Here’s why it’s interesting. The company will generate about $2B in FCF in 2026 on its way to $3B in 2028 after it fully integrates the “issuer solutions” business it acquired from Global Payments this year. In three years, FIS will have about $15B in debt as they use FCF to pay down acquisition debt. If it turns out, FIS can continue to grow revenue organically at 4%, it would not be crazy to assign a 20x multiple to it 3 years out, arriving at an EV of $60B. Subtract out the debt and the equity would be worth $45B vs the $25B it currently trades for. That equates to a compound return of 22% - not shabby.

That’s the easy part of this story. The real question is how likely is this business to keep growing for the next ten years?

Let’s get into what FIS actually does. Here’s a summary from Gemini.

The company is now organized into two primary pillars:

1. Banking Solutions

This is the heart of FIS, focusing on the technology that allows banks and credit unions to operate. Following the recent acquisition, this segment is now divided into two clear divisions:

• FIS Total Issuing™ Solutions: This is the newest and largest component, formed by merging Global Payments’ issuer business with FIS’s legacy debit/prepaid assets. It is the world’s largest credit card issuing platform, processing over 40 billion transactions annually. It provides the “back-end” for credit card programs, fraud prevention, and loyalty schemes for the world’s biggest financial institutions.

• Core Banking: FIS provides the “operating system” for banks—managing ledgers, processing deposits, and handling the digital banking interfaces you see on your phone. Their focus here is moving legacy banks to the cloud and integrating AI to automate compliance.

2. Capital Market Solutions

This segment serves investment banks, hedge funds, and corporate treasuries. It is a high-margin business that focuses on:

• Trading and Asset Management: Software that manages the lifecycle of a trade, from execution to settlement.

• Corporate Treasury: Tools for large corporations (like those in the S&P 500) to manage their cash, risk, and insurance.

• Automated Finance: Recently moved into this segment, this focuses on using AI to handle complex financial workflows and data analytics for institutional investors.

As you can see from the below snapshot, this isn’t exactly a high growth business. In fact, in the last seven years, revenue has grown at a measly 4% CAGR. This is not entirely surprising when you consider the customers of FIS and their own growth rates.

I don’t expect revenue growth to accelerate over the next 3-5 years, but as I described at the beginning of this post, the business just needs to show staying power for the next 20 years to be a good investment at current prices. Their end customers are inherently risk averse, so the odds of them replacing the rails on which their businesses run seems low.

Risks

1. Higher unemployment caused by AI means banks struggle with rising delinquencies. This may make them hesitant to spend more on technology causing FIS to stop growing or even shrink. The mitigant is valuation. Even at a 15x multiple on anticipated FCF, the equity is worth $30B, so you don’t lose money.

2. Management is unproven as both the CEO and CFO have only been in their roles for about three years. The CEO is a former accountant. I can’t think of any examples where a bean counter has a good track record as a CEO. I can, however, think of several companies that have been brought down by such CEOs. Intel and Boeing come to mind.

Opportunities

1. AI could help them shrink their workforce and improve margins. They currently have 44,000 employees with 27,000 of them outside the US.

Like a lot of spinoff’s, the stock has been crushed out of the gate as some holders of Comcast are forced sellers. See chart below –

The story here is not exactly compelling. Versant is a collection of ‘legacy media’ businesses and 80% of their revenue comes from linear TV, which is a dying business. See financial snap shot below from the December 2025 investor day.

The guidance for 2026 is not going to get anyone excited either - snapshot below.

Free cash flow (FCF) potentially shrinking 25% is not something investors get excited about.

Based on the commentary from the investor day, my sense is that management is going to try and slow FCF shrinkage by focusing on costs, so I expect it to decline by about 10% a year for the next 10 years. In this scenario, starting at 1.1B in FCF in 2026, the cumulative 10 year FCF generated by the business would be about $7B. I’ve found that paying 10x average forward FCF is generally a decent bet, so with the market cap at $4.7B today, this could be an attractive set up.

The company has $2.3B in net debt, so from an EV stand point its exactly at 10x average forward FCF.

If you bought the business in its entirety today, you could use the FCF to pay yourself back over the next five years, recouping your cost, and then whatever it’s spitting out would be gravy. Given it’s likely doing 500m in FCF in five years, it’s effectively a 10% go forward yield on the equity. As I write this, I realize it’s not that compelling, but you do get all your capital back in five years, so the downside is low.

What could go well?

1. FCF stabilizes at about $750m (a 15% margin on $5B in steady state revenue). They accomplish this by better monetizing unique assets like CNBC and keeping costs under control.

2. We could reach a steady state in linear TV watchers in the country, so the decline in revenue slows to low single digits. Maybe the most eager cord cutters have already left.

