Good value or overvalued: Cettire, Domi no’s, Nick Scali, Carsales, CBA

Friday, 9 February 2024 — Melbourne, Australia

[5 min read]

Dear Reader,

People like aphorisms.

So how about this one.

We are what we pay attention to. And the landscape of our thought is bounded by our focus.

There is so much information out there. Data, facts, titbits.

But there is only so much attention. Information is boundless, attention is not.

So, what you attend to separates you from the rest. The crucial question is what deserves your attention and what doesn’t.

If you’re a stock picker, does the Reserve Bank deserve your attention? Or the latest inflation forecasts?

Unlikely.

I agree with colleague Callum Newman, who recently said:

‘The only way to rip alpha out of the market is to find information and situations most aren’t following…and therefore are not reflected in the price.

‘Often, investors are preoccupied with things that seem important but are hard to turn into market profits.’

So on this week’s episode of What’s Not Priced In, we get back to the basics.

Talking stocks, valuations, and businesses.

Because, in essence, that’s what investing is. The appraisal of businesses and their outlook. Topics Greg Canavan (yes, he’s back again!) and I discussed:

Looking back on our Nvidia call

In our inaugural episode, in late May 2023, Greg and I talked about Nvidia.

Nvidia was then becoming a household name. We mused this meant the valuation has likely plateaued. If it’s in the news, it’s in the price.

But since that episode, Nvidia is up nearly 80%. It is now a US$1.7 trillion company.

In the last six months alone, the chipmaker added US$700 billion to its market cap. That’s bigger than some iconic US names like Coca-Cola and PepsiCo combined.

Nvidia is now also the top constituent of Goldman Sachs’ Hedge Fund VIP basket. It’s an index of the biggest positions held by 740 hedge funds. In total, these funds have US$2.2 trillion of gross assets.

It’s not hyperbole to say Nvidia is the most talked about stock. And hundreds of hedge funds have backed the talk with cash.

So were we wrong?

Was the market wrong?

Or have the facts changed in the interim to render our initial thoughts obsolete? Has, perchance, Nvidia’s growth outlook improved in the intervening months?

Greg didn’t beat around the bush.

Clearly, we were wrong.

But can Nvidia keep rising from here? Can it hit US$2 trillion? US$3 trillion? That’s some crazy numbers!

A stock’s price is not a reward for past performance. It is a bet on the future. Pick up any corporate finance textbook and you’ll find the message repeated.

Here’s Martin Fridson, in his popular text: ‘A company’s equity value lies wholly in its future performance.’

Nvidia had an exceptional 2023. But its feverish rally is not about last year’s big profits. It’s about 2024, 2025, 2026…

How much future growth is already baked into Nvidia’s current price?

Yes, AI is transformative. But investing isn’t as easy as simply knowing what technology is the next big thing.

As Warren Buffett once said:

‘The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage. The products or services that have wide, sustainable moats around them are the ones that deliver rewards to investors.’

Nvidia’s valuation is provoking some dissent on Wall Street.

Last week, Barclays’ Sandeep Gupta exited the echo chamber to voice concerns about Nvidia’s outlook. Supta thinks competition is coming along with demand headwinds:

‘AI chip demand will eventually normalize once the initial training build has been completed. The inference phase of AI is going to require less computing power than the training phase. High-powered PCs and phones could be capable enough to run inferences locally, reducing the need for growing GPU plants. [...] We think the cost of building Large Language Models (LLMs) and limited monetization opportunities could eventually force the exit of smaller (but still meaningful) customers of Nvidia from the AI market, helping to ease GPU supply constraints.’

There’s also the fact that 46% of Nvidia’s revenue last quarter came from just five customers.

And these five customers have enough cash and incentive to invest in their own chip-making capabilities.

How?

The customers are Microsoft, Meta Platforms, Amazon, Alphabet, and Dell.

As Supta summed up, Nvidia could lose revenue share ‘if its tech customers develop self-sufficient chip manufacturing capacity’.

So let’s see how the next 12 months pan out.

