Here are the financials:

Read more

We had four more earnings this week! Let’s waste no time…

Transmedics

Read more

Let’s get right into it!

Nu

Nu had a couple interesting announcements. First, they will officially begin operating as a bank in Mexico on August 6th, after receiving the…

Read more

Let’s get right into it!

Nu

Nu had a couple of interesting announcements. It bought a Brazilian bank for its license. I guess they must’ve been having a hard time gettin…

Read more

Pretty quiet week of news as it’s shortly before earnings season. The big thing was Nu Mexico’s banking license approval. Let’s get right into it!

Nu

Nu and Amazon cont…

Read more

Let’s get right into it!

What Not To Do

I’ve made SO many mistakes in my investing career. Like, an unbelievable amount. The allure of a potential 100 bagger will turn off your brain. And the pain of changing your mind when a stock is down 50% will cause you to rationalize evidence that is, if you’re honest, contradictory to your original thesis. But this is the game. The pendulum of fear and greed in single stock picking can be mind-bending at times. So this week’s post is my attempt to share some of the same mistakes I’ve made. Here are the three main ones I could come up with:

1. Don’t invest in unprofitable companies

I’ve said this before but here are some more details around this. People mean very different things when they say this. I mean “cash from operations is negative”. I’m willing to invest in a company that is GAAP EBIT or net income negative if there is some stock-based compensation or some weird warrant deal or even in the very rare case, a company that is free cash flow negative because they are investing so heavily in capex. If a company has negative cash from operations that means they don’t have true economic returns yet and they don’t have helpful working capital conditions (like negative working capital or deferred revenue) that can cut down on the need to fundraise.

There are always exceptions to the rule but I’ve found that if you simply wait to get confirmation that the business model actually works (i.e. at least one dollar of positive free cash flow), then, on a risk-adjusted basis, the investment actually can be better even if you give up the first 2-4x. Put another way, if you find a cash-burner at $10/share, once it reaches free cash flow positive status, it could be a better risk-adjusted investment at $30/share, for instance.

It is very helpful to look at incremental margins when doing this exercise. If the incremental margins are already positive, then that reduces the risk. This just means that if the company is losing fewer absolute dollars on more revenue dollars, there is real progress being made. For example, if the company loses $30 million in one year and then $20 million the next, on $30 million more dollars of revenue, the incremental margins could already be >30% (+10/30) even though absolute margins are around -15% (-20/130).

If a company is free cash flow positive but GAAP unprofitable, the cause is usually stock-based comp. If it’s GAAP profitable but free cash flow negative, it’s usually capex. In this case, what I like to do is take cash from operations and subtract depreciation to get a rough owners earnings estimate. Sometimes a company is spending a ton on capex to ramp up a factory or something but their actual maintenance capex – the amount they need to spend to keep their current revenue base and not lose competitive positioning – may be lower. Using depreciation as a proxy for maintenance capex is not always correct but it makes sense considering that is the amount that the accountants say the PPE base is degrading every year. So, logically, they would need to replace that wear-and-tear (i.e. maintenance). If a company is GAAP profitable but cash from operations negative, that usually means a working capital problem. And most of these problems boil down to inventory build or accounts receivable collections. Both of these problems usually stem from customer concentration and bargaining power. For instance, big customers know they have leverage so they won’t pay you quickly. It’s usually not as much of a worry if inventory is building, but it’s terrible when a company orders too much and then demand dries up. That leads to inventory write-downs which are never fun. But watching receivables is important because if you are recognizing revenue but can’t collect your cash on time, that shows that your product may not be mission critical. Because if you really had bargaining power, your customers would be fearful that you’d cut them off for their late payment habits.

It is important to normalize working capital changes based on growth because it can be difficult for a physical goods company to grow quickly without big changes in working capital. But if the growth in inventory and receivables is significantly beyond the dollar amounts of revenue increase, then there is a serious problem.

If the company is GAAP unprofitable and cash from operations unprofitable, and incremental margins are not exciting, then you probably don’t have a real business. If you passed on every single one of these opportunities, this is probably the single, easiest way to increase your investing batting average. Sure, you may miss a huge winner, but this is what I’ve found from looking at thousands of companies.

