For SaaS companies, rule of 40 is a quick back-of-the-envelope calculation, to measure the healthiness of the business.
Score = top-line growth + bottom-line margin
Score of 40 or above is good – e.g. a business grows at 40% with 0% adj. ebitda margin.
The valuation for those businesses, which usually starts at 10x revenue, is assuming a maturity stage of 0% growth and 40% profitability.
10x revenue @40% profit margin = 25x P/E
8x revenue @40% profit margin = 20x P/E
Back in January, I wrote about how DoorDash could be valued at $60bn, with solid earnings (in the future).
While I question the near-term growth beyond $60bn, today’s earnings obviously doesn’t help.
Its stock drops more than 10% after-market.
Two things that the market seems to be too optimistic about:
1/ GOV and revenue growth – won’t be amazing
While it’s amazing that DoorDash GOV grew more than 200% in 2020, its forecast for 2021 is conservative: $30bn to $33bn, or 28% growth at the middle point.
Given Q4 GOV is ~$8.2bn, it’s basically forecasting minimal sequential growth. (lower in Q3/Q3 and higher in Q1/Q4, considering seasonality)
Our outlook anticipates the successful rollout of COVID-19 vaccines, among other things. Though we cannot predict the short or long-term effects this will have on consumer behavior, our guidance assumes it creates headwinds to growth in total orders and average order values. We caution investors that the outlook for 2021 remains highly uncertain, and consumer behavior could deviate from the expectations included in our guidance. Our guidance also assumes that the timing of scaled vaccinations will coincide with our seasonally softer Q2 and Q3 periods. Consequently, our forecast assumes increasing consumer churn, reduced order frequency at the cohort level, and slightly smaller average order values beginning in Q2. Because of this, our full year 2021 guidance assumes Marketplace GOV in Q2 and Q3 will be below the levels we expect in Q1.
2/ Profits – won’t be amazing
While DoorDash posted ~10% adj. EBITDA margin for the past three quarters, it may not be able to do so in 2021.
Considering $86 million adj. EBITDA in 2020 Q3, the forecast of $0-200 million for FY2021 seems lower than what investors were expecting.
That being said, to maintain a healthy ecosystem and to withstand the normalization of life, DoorDash needs to put extra efforts in retaining users and Dashers, and business partners. And it can and will invest more in acquiring talents.
Even 2021 GOV is $30-33bn, it will diversify (more heathy/stable demand), growing outside of the food delivery business. In 2023, this number can still go to $50 billion (say 2 billion orders x $25 per order), growing at over 25%.
And on the subscription front,
While DashPass orders carry a below-average Take Rate, the average DashPass subscriber orders more frequently and stays on the platform longer than the average non-subscriber.
DoorDash is playing the long game and the business is here to stay.
Be patient.
US stock market is in a tough week as 10-year yield rises.
It’s interesting to review the CAPM formula and its relation with multiple.
Assumptions:
| Risk-free rate | Discount | Multiple |
|---|---|---|
| 2% | 8% | 20.0x |
| 0.5% | 6.5% | 28.6x |
| 1% | 7% | 25.0x |
| 1.5% | 7.5% | 22.2x |
When market was performing like it’s 1% but realized that it’s actually 1.5%, the correction is ~9%.
When market was performing like it’s 0.5% but realized that it’s actually 1.5%, the correction is ~22.5%.
Found this proposed law in Japan very interesting – for Financial Services Intermediary Business operator (FSIBO).
It’s basically a single registration system that allows 4 types of major fintech services: Banking / Lending / Securities / Insurance, as long as it’s an intermediary business.
It’s like a law for Ant Group…
Or for PayPay (backed by SoftBank).
To list a few details here:
FSIBO is not required to be sponsored by a principal institution
A FSIBO is required to make a security deposit at a public deposit office before commencing its services to secure the payment of potential damages to its clients.
FSIBO can offer only those conventional products or services that do not need a sophisticated explanation to the clients
The FSIBO must disclose fees or remuneration to be received from financial institutions or other matters upon clients’ request. The FSIBO is generally prohibited from receiving deposit from clients in relation to its intermediation service with financial institutions.
FSIBO is subject to further requirements depending on the financial sector where the FSIBO provides its services
Facebook blocked all news content in a Australia on Thursday – users cannot share news links and Facebook Pages of media account are taken down.
This is in response to Australian government’s proposed law, which requires payment deals between media outlets and tech companies over content.
This is also one day after Google stroke a deal with News Corp, the media giant. Under the proposed law, Google will need to pay for news content if they appear in search results.
1/ Why Google and Facebook chose different routes (at least for now)?
I think their ad business are fundamentally different.
Facebook ads is seen on Facebook platforms, but Google ads is seen on both Google products and third-party websites.
Google is enabling third-party advertisers (think about the ads on newspaper’ website) to make money, e.g. AdSense. They are partners, and this network of advertisers is valuable to Google.
Facebook’s ads is sold by getting to know users better and letting users stay on its platforms longer. Traffic is important to Facebook, so news is important as a form of content that users want to see. However, Facebook also thinks it is giving media outlets traffic in return. More important, ads sold by Facebook is not relying on those media outlet.
2/ What content should be on social media?
Instagram is in a purer form of social media, so does Twitter. They are usually gravitating towards certain types of contents. On the other hand, products such as Facebook’ main app are aggregating all kinds of “feeds” as long as they can drive traffic.
I think the two types are both here to stay.
Another related issue is how to regulate contents, which has been an increasingly important issue in the US and globally.
“Regulate more” or “regulate less”?
I think either way more regulatory interventions (government) is most likely inevitable.
If platforms regulate less, regulators may think Section 230 is providing to much protection and platforms are not doing enough for their social responsibility.