Cettire shows Domino’s what a good balance sheet is

We didn’t spend the whole episode talking about Nvidia, however.

Most of the time was spent analysing local ASX companies.

Including pizza merchant Domino’s and luxury retailer Cettire.

Greg admitted he wasn’t much of a luxury retail guy, but he was impressed by Cettire’s balance sheet.

It’s light on capital and debt. Unlike Domino’s.

We then went through how to analyse a company’s balance sheet, leverage, and financial position.

And it’s not a What’s Not Priced In episode without some estimates of intrinsic value.

I won’t give it away here, so watch the full episode.

Greg didn’t just run the numbers on Domino’s and Cettire.

He also appraised Nick Scali, Carsales, and that venerable Aussie institution Commonwealth Bank.

‘Now it’s about free cash flow’

Finally, an observation.

In May 2022, CNBC obtained an email Uber CEO Dara Khosrowshani sent to staff. Khosrowshani wanted Uber to focus less on growth and more on profit.

He wrote:

‘In times of uncertainty, investors look for safety. They recognize that we are the scaled leader in our categories, but they don’t know how much that’s worth. Channelling Jerry Maguire, we need to show them the money. We have made a ton of progress in terms of profitability, setting a target for $5 billion in Adjusted EBITDA in 2024, but the goalposts have changed. Now it’s about free cash flow. We can (and should) get there fast.’

The goal posts did change. Rising cost of capital has a habit of doing that.

But Uber adjusted well.

Earlier this week, it hit new highs after reporting its first annual operating profit.

The stock is up ~95% in the last 12 months. And up ~190% since Khosrowshani’s email.

We have two local examples, too.

Online retailer Kogan and buy now, pay later fintech Zip.

Both suffered in recent years after prioritising growth at the expense of cash. Zip was by far the worst.

But the pair tightened the belt. Zip has been touting its ‘path to profitability’ for many a quarter now.

And Kogan, despite weak sales growth, is restoring its margins…and earnings.

Both have rallied in the last 6–12 months.

Kogan is up 70% since April 2023.

Zip is up 230% since October 2023. (Albeit still down 90% from its peak, with a long way to go to be self-sustaining).

In the end, cash is king.

Investors can be patient. But at some stage, you have to show them the money.

Enjoy the episode!

Regards,

Kiryll Prakapenka,
Analyst and host of What’s Not Priced In

Kiryll Prakapenka is a research analyst with a passion and focus on investigating the big trends in the investment market. Kiryll brings sound analytical skills to his work, courtesy of his Philosophy degree from the University of Melbourne. A student of legendary investors and their strategies, Kiryll likes to synthesise macroeconomic narratives with a keen understanding of the fundamentals behind companies. He’s the host of our weekly podcast What’s Not Priced In, where he and a new guest figure out the story (and risks and opportunities) the market is missing to give you an advantage. Follow via your preferred channel and check it out!

[4 min read]

Dear Reader,

‘No one starts a war — or rather, no one in his sense ought to do so — without first being clear in his mind what he intends to achieve by the war and how he intends to conduct it.’

― Carl Von Clausewitz

This is not an ideal time to take the ferry from Ireland to France. Most of the passenger ferries aren’t running. Your only choice is to go with the Polish truck drivers on the Stena Line.

And then, when you get out in the Atlantic, the sea is rough. The clouds are low. The wind is stiff. All you can do is to lie in your berth, and let the gentle, or not so gentle, rock of the boat put you to sleep.

Last night, the on-board restaurant was nearly empty. The truck drivers have their own restaurant. There were probably only four or five passengers who were not truck drivers on the ship, including one older man with wild white hair, who resembled Albert Einstein in later life.

We could not linger over dinner. The ship was beginning to rock and roll too violently. So, we made our way down the corridor, bouncing from one side to another, to our cabin.

There, we hastened to bed. Lying flat seems to be a good way to avoid getting sick. Then — except for the crash of the waves against the hull…and the creak of every piece of metal above the water line — you can imagine that you are on a hammock softly swinging in a summer breeze.

But here we are. It is still very gray and cold. But, there’s work to do. Reckoning to reckon with. Dots to connect.