Read more

Let’s get right into it!

Nu

This article from Nu’s engineering team shows just how difficult it is for incumbents to adapt to current technologies. This was Nu’s journey…

Read more

Let’s get right into it!

Nu

Nu finally hit 1 million telecom customers in its NuCel plan. This took longer than I expected so it’s a bit of disconfirming evidence for th…

Read more

Let’s get right into it!

Nu

Last week, Nu announced they initiated their first buyback worth $1 billion. That signals they think their stock is undervalued. And it’s esp…

Read more

Let’s get right into it!

Nu

Before getting into the main section, Nu had a great podcast with its CTO and its GM of Core AI. They detail the AI roadmap and how they plan…

Read more

Let’s get right into it!

Nu

Nu appointed a new CFO, Rob Livingston, who was the CFO of Visa North America. The stock promptly dropped 13% over the next couple of days. L…

Read more

Let’s get right into it!

Tesla

Tesla has officially started construction of its Optimus Factory as an extension of its Austin location. The company is targeting volume p…

Read more

Let’s get right into it!

Nu

Nu recently hired a new Chief Product Officer from Shopify, who was head of Merchant Services, which was the fastest growing piece of the bus…

Read more

Let’s get right into it!

Nu

Before jumping into the earnings analysis, last week, there was a NU Videocast with two of the top credit execs at Nu. Both guys came from so…

Read more

- how Ralph thinks about hidden champions

- what pesto taught him about moats

- the standard required for huge concentration

- how Ralph does scuttlebutt

- how his operating experiences have helped him become a better investor

- and much more!

You can find Ralph's blog here to learn more about him and his process.

Thank you so much for listening, we really appreciate you.

• ​If you have found this valuable, please consider leaving us a ⁠review⁠ as it will help more people find it! Thanks you're awesome!

• ​You can find more information and content here. 

Again, we really appreciate that you would take the time to listen. Hope it was valuable. Let us know if you have any questions!

To listen to more episodes, you can find them ⁠here⁠.

Disclaimer: Under the Investing City umbrella, Infuse Asset Management LP (“Infuse”) is an investment management company to a fund that is in the business of buying and selling securities and other financial instruments. This information is provided for informational purposes only and does not constitute investment advice or an offer or solicitation to buy or sell an interest in a private fund or any other security. An offer or solicitation of an investment in a private fund will only be made to accredited investors pursuant to a private placement memorandum and associated documents. 

Infuse may change its views about or its investment positions in any of the securities mentioned in this document at any time, for any reason or no reason. Infuse may buy, sell, or otherwise change the form or substance of any of its investments. Infuse disclaims any obligation to notify the market of any such changes. 

The information in this material is only current as of the date indicated and may be superseded by subsequent market events or for other reasons. Statements concerning financial market trends are based on current market conditions, which will fluctuate. Any statements of opinion constitute only current opinions of Infuse which are subject to change and which Infuse does not undertake to update. Due to, among other things, the volatile nature of the markets, and an investment in the fund/partnership may only be suitable for certain investors. Parties should independently investigate any investment strategy or manager, and should consult with qualified investment, legal and tax professionals before making any investment. 

The fund is not registered under the investment company act of 1940, as amended, in reliance on an exemption thereunder. Interests in the fund have not been registered under the securities act of 1933, as amended, or the securities laws of any state and are being offered and sold in reliance on exemptions from the registration requirements of said act and laws.

We have five earnings recaps below. Let’s get right into it!

MercadoLibre

Read more

Let’s get right into it!

Amazon

Amazon reported after the bell on Wednesday and here’s the numbers:

Read more

Let’s get right into it!

Nu

I hadn’t seen this yet but Nu appointed a separate board of directors for the US. They had to do this for regulatory purposes. Here is the de…

Read more

Let’s get right into it!

Duolingo

Good interview with Luis von Ahn, Duolingo’s CEO. The intro is in Chinese but Luis speaks English. Not a whole lot new except that Luis…

Read more

Let’s get right into it!

Tesla

Holding Tesla requires cognitive dissonance. The company often oscillates between being a story stock and one that delivers on the fundame…

Read more