I am struggling with this. As I read your thesis, all I keep hearing in my head is "the best company at the wrong price makes for a bad investment".
Gross margins above 70% are awesome, but OPEX is eyewatering. For the past five full financial years, the combination of SG&A and R&D consumed all of the gross profit and then some. Said differently, the company is loss making which doesn't bode well for shareholders. To make matters worse, they are constantly issuing stock and so diluting shareholders (13% dilution since 2021).
Digging deeper, and the free cash flow numbers aren't what they seem to be. A huge part of the cash from operations on the cash flow statement is the result of adding in unearned revenue - what kind of accounting alchemy is this?
To make matters worse, the company extracting stock based compensation booked in FY23 as 6x net income (it will invariably be far more once it vests!)
This is a business being run for the benefit of insiders at the expense of shareholders.
This kind of investment should come with a health warning attached - or more appropriately, a 'wealth warning' attached. This is a conduit for transferring wealth from shareholders to insiders. It is highly unlikely to end well for outsiders.
I wouldn't touch it. Just my view. Best of luck if you take a counter view.
I am struggling with this. As I read your thesis, all I keep hearing in my head is "the best company at the wrong price makes for a bad investment".
Gross margins above 70% are awesome, but OPEX is eyewatering. For the past five full financial years, the combination of SG&A and R&D consumed all of the gross profit and then some. Said differently, the company is loss making which doesn't bode well for shareholders. To make matters worse, they are constantly issuing stock and so diluting shareholders (13% dilution since 2021).
Digging deeper, and the free cash flow numbers aren't what they seem to be. A huge part of the cash from operations on the cash flow statement is the result of adding in unearned revenue - what kind of accounting alchemy is this?
To make matters worse, the company extracting stock based compensation booked in FY23 as 6x net income (it will invariably be far more once it vests!)
This is a business being run for the benefit of insiders at the expense of shareholders.
This kind of investment should come with a health warning attached - or more appropriately, a 'wealth warning' attached. This is a conduit for transferring wealth from shareholders to insiders. It is highly unlikely to end well for outsiders.
I wouldn't touch it. Just my view. Best of luck if you take a counter view.
Great read! Is their move into other learning areas like maths part of your thesis?
What is the total market size of language learning for consumers?
Great insight, excellent company. Luis is one of the best CEOs out there.
Nice article!
Just upgraded to paid to support you, follow you on X too and your work on SoFi is great :)
Thank you for your support! It means a lot.