What could go wrong?

1. The Citrini unemployment scenario plays out and linear TV subscribers decline faster than expected. This is going to be very difficult for Versant to overcome if it plays out. Unlike the market, I ascribe a 50% probability to unemployment reaching 10% in the next three years, so the risk here is very real. The offset is that its likely mostly older retired Americans watching linear TV, so maybe white collar job loss doesn’t actually hit VSNT that hard.

2. FCF falls faster than 10% a year as management invests FCF into businesses with poor long term prospects instead of returning cash to shareholders. Because the spin is so new, management effectively has no track record of capital allocation to evaluate.

3. Even if TV subscribers hold up, advertising spending on linear TV could continue to shrink as advertisers channel spending to the platforms with the best ROI – think Meta. This likely results in lower revenue for the Versant’s linear channels and is the single biggest headwind to this business over the next ten years.

Given the puts and takes, I can justify holding only a very small position (~1%) in my portfolio. If the stock pops 30% or more at any point over the next year, I will take my profits and move on.

The difference is that 2/3^rds of Goldman’s revenue comes from investment banking and markets whereas this is only about half of Morgan Stanley’s revenue. The other half of Morgan Stanley’s revenue comes from asset management, which has doubled in the last seven years implying a 10% CAGR. See here for select historical financials.

An investment in Morgan Stanley is really a bet on their asset management business continuing to grow. The competition here has only become more intense with Goldman competing aggressively for UHNW dollars and everyone from Schwab to Merrill competing for households with liquid assets in the $1-$10M range.

While I understand why investors prefer the predictability of fees from asset management to lumpy banking and markets revenues, its fairly easy for wealth management clients to move their money to another institution if they are not happy with performance in any given year. I’d assume all large wealth managers are closet index huggers with a dash of ‘alternatives’ thrown in, so its unlikely there’s much divergence in investment performance, but to the extent MS has a worse year than some of its competitors, it could be an opportunity for others to steal clients.

My current sense is Goldman has more upside from here than MS, but neither are particularly compelling at about 20x normalized earnings of $15B. If there is a correction in the broader market or another financial scare like in 2023, these would be good names to add to the portfolio in the 15x earnings range.

Notes

MS’s long term debt has increased by $150B in the last seven years to $340B today vs GS where this has increased by $50B to $276B. This does not necessarily mean much by itself but is worth pointing out.

At the beginning of 2023, Goldman’s common shares were trading at a 9% net income yield based on trailing earnings. See historical financials here.

There was a narrative that they’d lost their focus. Morgan Stanley was apparently eating their lunch on asset and wealth management, and the CEO was distracted by his side gig as a DJ. In addition, their consumer business was struggling.

Fast forward to today and they’re back on top of the world. They wound down the consumer card business. The CEO stopped talking about his side hustle and they focused on what they do best - investment banking, trading and asset management. While revenues from these businesses haven’t grown that much since 2023, sentiment on Goldman’s prospects has changed dramatically. The common shares now trade a 5% normalized net income yield, which is the most expensive the stock has been in the last ten years.

This is a reminder that when you can buy a world class franchise for cheap, you should back up the truck. Smart people typically learn from their mistakes and figure things out and Goldman (which employs some of the smartest people in the world) is no exception

My sense is that Goldman will earn about $15B in ‘normalized’ net income in 2030 - see assumptions in the spreadsheet. I can see a 20x multiple given the business is now much more about consistent fees, so fair value is about $300B. At the current $290B market cap, there’s really no upside here.

2026 will likely be a stellar year for Goldman given the advisory backlog, so the market is back in love with Goldman.

Bank of America seems like a much better bet here trading at 13x current earnings, with earnings likely growing 5-7% a year for the next five years as their low yielding assets re-price higher.

If Goldman’s market cap falls into the low-to-mid $200B range that would certainly be a buying opportunity.

This is because Meta and Google are both improving their advertising stack such that eventually brands will be able to come to their platforms, provide some very basic photos and information on the products, and Meta and Google will handle the rest using AI to maximize return on ad spend in a way that humans just can’t compete. This would theoretically mean the number of people using Adobe’s products to create online ads shrinks. The challenge as an investor is that Adobe doesn’t spell out how much of their revenue comes from this type of user. This makes it very hard to handicap the future trajectory of this business, and it is therefore in the ‘too hard’ pile for me.

If you’re optimistic about the future of Adobe’s creative cloud and you think the business will continue to grow revenue at 8-10%, you could easily double your money in the next five years assuming the multiple stays where it is today at 20x net income and they continue to return free cash flow to shareholders via buybacks.

