3 Quality Businesses
ABNB, SHOP, FTNT: leading indicators checklist
It’s been a shaky Mr. Market during the last earnings season.
A few notable stocks got hit by negative price reaction on weaker than expected demand guidance for the next quarter.
AirBnb, Shopify, and Fortinet were no exception.
Do these stocks deserve a spot in your watchlist?
In today’s note, I will try to introduce these profiles using my leading indicators checklist and a few financial indicators.
Qualitative Checklist
In my previous article, I went through the list of leading signals that I always look for in a new business. For simplicity, here’s the summary checklist:
Founder still CEO
Owner-operated Company (Insider Ownership > 20%)
Net Promoter Score > 50
Proven track record of winning M&A deals
Innovator: R&D spending > 15% of Revenues
Brand: growing global brand value ranking(s)
Blue Ocean Sectors: growing industries, with multiple winners
Financial Metrics
In addition, we will look at the following financial KPIs to give you a more comprehensive flavour on why these businesses prove their quality.
3Yr Revenue Growth (% CAGR) > 20%
Gross Margin (% of Sales) > 50%
Return on Invested Capital (%) > 15%
Shares Outstanding (% change y/y) negative
Free Cash Flow margin (% of Sales) > 15%
AirBnb
The Company:
Airbnb connects travelers with unique accommodations worldwide, offering short-term rentals, experiences, and guiding hosts through the process of sharing their spaces.
Quality Checklist - december 2023 data:
Founder Still CEO: ✅ Brian Chesky, Co-Founder and still CEO
Owner-operated Company (Insider Ownership > 20%): ✅ 32.21%
Net Promoter Score > 50 ✅ 74
Proven track record of winning M&A deals: ✅ more than 20 acquisition deals succesfully done
Innovator: R&D spending > 15% of Revenues ✅ 17.35%
Brand: growing global brand value ranking(s) ✅ +22% vs 2022 in Brand Value in the top 100 global brands by Interbrand
Blue Ocean Sectors: growing industries, with multiple winners: ✅ C2C and Travel Platforms
Financial KPI overview:
3Yr Revenue Growth (% CAGR) > 20%: 44.1% ✅
Gross Margin (% of Sales) > 50%: 82.9% ✅
Return on Invested Capital (%) > 15%: 33.9% ✅
Shares Outstanding (% change y/y) negative: +1,1% ❌
Free Cash Flow margin (% of Sales) > 15%: 41.2% ✅
Overall, ABNB shines as solid profile.
Shopify
The Company:
Shopify is a Tech/E-commerce was born as tech infrastructure that allows businesses to create online stores and sell products. It provides tools for website building, payment processing, inventory management, and more, enabling entrepreneurs to easily start and manage their online businesses.
Qualitative Checklist - december 2023 data:
In my previous article, I went through the list of leading signals that I always look for in a new business. For simplicity, here’s the summary checklist:
Founder still CEO ✅ Tobias Lütke, Co-Founder and still CEO
Owner-operated Company (Insider Ownership > 20%): ❌ 6.49%
Net Promoter Score > 50 ❌ 35 (will need to check this out: NPS for B2B firms is tricky)
Proven track record of winning M&A deals ✅ Deliverr, Oberlo, Handshake, and the list could continue
Innovator: R&D spending > 15% of Revenues ✅ 20.1%
Brand: growing global brand value ranking(s): ✅ the Brand is not listed in global rankins, yet various sources lead to an increase in Brand Equity (this one for instance)
Blue Ocean Sectors: growing industries, with multiple winners ✅ e-commerce, online payments, merchant solutions
Financial KPI overview:
3Yr Revenue Growth (% CAGR): 29.1% ✅
Gross Margin (% of Sales): 50.61% ✅
Return on Invested Capital (%): 3.4% ❌
Shares Outstanding (% change y/y): - ❌
Free Cash Flow margin (% of Sales): 12.8% ❌
Overall, it seems clear how Shopify’s business is far from maturity and earnings optimization, which makes financials less relevant now. Quality indicators look attractive meanwhile.
Fortinet
The Company:
Fortinet provides cybersecurity solutions, specializing in network security, including firewalls, intrusion prevention systems, endpoint security, and more. They offer products and services to protect organizations from cyber threats across networks, endpoints, applications, and the cloud.
Qualitative Checklist - december 2023 data:
Founder still CEO: ✅ Ken Xie, Co-Founder and still CEO
Owner-operated Company (Insider Ownership > 20%): ❌ 17.55%
Net Promoter Score > 50 ? data not available
Proven track record of winning M&A deals ✅
Innovator: R&D spending > 15% of Revenues ❌ 11.8%
Brand: growing global brand value ranking(s): ? data not available
Blue Ocean Sectors: growing industries, with multiple winners ✅ Cybersecurity
Financial KPI overview:
3Yr Revenue Growth (% CAGR) > 20%: 25.5% ✅
Gross Margin (% of Sales) > 50%: 77.1% ✅
Return on Invested Capital (%) > 15%: 20.4% ✅
Shares Outstanding (% change y/y) negative: -0,6% ✅
Free Cash Flow margin (% of Sales) > 15%: 31.4% ✅
Overall, FTNT seems to approach earnings optimization, which makes financials more relevant. Some quality metrics do not meet our standard by a few percentage points only.
Summary: and now what?
Overall, the aforementioned businesses appear to be of high quality.
The aim of these checklists is to conduct straightforward yet thorough research, optimizing time and reducing errors.
Viewed in this light, the checklists unequivocally endorse moving forward with the subsequent stages of my investment process.
Leading indicators serve as a solid starting point for me. However, they merely constitute the inception of a comprehensive process, encompassing valuation assessment, in-depth analysis of business fundamentals, risk management, and beyond.
That’s it for today. If you found value, feel free to share and restack today’s post!
As usual, thank you so much for your valuable time.
Happy Investing,
Francesco - Business Invest