If platforms regulate more, regulators might think they have too much power, which is also risky. And as they moderate more, it costs more and they may be challenged more often on their decisions.
“Public square” is not easy. “Digital living room” is where Facebook may find more flexibility in contents.
Paying for news might be one of the solutions to navigate some content risk, e.g. fake news, misinformation. However, fake news or misinformation might be the traffic driver that Facebook values.
As of Feb 2021,
For independent individuals – 40% of gross value of virtual gifts, when tax withheld is 20%
Streamers = 40%
Streamer’s tax withheld by Kuaishou = 10%
Kuaishou = 50%
For streamers under a “family/union” – varies.
Unions can set the sharing ratio to between 35% and 50%.
For example, if the ratio is set at 40%, and tax withheld is 0 (to simplify)
Streamers = 40% (certain tax should be withheld)
Union = 10%
Kuaishou = 50%
In addition, Kuaishou gives back additional revenue-sharing (“bonus”) as incentive if certain growth/active targets are achieved, up to 12% of gross value (after-tax I assume).
The larger the union, the higher basic bonus (up to 2%) it can get. Active bonus (1%) requirement is a bit higher for larger union. Growth target is lower for large unions. Growth bonus is tiered and every union can potentially get the full 9% growth bonus.
Therefore, if a union get say 5% bonus, following the previous example, then
Streamers = 40%
Union = 15%
Kuaishou = 45%
Unions can set certain bonus internally for streamers, and often provide a base pay + % commission model for streamers.
We could see from Kuaishou’s reported financials that after deducting “revenue sharing to streamers and related taxes”, Kuaishou retains a bit over 40% of its live-streaming revenue.
On Monday, Feb 8, Tesla announced it bough $1.5 billion bitcoin and would accept it as a payment method soon.
A few takeaways:
1/ There will be more companies using bitcoin to manage their cash, adding to the demand for it.
2/ Bitcoin as a payment method will be more mainstream. Now people not only can rely on selling it to the market, but maybe can buy a Model Y. The future question would be – what will the “economy” look like on Mars? I bet Bitcoin will be important.
Questions remain –
How Tesla is gonna price its cars? in fixed Bitcoin? that will cause a collision with USD, etc. as Bitcoin is volatile on a daily basis.
Clubhouse is a $1 billion business with 2 million weekly active users (as of Jan 2021).
Despite the exploding user count, it appears to have zero revenue now.
Clubhouse mentioned three business model: tipping, tickets and subscriptions (therefore, no ads – good!).
1/ tipping – it’s an established model in Asia but don’t think it will work well in the US. If rolled out, it will be on a smaller scale and shouldn’t be the main source of revenue, unless it incorporates cryptocurrencies like Dogecoin!
2/ tickets – I think this can work but it’s not sexy. It makes the app more “administrative” and ordinary. Also, eventbrite works well with some 2.5%+ fees.
3/ subscriptions – this sounds interesting and may leapfrog podcast subscription model. Another layer of curation can be added, which Clubhouse might have been working on).
Clubhouse may also think about adding features to be more relevant on a daily basis, than monetizing the app right now.
Spotify management should be worried.
Social medias should be worried too.
A week of blogs about GameStop – why not.
Reflecting on the GameStop mania, I feel it’s more like a macro trade, e.g. how Soros broke Bank of England in 1992.
1/ hedge funds are like the role of Bank of England facing Soros (retail investors, etc.). It’s almost certain that they cannot cover the shorts in the near term – just like BoE couldn’t support fixed exchange ratio.
2/ HFs didn’t realize that reflexivity is so important… they are analyzing the company as if they are the outsiders. But as people realize their short/put positions, they can support both GamStop’s real business and its stock. HF’s participation changes the real world itself. Also, people’s decision of holing GME stock also changes their purchasing behaviors.
3/ social medias (reddit, twitter trending, etc.) are now playing a role like Draghi’s “whatever it takes” speech. When expectation is set, people’s decision change as well – it becomes self-fulfilling.
I was reading several articles regarding kindergartens in China. The industry has changed a lot in the past few years, mostly related to regulations/policies and RYB Education (NYSE: RYB). RYB has renamed itself as GEH Education.
One set of definition is around “for-profit” and “not-for-profit”, which is used in private education in general, not just for kindergartens.
Another definition is “affordable”. In an opinion document issued in November 2018, the target is that 80% of kindergartens should be “affordable”.
Nuances:
1/ Technically, “affordable” doesn’t equal to “not-for-profit”. Though it’s not surprising that some confusion may come. (seems to be a good and necessary public education)
The law around “for-profit” and “not-for-profit” is issued by Minister of Justice, and it defined based on legal definitions. “Not-for-profit” basically means the entity cannot distribute residual “profits”. The law itself, by defining “for-profit” private education, actually gives a boost in drawing investment.
“Affordable” is a term developed for policies. For kindergarten owners, it means to accept local government’s guidance on pricing while receiving grants or other help from local government.
In reality, local governments often require that “affordable” kindergartens are registered as “not-for-profit”.
2/ “Affordable” sounds like what parents might want – it indicates that the kindergarten is not expensive (?)
It should be. However, in certain circumstances, “affordable” also mean cost control, which leads to cutting the existing offerings/amenities, which parents might don’t want. And kindergartens might charge extra fees on top of the “basic” package.
3/ “for-profit” implies profits, IPO…?
Nonono.
Many kindergartens won’t be profitable if not with some form of government support.
And it’s not allowed for any public companies to invest or acquire kindergartens, whether it’s for profit or not.
4/ “not-for-profit” means no profits?
No.
I think this is actually the path that many policies would want – “not-for-profit” kindergartens that offers high quality services and can sustain itself. (like non-profit private institutions/universities)