Management is trying to paint AI as an opportunity for Adobe, but it’s hard to get behind this story knowing what Meta and Google are doing with their ad tech. There are also the obvious competitors to Adobe in Figma and Canva, the latter of which has added $3B in revenue in the last five years. Future growth in this space will be hard fought.

I have a very small position here just to see how things unfold over the next few years.

Their stocks are also down this year for the same reason. Residential broadband subscribers continue to fall and this segment is responsible for the bulk of the free cash flow these businesses produce. This has the market spooked and as a result Charter’s market cap has halved in the last two years.

Charter is also about to complete a major acquisition of Cox, which will likely close next year barring any regulatory hurdles. This is going to dilute existing Charter shareholders, with the fully diluted share count rising from about 136m today to 197m.

In addition, Charter will take on about $16B in additional debt, bringing the total to $111B. This is a massive amount of debt for a company that is expected to produce about $3B in FCF this year.

Here is the investor presentation laying out the Cox acquisition - https://ir.charter.com/static-files/17f74638-d569-448c-be88-76d00f9c6fff

Why do I think this is an interesting set up?

Charter management has made it very clear that 2025 is peak cap ex. They expect FCF to grow by $4B over the next few years. The exact timeline has not been spelled out, but lets say it takes them three years to get there, my sense is they’ll be making $7B in FCF. They are claiming FCF of $9B in the latest investor presentation (see below), but that assumes $5B in current run rate FCF, which I think is exaggerated. See my model here.

Even with the Cox dilution, the implied market cap at today’s stock price is $40B, so the market cap is less than 6x my expected FCF.

Charter has a solid history of buying back stock with the share count almost halving in the last seven years. If the broadband business declines at 1-2% a year as I expect, then the FCF should hold relatively steady for the next five years enabling Charter to theoretically buy back all the outstanding stock over the next seven / eight years. This would obviously do wonders for the stock price.

What are the risks?

1. Charter broadband subscriber losses accelerate. This would be bad, but I think internet to the home is fairly sticky for most people. If it ain’t broke, I don’t see most people making an effort to find a different provider.

2. A meaningful part of their broadband footprint is in parts of the country like Florida, Southern California and the Carolinas, which are susceptible to natural disasters. This could result in higher maintenance capex costs over the next several years.

3. There is a massive debt maturity wall coming. See below. If debt markets freeze up, Charter’s cost of debt may double to 10% vs the ~5% today. On $40B that would be an extra $2B in interest payments, bringing the FCF closer to $5B. The stock could get cut in half again to get back to a $25B market cap post the Cox merger.

These are very real risks, so I’m going to take a very small position here just to see how things unfold with Charter over the next few quarters. Post the Cox acquisition, I think we may get a chance to acquire shares at a more attractive price.

Unless you’ve worked in digital advertising, this is not a company you’ve likely heard of. After spending a week digging into this business, I have only a superficial understanding of what they do. The lack of transparency from management make it difficult to handicap their odds of success over the next five years.

The Business

If you’re an advertiser, you can hire DoubleVerify (DV) to make sure your ads are not showing up in places that you don’t want them to. DV can also try to determine whether the clicks your ads get are from humans or bots. With their acquisition of Scibids they can help advertisers adjust their bidding strategies to maximize ROI and with their acquisition of Rockerbox they can help advertisers evaluate the performance of the ads.

Below is a quick summary of their product offerings.

While this product suite sounds great in theory, it’s unclear how effective any of these products actually are. I also think this product suite is more applicable to the open web vs walled gardens like Meta. And unfortunately for DV, more ad dollars are moving to the walled gardens. Witness Google’s shrinking Network revenues in the latest quarter vs the growth in Search and YouTube ad revenue.

As an advertiser, you may still hire DV to make sure your ads don’t show up near problematic content in Meta, but outside that use case its hard to see where the growth comes from for DV. They are leaning into connected TV, but its likely Amazon comes to dominate that ecosystem and the need for DV is limited.

In some ways DV is like a rating agency a la S&P or Moody’s. Anyone who’s worked in finance knows their ratings are essentially meaningless. By definition, the best analysts don’t work at these companies, and yet rating agencies are great businesses (with around 40% operating margins) because they provide investors with aircover if something blows up. These are CYA businesses, and I think DV is that for marketing / advertising folks at large brands.

Valuation

Unlike S&P and Moody’s, DV’s products don’t provide clear tangible metrics. It’s unclear how effective they really are and I think this will mean there is a constant need for marketing spend and product innovation and therefore margins likely remain low.

One of my main concerns with DV is just how little disclosure there is from the company on metrics like what percentage of revenue is from social media vs the web, how much is international etc.