Ready, Fire…Aim

If you’re going to have any hope at all of understanding and anticipating what’s coming our way…you need a framework — a structure on which to hang the baubles and bangles of the daily news.

For example, in the news last week was this, CNN:

President Joe Biden’s decision to strike 85 targets in Iraq and Syria on Friday in response to the death of three American soldiers last weekend amounted to a middle ground: short of a direct strike inside Iran, which would almost certainly spark a wider war, but still more expansive than any action the US has taken so far against the groups it accuses of destabilizing the region.

Whether the 125 precision-guided missiles fired over 30 minutes Friday night will have the effect of preventing further attacks on Americans is a question officials aren’t yet ready to answer.

“I think it is a real strong deterrence,” said Sen. Tammy Duckworth, an Illinois Democrat and Iraq War veteran. “We’re saying: Listen, we don’t want to go to war. But have a little taste of what we can do. Here you go. Eighty-five targets. And I think that that is part of the balancing act that we need to be engaged in right now.”

85 targets? 125 missiles? Show them what we can do?

We pause for breath. To the clowns currently listed on ballots across the country must be added the jokers who run America’s military machine…aka, the firepower industry. Between them — civil and military authorities — these deciders have the wherewithal to ruin the economy and bring the empire to its knees. What to make of them? Are they not nature’s way…like mould on yoghurt…to turn a wholesome dessert into sickening slime?

A Military Maxim

What is the likelihood that the same intel geniuses who missed 9/11 and the Hamas attack have now peered into the dark hearts of ‘terrorists’ in 85 separate locations? Where is the risk/reward calculation that tells us it would be a good idea to kill them…even at the risk that the survivors will become sworn, lifelong enemies of the USA? Where in the US Constitution does it give a president the right to start a war on his own say-so?

And what would Clausewitz say? Where is the plan? What are the war aims? Have the pros and cons been debated by the peoples’ representatives?

‘You shoot at everything…you hit nothing.’ It’s a military maxim that applies to the rest of life. You try to do everything, you end up getting nothing accomplished. That’s why Clausewitz has been so popular with business schools. Commerce, like war, is competitive. The competitor who tries to be everything to everyone gets nowhere. The winners are those who know where to attack…and do so precisely. Military power, too, needs to be focused…on particular, achievable objectives. It’s not meant to be hurled around like cheap threats in a Saturday night barroom.

Smart attackers do not disperse their firepower, they concentrate it on specific points for specific reasons — to cut off the enemy from his supplies, to capture (or destroy) a vital bridge, to eliminate a small force before it can join with others, and so forth. As Clausewitz explains, there’s ‘emotion’ involved in war. And chance. But they are tempered and directed by reason. Where’s the reason in Biden’s missile barrage?

Forever Wars

The logic of Generalissimo Biden’s war must be to ‘send a message’ to Iran. But this is the same kind of numbskull thinking that had the US bombing the hell out of Laos and North Vietnam…threatening to send them ‘back to the stone age.’

It did no good. In Laos, US bombing killed a tenth of the population. No advantage was gained. In Vietnam, the ‘enemy’ bobbed and weaved…in a kind of lightweight military ‘rope-a-dope’ strategy. The Pentagon’s amateur bean counter — Robert McNamara—could do all the body counts and pain assessments he wanted. But in the end, the US had no alternative but to run away…with a final, disgraceful retreat by helicopter from the roof of the US embassy in Saigon.

And anyone who thinks the ‘terrorists’ will now back off — in shock and awe at American firepower — is just not paying attention. The Iraqis have had more than a ‘little taste’ of US firepower; they got a full meal of it during America’s war to liberate them. Now, they want the US to get the hell out.

And the Houthis are regarded as the heroes of the whole Muslim world…and much of the rest of it. They’ve been taking US-made ‘incoming’ fire for the last 20 years. They’re not going to stop now that it is coming directly from the US rather from its proxies in Saudi Arabia.

What outcome is likely? What would Clausewitz say?

More to come…

Regards,

Bill Bonner,
For Fat Tail Daily