Good morning, hope your week is off to a good start.

On to the update:


1. A $22 billion company you’ve probably never heard of

An overview

Atlassian develops software that helps teams collaborate on projects. They are a SAAS company (software-as-a-service). This means their products are stored and accessed via the cloud.

The next few slides are from a presentation they gave in 2017. You can view the whole presentation here.

Their products

Their philosophy

Compounding advantages

The top chart shows their sales and marketing (S&M) as a percentage of their revenue, relative to their competitors.

The bottom chart shows how much they spend on R&D, relative to their competitors.

Their revenue growth has been impressive

They’ve compounded their revenues at 41% a year since 2013.

Unlike other tech companies ( hello Uber & WeWork), they have been profitable since the beginning. Their free cash flow margin sits at 30% for 2017 and has never dipped below 20%.

In 2017, over 80% of their revenue was recurring.

Our view

With a market cap of $22 billion, they are trading at 25 times revenue. Not exactly cheap… However, that doesn’t mean their stock has to fall. Companies can grow into their valuation while their stock goes sideways.

The key question for us: Do their customers see their product as having no close substitutes?

That’s a hard question to answer because they are not a consumer-facing company, they are a B2B (business to business) company. In addition, unless you are in that space, it’s hard to know which companies have the goods and which companies are posers.

There aren’t great public comps for Atlassian. Project management software companies have exploded the past five years, but most are private. See Slack, Asana, and Airtable.

For us, we will try to gain deeper insights into this market. Clearly, their category is expanding. The skill is trying to determine which companies will capture that value or if their software will become commoditized.


2. Big money is flowing into marijuana

Source: WSJ

Quick stat: In the first quarter of 2018, $7.9 billion was raised by cannabis companies. That was double the amount raised in all of 2017.


3. Not the sexiest stock in the world but…

Source: McCormick website

McCormick announced sluggish earnings and expects slower sales growth for 2019. It was the first time I have thought about McCormick in years, even though I use their products every week.

Quick overview

  • If you looked in spice cabinets around America, you would discover at least one McCormick product.
  • I call these types of stocks, “Steady Eddies.” They won’t grow 15-20% a year and that’s ok. Growing 5-10% a year with a high probability of being around in 20 years is valuable.
  • They pay a modest dividend of 1.87%.
  • They almost tripled their debt levels (see statements below) with their 2017 acquisition of RB Foods; whose brands include Frank’s hot sauce and French’s mustard.

Our thought bubble

While not a stock for us, it could be a good fit for the right investor.

And unlike the tech space, where companies can be on top one minute and irrelevant the next (hello Snap), there’s little chance people will quite adding spice to their foods. If you are looking for a company where technology is not a primary factor in their success, McCormick might be worth further research.

Financial Statements

Income Statement

Balance sheet

Note: Their long-term debt tripled with their acquisition of RB Foods. However, their earnings to interest ratio is 10 to 1; so they can safely service their debt payments.


4. I should have opened a nail salon…

Source: Axios

Nail and waxing salons—in addition to pet grooming shops, cosmetic stores, tattoo parlors, and gyms—stand out as improbable avatars of the future of retail, surviving and thriving amid the decades-long annihilation of mom-and-pop apparel, book, and hardware stores reports Axios.

Interesting stat: Between 1990 and 2017, the number of nail salons for every 100,000 Americans nearly tripled from fewer than two to almost seven.

Our thought bubble

What do the victors have in common? They can’t be easily replicated online. Humans are an integral part of the transaction.

I don’t think I’m ready for a robot to give me a manicure:)

Unfortunately, there isn’t a great way to invest in nail salons or pet care businesses; many are mom and pop operations. And restaurants, fuhgeddaboudit.


5. Companies with the most exposure to China

Source: Axios

The companies in the blue boxes have fallen at least 30% from their recent highs. Those companies are good places to go hunting for new ideas.

Here’s a brief summary:

  • Skyworks Solutions (SWKS) | They make semiconductors for a wide range of products including aerospace, automotive, and the connected home. | Check out this presentation to get a better idea of what they do.
  • Wynn Resorts  (WYNN) They own and manage hotels and casinos.
  • Nvidia (NVDA) | They make GPUs (graphical processing units) that will power next-generation technologies like AI and self-driving cars. See this article #2.
  • IPH Photonics (IPGP) | They make really cool lasers that are used in materials processing, medical applications, and telecommunications.
  • Applied Materials (AMAT) | They make the machines that companies like Intel and AMD use to make semiconductors.
  • Western Digital (WDC) | They make data storage products like data center systems and cloud storage services.
  • LAM Research (LRCX) | Similar to Applied Materials, they make equipment used in the manufacturing of integrated circuits (chips).
  • A.O. Smith Corp (AOS) | They are the largest maker of water heaters in North America.

6. Warren Buffet—”Really successful people say no to almost everything”

I sometimes struggle with staying focused. I have big eyes and so many things look interesting, business wise. This guy breaks down how Warren Buffett has stayed focused throughout his career.  WORTH A READ

Two of my favorites:

  1. Kill busy work. We all have things we must do (chores and whatnot), so we can’t kill them, but I have found batching to be helpful. I will do certain tasks on certain days. For example, my research days are Wednesday through Friday. I create media on Monday and Tuesday. Batching has helped me not feel overwhelmed and better organized.
  2. Focus on a few high-quality bets. In my view, there is only a handful of A + opportunities a year. We try to focus our capital only on those opportunities.

Thanks for reading and have a great day,

Caleb

Category:
Articles, Company Briefings