The only useful metric they share is gross revenue retention, which has been over 95% for the past few years, so clearly existing customers see some value in the products.

I don’t find this business interesting enough to go much deeper, so this is going to be a superficial analysis. Management is guiding to about 10% revenue growth in 2026, and I assume this rate of growth continues for the next five years. I assume EBIT margins improve from 12% today to 20% in five years and the tax rate holds at about 30%. These assumptions yield about $170m in net income. Assuming a 20x multiple (DV will clearly have proven to be a real business if these assumptions are true), you get a market cap of $3.4B. Compared to the ~1.7B EV today, that’s a double in five years. You can use your own assumptions in the model here.

While that’s attractive, the uncertainty and opacity of this business make me uncomfortable, so I have a very small position just to see how things evolve.

Notes

1. Providence Equity Partners, which acquired a majority stake in DV in 2017, has sold their position down to 16% as of the most recent proxy filling. This may mean nothing as PE firms need to return capital to LPs. Or it may mean they have little confidence in the future of DV.

2. Integral Ad Science (IAS), which is DV’s closest competitor and similar in size ($600M revenue run rate), will be taken private by Novacap for $1.9B. In theory this should mean there’s a floor on DV’s stock price.

3. Spruce Point (a fund in NYC) published a short thesis on DV in 2023. You can access it here. Their thesis has mostly played out.

I’m going to skip the history lesson here because its long and complicated.

As of today, the company plans to focus on six core ‘growth’ businesses. As part of this focus, they are spinning off Versant, which will hold the legacy cable TV networks. Below are the six areas of focus –

1. Residential Broadband

2. Wireless

3. Business Services

4. Parks

5. Streaming (Peacock)

6. Studios

As you can see in the tables below, these six business are not created equal. The first three (bucketed as Connectivity and Platforms), generated $33B in EBITDA in 2024, while the last three (Content and Experiences), generated $7B in EBITDA.

Of the $33B in EBITDA from Connectivity and Platforms, $27B came from residential customers. As an investor trying to evaluate Comcast, the residential connectivity business is the most important one to get right over the next five years. So let’s dig in.

Residential Connectivity

From 2016 to 2021, Comcast's residential broadband customer base grew at about 5% a year (see model here with select metrics). In 2022 and 2023, there was essentially no growth and in 2024, the number of residential broadband customers shrunk by 1%. Quarter to date this year it is down 2%. This accelerating rate of subscriber losses is what likely has the market spooked. See stock price chart below.

Comcast is losing broadband subscribers to two classes of competitors - mobile network operators (like T-Mobile and Verizon) offering a ‘fixed wireless’ WIFI service and fiber to the home providers. Speeds on fixed wireless connections are typically about 300Mbps on download vs 1Gb or more from Comcast, but there is a section of customers who will take the lower speed to save money. This is not the customer base Comcast’s CEO is losing sleep over. See comments from the CEO below at Goldman’s tech conference in September 2025.

And so our strategy on fixed wireless now has been part of the new go-to-market strategy, we’ve introduced a 300-meg tier, very simple pricing, our best device is included. And so that is to go straight at where we were weaker in the market opportunity that the fixed wireless guys have been tackling. And that’s alongside Now Internet, our lower-end brand, and Internet Essentials. So I think now we’re just getting in the market with something that is -- I think it’s still -- there’s still pressure on the fixed wireless side, but I think we’re more on footing to offer the consumer a real alternative and get them on to our system and for the future where we think there is opportunity to bring people to higher tiers.

But like you said, fiber is really the competition that we worry most about. I won’t repeat the stats about how much network used -- I got those out at the beginning, but that’s what shapes that view. And so the desire there is to just stay on top of delivering our go-to-market on the higher end and sell in wireless where we can, which is another step in that direction. And what we see, because we’ve been at it for a while, what we see in markets where we’ve been up against fiber from a telco is stable after a period of time, there’s stability in market share, and there’s healthy ARPUs.

The challenge for Comcast is its fiber competitors only seem to be investing further. See below from a Bloomberg article summarizing Verizon’s 2025 Q3 earnings.

Verizon also intends to continue pushing into home internet offerings. On Monday, Verizon announced a partnership with Tillman Global Holdings’ Eaton Fiber LLC, which will expand its broadband footprint beyond its Fios network. Verizon is additionally in the process of buying Frontier Communications Parent Inc.’s fiber network, which is scheduled to close early next year.

Verizon added 306,000 broadband customers in the third quarter. The company said more than 18% of its consumer postpaid phone customers have an offer that includes internet.

While Comcast is losing subscribers, Verizon is gaining them. This is not a good fact pattern for Comcast.

