Investing – Page 2

The worst credit is issued at the best of times

I am recently reading Howard Marks’ The Most Important Thing and come across the section describing the credit cycle.

Why the worst credit is issued at the best of times?

Because bad news is scarce and when financial institutions compete for market share by lowering lending standards or required returns.

Typically when there is more capital available to companies or individuals, you have lower return on capital when they invest.

Then when something bad happens, the cost of capital can shoot up and become higher than the return of capital generated by the previous projects.

These projects can’t sustain in the new environment and thus are destroying capital.

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This is also true in valuation and VC returns.

The worst VC deals are made during the best of times!

Remember the 2020-21 era? Not hard to destroy some capital if you invest in a SaaS company with 40x P/S during that time.

Read more on SaaS P/S here – The previous 40x P/S sector was SaaS

The previous 40x P/S sector was SaaS

Cloud and SaaS received premium valuation from 2020 to 2021.

The outperformance started in 2016 and lasted 5-6 years. Watch that outperformance here: https://cloudindex.bvp.com/

Back then, “rule of 40” is the king of valuation metrics, which means “um of revenue growth and profit margin should equal 40%+”. The higher the better of course.

While market fluctuates, you can find the P/S or revenue multiple in the past.

Here, you see that in 2016 companies at rule of 40 receives ~6-7x current year revenue multiple.

Here, you see that in 2020 companies at rule of 40 receives 17x LTM revenue, or 12.8x forward revenue.

During this 2020-21 period, it’s normal to see 30-40x P/S for hot SaaS companies. I remembered Shopify was 40x P/S.

Looks at these charts from here – the evidence of 30-40x P/S glory days.

We all know what happened next.

That multiple fell back to ~6x for the regression line in 2022, with Fed raising interest rates. See here for the chart.

The multiple has stabilized afterwards, from 2022 till now.

Currently, the valuation (forward revenue multiple) is ~4-5x for 2nd and 3rd quantile companies followed by BVP, including the names like Salesforce, Hubspot, Workday, Nutanix, etc.

BVP has introduced the new the Rule of X to give growth more credit btw.

I think some bubble is brewing now, with AI model companies or even chip companies.

However, investors keeps dancing, expecting that Trump will appoint new Fed Chair this year and the new chair won’t raise rates. Trump wants lower rates, not higher.

Maybe we should see another around of crazy valuation first.

And if SaaS outperformed 5-6 years (2016-2021), maybe AI-related stuff should outperform till 2027/28.

MSFT, Alphabet, Meta, Amazon all expected further increase in capex

What you are seeing in 3q25 capex spending…

What you are hearing from mgmt.

MSFT – “now expects capital investment growth in fiscal 2026 to exceed that in fiscal 2025”.

Alphabet – “expect significant increase in 2026 capex” / 2025 capex to be in a range of $91 billion to $93 billion” vs $85 bn guided in 2q25.

Meta – “capital expenditures would be notably larger in 2026 than 2025”. / 2025 capex to be $70-$72 billion vs $66-72 billion guided in 2q25.

Amazon – “we expect our full-year cash CapEx to be ~$125 billion in 2025, and we expect that amount to increase in 2026” vs ~$118bn guided in 2q25

Robots should be capex?

Technically, capex should be more one-off than recurring.

Phone used to be a “capex” item. You won’t buy a phone every other year, before the iPhone era. Apple’s P/E multiple expanded when it transformed the category into a more “recurring business”.

In the early stage of AI training, people spend whatever is needed on chips capex. This is due to the increased performance of AI GPUs and thus the efficiency of training. However, after this growth era, I think this is still more of a “capex” item thus the growth should normalize later. Inference is another thing though.

Robots should be capex ultimately. However, in the initial adoption stage, which hasn’t arrived yet, we should see a growth that makes people forget this is a capex category. Then there will be a period of doubt, like when Buffett purchased Apple. And hopefully, the leading robot company by then can transform robot into a “recurring” category like Apple did for smartphone.