In my model, I assume broadband subscriber losses accelerate to 3% a year vs 2% currently. Comcast is doing everything they can to mitigate these losses by improving customer service and providing more transparent pricing, so this seems like a reasonable assumption to me. I also assume that video subscriber losses are offset by gains in wireless subscribers. I assume that business and international subscribers remain about flat for the next five years. All of this means that total connectivity and platform customers move up or down only based on assumptions around domestic broadband in the US. This is obviously a gross simplification, but I don’t think its far off from the reality. I also assume ARPU stays flat for the next five years because of competition and EBITDA margins drop from 40% to 39%. The margin drop is based on guidance from the latest earnings call.

Based on all these assumptions (and there are a lot of them), I see FCF from the connectivity and platforms segment dropping by about $3B in five years. Assuming the rest of Comcast’s businesses hold up, FCF for the company should go from about $15B today to $12B in five years. If domestic broadband subscribers decline at 5% a year for the next five years, FCF will decrease by $4B (all else equal) to $11B.

Given this rather unattractive dynamic, why even consider owning Comcast? Well, the price.

Valuation

In 2023 and 2024, Comcast generated about $15B in true free cash flow and returned almost all of it to shareholders. The same is set to happen this year. In my base case above, Comcast will generate about $70B in free cash flow over the next five years. In my downside case, that number drops to $60B. I think in almost any scenario, Comcast will return $10B a year to shareholders, so you’re getting a 10% yield on the current market cap of $100B. If the downside scenario plays out and the multiple on earnings five years out is 7x on $11B in FCF, you still end up with a 5% annual return. If Comcast can deliver on their vision of domestic broadband subscribers growing towards the end of next year and wireless subscribers also growing at more than one million net ads a year, free cash flow could actually end up at $15B in five years and using a 10x multiple on that, you’d make 19% a year in total shareholder returns.

While this seems like an attractive set up, management has very clearly stated that the next two to three quarters are going to be tough as their GTM changes will take time to have a positive impact. They will also only see the benefit of the free wireless line they are offering customers convert to paid in the second half of 2026. So, while I think the stock is already at an attractive level, I think it likely goes even lower over the next six months. I’ve initiated a 2% position and will add to it on any meaningful drops. I will also likely buy long dated calls once the Versant spin is complete.

I should note Comcast has $100B in debt. If the business falls apart, the equity will get hit hard because the math above only holds for a business that shrinks (or ideally grows) slowly over the next twenty years.

Risks

1. In addition to the $100B in debt, Comcast also has $96B in programming and production obligations (mostly live sports). If they cannot effectively monetize the content, that will create a drag on free cash flow.

2. The intense competition from fiber makes it very hard to handicap how Comcast’s broadband subscriber business will evolve. While the assumptions I’m making same reasonable based on current market dynamics, churn could increase if any of the large players decide to enter into a price war.

Airbnb was founded in 2008 and one of the original founders, Brian Chesky, continues to be the CEO today.

The gross booking value (GBV), which represents the dollar value of bookings on the platform, has grown from $38B in 2019 to $82B in 2024.

As an investor, there are really two questions to answer.

1. How much can GBV continue to grow?

2. Can Airbnb manage expenses to take operating margins higher?

GBV

Let’s start with GBV

In the last few years, Airbnb has made a concerted effort to launch experiences and services in addition to accommodations. So far, the traction has been lackluster, and I don’t have high hopes of these verticals moving the needle for them. What has grown meaningfully for them is international revenue, and I expect this will continue to be a growth area. As you can see from the table below, US revenue is up about 18% in the last two years, whereas international revenue is up 44%.

This calendar year, GBV is expected to grow 9%. This is in a pretty robust U.S. economy. Going forward, I model growth of 6%, but you can feel free to input your own assumptions in the model here. I could see 7-8% growth as being reasonable too.

Airbnb’s current take rate is about 14% and it doesn’t seem like a stretch that it would grow slowly over time. I have it at 15% in 5 years.

Expenses

With this anemic growth rate, I expect Airbnb will need to be fairly disciplined about expense growth, so I model marginal operating expense growth over five years. It makes no sense to me that Airbnb spends over $2B on R&D today. This is not a business that requires complex tech, so I think there’s room for them to cut there as well as potentially on sales and marketing.

Conclusion

In my base case, this means $5.2B in net income in five years. A 20x multiple seems reasonable for a scaled sticky platform with slow growth (see Ebay today), putting the expected market cap at $104B. Airbnb returns about $1.5B to shareholders each year (net of stock based comp), so put this all together and you get a 7% CAGR for the next five years.

If revenue grows at 7%, and they can cut expense on R&D and marketing, there is a world in which net income is $7B. Using the same multiple, this equates to a 14% CAGR.

The risks are as follows –

1. Regulators / local governments come after them for higher taxes or just completely shut down short term rentals. They’re an easy target vs hotels because they don’t create employment and detract from the housing stock.

   Airbnb has been pretty smart at navigating this by partnering with cities around big events like the Football World Cup and Tour de France. Each of these events brings inventory on to the platform and some percentage of that will remain even after the event is over.

2. I’m not sure Airbnb has any sort of competitive advantage over Booking.com and VRBO. They do have a head start on alternative accommodations, so their guests and hosts are better ‘validated’ via reviews, but Booking and VRBO can probably offset the risk for hosts with insurance protection. This means there may not be much room for the take rate to increase.

The biggest mitigation to the risks is that Airbnb could probably earn $5B in net income today if they were more disciplined on costs. Even at a 15x multiple, that’s $75B, which is just 5% below today’s market cap.

In summary, this is a low downside opportunity with 7-14% upside. I’m going to take a small position here and watch how things progress. I ideally want a 10% CAGR in the base case to take a position of 5% or larger.

Schwab operates with three subsidiaries –

1. Charles Schwab & Co., Inc. (CS&Co), incorporated in 1971, a securities broker-dealer;

2. Charles Schwab Bank, SSB (CSB), the principal banking entity; and

3. Charles Schwab Investment Management, Inc. (CSIM), the investment advisor for Schwab’s proprietary mutual funds (Schwab Funds®) and for Schwab’s exchange-traded funds (Schwab ETFs).

In 2020, Schwab acquired TD Ameritrade for $26B, almost doubling client assets.

Schwab breaks down their revenue into three buckets -

1. Net interest revenue (NIR)

2. Asset management and administration (AMA) fees, and

3. Trading revenue

In this post, I’m going to dig into each of these buckets to make a guess at revenue and net income five years from now. Here is the model you can use to put in your own assumptions.

Net Interest Revenue

Let’s start with net interest revenue, which is by far the largest component of revenue. In 2024, this was $9B vs $6B from AMA and $3B from trading.

Here’s a description from Schwab on how they earn this revenue -

Schwab’s primary interest-earning assets include cash and cash equivalents; cash and investments segregated; margin loans, which constitute the majority of receivables from brokerage clients; investment securities; and bank loans. Schwab’s interest bearing liabilities are comprised of bank deposits, which include brokered CDs issued by CSB; payables to brokerage clients; payables to brokers, dealers, and clearing organizations; FHLB borrowings, other short-term borrowings (e.g., commercial paper, repurchase agreements, other secured borrowings); and long-term debt. Schwab deploys the funds from these sources into the assets outlined above. Net interest revenue also includes amounts earned and expenses incurred on securities lending and borrowing activities conducted by our broker-dealer subsidiary using assets held in client brokerage accounts.

As Schwab builds its client base, we attract new client sweep cash, which is a primary driver of funding balance sheet growth. We do not use short-term, wholesale borrowings to support our long-term investment activity, but may use such funding for short-term liquidity purposes or to provide temporary funding as we have in recent years. Non-interest-bearing funding sources include stockholders’ equity, certain client cash balances, and other miscellaneous liabilities. Revenue on interest-earning assets is affected by various factors, such as the composition of assets, prevailing interest rates and spreads at the time of origination or purchase, changes in interest rates on cash and cash equivalents, floating-rate securities and loans, and changes in prepayment levels for mortgage-backed and other asset-backed securities and loans. Schwab establishes the rates paid on client-related liabilities, and management expects that it will generally adjust the rates paid on these liabilities at some fraction of any movement in short-term rates. Interest expense on long-term debt, FHLB borrowings, other short-term borrowings, and other funding sources is impacted by market interest rates at the time of borrowing and changes in interest rates on floating-rate liabilities.

As you can see, this is complex number to model going forward given all the moving parts. One simplistic way to look at this is from a historical perspective, using NIR as a percentage of client assets. Over the last six years (ignoring 2022), Schwab’s NIR has averaged 0.11% of client assets. I ignore 2022 because it created an unusually good NIR environment, where deposit costs had not yet increased, but yields on cash had improved dramatically.

Now that Schwab’s clients are used to earning a return on their cash, the days of 13bps to 18bps (of total client assets) of NIR are over. I therefore model 11bps of NIR on a go forward basis.

This could of course be wrong. If there’s a dramatic steepening of the yield curve, maybe there is more NIR upside than I’m projecting.

The other question is how do client assets grow over the next 5 years. I assume about $300B a year in new client assets (in the same ballpark as 2023-2024) and a 7% CAGR on existing assets. 7% is about the average long term return of a 60/40 portfolio. See here.