Why yield has been less relevant to stocks?

1/ top companies are cash rich and don’t rely on debt – interest rate doesn’t directly affect interest expenses. And these companies have bigger weight in the index.

2/ top companies have huge pricing power – when real yield doesn’t change and nominal yield mostly reflects inflation, top companies will have higher earnings if inflation is high. So higher nominal yield or discount rate is offset by higher free cash flow.

Investing in AI age (2)

Look for the “contexture” – unquantifiable traits.

You don’t want to compete with AI on quantifiable data. Same as news, AI should be able to record and analyze data at amazing speed.

In order to know what’s unquantifiable, you need to be on the AI side first. AI would want to make more info quantifiable. If you are on the AI side, you will know what kind of traits is hard to quantify.

Investing in AI age (1)

Don’t trade on news.

Human won’t be able to compete with AI on speed (of reading news) and breath – AI can consume a lot of news in a second.

What should human investors do?

Look for any discrepancies vs reality – a) some are just fake news, b) some are partially made up based on leads, c) some are true but not important, etc.

So $IBB generated negative return over the past 5 years…

And it probably should be down.

Top weighted companies within $IBB are Gilead, Vertex, Amgen and Regeneron.

Gilead 1q 2022 revenue was $6,590 million and 1q 2025 revenue was $6,667 million – no growth for 3 years.

Vertex 1q 2022 revenue was $2,097.5 million and 1q 2025 revenue was $2,770.2 million (but 1q 2024 revenue was $2,690.6, so revenue growth slowed significantly). Additionally, Vertex shows no growth in non-gaap operating income.

Amgen is better – 1q 2022 revenue was $6,238 million and 1q 2025 revenue was $8,149 million. But growth is smaller in operating income vs 3 years ago – non-gaap operating income grew to $3,599 million in 1q 2025 vs $3,140 million in 1q 2022, or ~15% growth in 3 years.

Regeneron 1q 2022 revenue was $2,965 million and 1q 2025 revenue was $3,029 million – no growth vs. 3 years ago and 1q25 vs 1q24 declined 4%.

Gilead and Vertex stock performance is not bad actually.

In the past 3 years, Gilead stock is up 75% and Vertex stock is up 50%.

However, the index is pressured – only those companies with promising new “story” to tell are up meaningfully. Existing business lines are not sexy as shown above.

No rising tide that could lift all boats post covid – only dangerous ones like rising interest rate.

Notable decline in Baijiu stocks

See my previous posts on Baijiu here (Jun 2024) and here (Sep 2024) – concerns on volume growth and the ability to further increase profitability.

While premium Baijiu company like Moutai can still do ok, as key product’s market price is still higher than its ex-factory price, the price gap is narrowing, which means Moutai’s distributors are having a bad time.

The end demand is additionally weak after Chinese gov’s recent liquor ban.

Moutai’s stock price has declined by ~15% since mid-May (1645 -> 1401). Currently, Jun 16 is one of the lowest closing price in 2025, worse than Apr 7 when tariff hit.

However, this represent a buying opportunity I believe.

Besides Moutai, other Baijiu brands stock also declined. Wuliangye has declined about 15% from its peak this year. In fact, it’s more than 10% lower than end of 2019 level (~rmb 133 per share)!

Luzhou Laojiao has declined about 25% from its peak this year.

They are trading at 20x (5% earnings yield, Moutai) and 14x (7% earnings yield, Wuliangye), and 12x (8% earnings yield, Laojiao) LTM earnings, compared with ~1.6% China’s gov bond yield.

VC investing and HF investing

I have worked in both industries, venture capital and hedge fund.

I found that sometimes they can be exactly the opposite in how to make money.

While in venture capital, the deals that are more successful are those that are consensus. Capital pile in, and those with capital runs faster, adding to the moat.

While in hedge fund, the stocks that work better are those that are considered un-investable. When other holders cut loss / exit, it creates better risk reward profile and the perfect buying opportunity.