Given how frothy the market is currently, I do assume a 5% drawdown in client assets from here to 2026.

Another way to look at this is to dig a little deeper into the existing asset / liability yields. In 2024, Schwab paid an average of 1.23% on bank deposits. In the first 6 months of this year that is already down to 0.64%. Deposit prices can’t go much lower, so I think in the short term they will at most pick up $500m of NIR from cheaper liabilities (mostly from paying off their FHLB loan). On the asset side, cash yields are coming down as the fed cuts rates, but about $40B of their AFS and HTM assets are re-pricing each year, picking up 2% in yield. That’s a $800M pickup each year. This would exactly offset a 1% drop in cash yields for the next year. In summary, I expect only about a 5% increase in NIR next year, followed by 7% growth each year till 2030 driven almost entirely by the 7% growth in assets.

AMA Fees

Retail asset management is a brutally competitive business. Vanguard keeps lowering fees on ETFs and the competition for ‘managed’ accounts is intense with Fidelity, Morgan Stanley, Merrill Lynch, Citi and others all vying for clients assets. Of the $6B in revenue in 2024, $1.5B came from Schwab’s 27bp fee on 500B in money market assets. To the extent that rates go down and money moves out of money market funds into equities or bonds, Schwab could actually see these fees go down.

Schwab has shown stickiness in this business with managed assets increasing steadily over the last 3 years. However, the tailwind from fees on money market assets is gone, so I model growth at half the rate of the preceding 5 year average.

Trading

Revenue per trade has dropped consistently since 2021. It was 8% lower YoY in 2024 and 10% lower QoQ in the latest quarter. The saving grace is that the number of daily average trades has exploded - up 9% in 2024 and a whopping 38% QoQ in the latest quarter. The latest quarter feels like bull market froth to me. I model 3% growth in trading revenue out to 2030 after an 8% drop next year. Maybe that’s too punitive in a cutting cycle, but I think 2026 could end up like 2022, where there is a market correction. The difference today is the fed is easing, so maybe the drop is more like 5%.

Either way, trading revenue barely moves the needle on total revenue.

Expenses

I’m assuming Schwab will show strong expense discipline over the next five years, given the likely anemic revenue growth. See the model for detail.

Conclusion

Adding this all up, my best guess for NI is ~$11B in in 5 yrs. At a 20x multiple, assuming $5B in capital returned each year, this is 8% CAGR. Not terrible, but certainly not worth buying in size.

If the yield curve steepens and Schwab earnings more in interest on their assets, I could see a scenario where they are making closer to $13B in NI in 5 years. In that case, assuming the same 20x multiple, you’d get a 12% CAGR.

In may ways, Schwab is just a play on US equity markets. In bull markets, they do well as margin loans, trading and assets all grow. In down markets, all the positives go into reverse.

Notes

1. Management. Rick Wurster is the 3^rd CEO in the company’s history. The first was Charles Schwab himself and the second, Walt Bettinger, was CEO from 2008 to 2024.

2. Regulation. There was a proposal in 2023 to force brokers like Schwab and Robinhood to gather quotes as opposed to just selling order flow. This got nixed under the current administration, but if it were to pass into law in the future, it would certainly hurt trading revenue. See 4 and 5 from this list - https://www.regulatoryandcompliance.com/2025/06/sec-formally-withdraws-fourteen-rule-proposals/

If you work at a Fortune 500 company, there’s a good chance you’ve used Workday. If not, you may never have heard of them. Either way, here’s a summary of what they do.

Workday’s suite of enterprise cloud applications addresses the evolving needs of the C-suite across various industries and is designed to be open, extensible, and configurable, allowing integration with other applications and the ability for users and our partners to build custom applications. Workday offers Financial Management, Spend Management, Human Capital Management (“HCM”), Planning, and Analytics applications.

Workday was founded in 2005 to provide cloud native HR and Finance applications to companies. Today, over 60% of Fortune 500 companies are Workday customers and revenue has grown from $3.6B to $8.4B in the last five years. Clearly they do something useful.

The question for investors is whether their best days are still ahead of them.

My Analysis

Workday breaks down revenue into subscription services and professional services. Subscription services are what customers pay for the actual software (typically on a recurring basis), while professional services are what they pay Workday to get everything up and running. The professional services piece is quite uninteresting from an investor perspective as its basically offered at cost, so workday makes no money here. The subscription service revenue is what we need to focus on.

Based on management guidance for the current and following fiscal year, Workday will add about $1B in subscription revenue each year. I expect this to continue till Fiscal 2031 as the absolute growth rate slows. I’ve included a model here for you to put in your own assumptions for revenue growth over the next five years. Here are some factors to consider –

1. Given they already have 60% of the Fortune 500 as customers, how much growth is ahead of them? They compete against Oracle and SAP for large enterprises and against smaller nimble startups like Rippling for smaller companies.

2. As a counter to the point above, they are focused on growing within hospital and health systems as well as universities and governments. They are also focused on international expansion. Currently, only 25% of revenue is from outside the U.S., so there’s certainly room here.

3. The big risk with all SaaS companies applies here too, which is that over time corporations replace employees with AI. Workday is paid based on ‘seats’ and so this would lead to revenue shrinking among existing customers over time.

4. Workday is exceptionally sticky with a 98% retention rate in the most recent fiscal year.

In my base case, I expect subscription revenue to be about $14B in five years. Could it be higher? Certainly. But this feels like a reasonable assumption to me.

The next question is what do margins look like. I doubt gross margins improve much given they are going to be paying hyper-scalers for AI workloads, so I assume fiscal 2025 gross margins hold.

The big question is what happens with operating costs. For the next year, we know from guidance, that they will go up about 13%. Beyond that, I model them only going up 5% and then 4% in the last 3 years. If revenue growth slows as I expect, the market is going to demand better profitability, so I expect Workday will take a page out of the Salesforce play book. Salesforce has improved their operating margins from 2% to 21% in the last three years by keeping operating costs steady and letting the bulk of the revenue growth drop to the bottom line.

Five years from now, I expect Workday to earn a 25% operating margin (and this is a GAAP number, not the made up operating margins that management shares every quarter which exclude stock based compensation). All of these assumptions imply about $3B in net income five years out. Put a 25 multiple on that (because revenue is now growing 8%) and you get a $75B market cap. The market cap today is $60B, so this is certainly not exciting. That’s a five year IRR of less than 5%.

The bull case is that revenues end up closer to $16B vs the $14B in my base case, so net income is $4B in five years. You could also argue for a higher multiple given the stickiness of the product (say 30x?) and now you end up with a market cap of $120B and you’ve got a compound IRR of 15% over the next five years.

Given how unappealing the base case returns are here, I’m going to take a small position to see how things play out. I think the downside is low because the company could cut head count more aggressively to get to $3B in net income in the next couple of years, so you’re only paying 20x that today. Obviously if AI leads to a 5% reduction in the white collar workforce every year starting soon, all bets are off.

The bull case for Bank of America (BAC) is very simple. I expect Bank of America’s net interest income (NII) to grow by about $6B over the next couple of years. All else equal, this would mean that the net income available to common stockholders is about $33B. At a 13x multiple, there’s about 35% upside from today’s price. Add in the ~6% yield from buybacks and the dividend (~$20B on a ~$315B market cap), and you should expect to compound at 13% a year or more over the next five years.

Now let’s get into why I think NII will increase.

During 2020 and 2021, BAC (like JP Morgan), saw a massive increase in deposits. Pre-covid, deposits had grown about $50B a year (see model here for details), but during the COVID years they added about $500B in deposits as people spent less and let account balances build up. In BAC’s infinite wisdom, they put a large chunk of those deposits into mortgage backed securities (MBS) yielding 2.5%. In some ways this made sense because the fed funds rate at the time was effectively zero (see chart below), but others like JPM were smart enough to keep the cash on hand to invest at more attractive rates.

As the fed raised rates in 2022, BAC had locked in 2.5% for over ten years on their MBS portfolio in a market that was paying 5% over night. This meant they were under earning by about $10B a year (2.5% on $400B). Thankfully, about $35B of this portfolio runs off each year, so they can reinvest it as today’s higher rates. Over the next few years, that means about $100B in assets will be earning about 2% more than it does today, so that’s $2B of the extra $6B in NII I expect.

The other $4B comes from lower deposit costs. I expect the fed funds rate to be about 1% lower in a year from now, so BAC can likely reduce their deposit rate on $1.4T by about 50bps. This would imply about $7B in extra income, but a lower yield also affects the asset side of the business, so I’d think they can only capture about half of this as actual NII. Here’s the relevant math as described by their CFO on the latest earnings call.

Let's turn our focus to NII performance on Slide 11, where on a GAAP non-FTE basis, NII in Q1 was $14.4 billion. And on a fully-taxable equivalent basis, NII was $14.6 billion. That's up 3% from the first quarter of last year. We finished at the higher end of our expected range, and NII grew $75 million on a fully-taxable equivalent basis over Q4, even as we incurred approximately $250 million headwind from 2 fewer days of interest accrual. The improvement was driven by Global Markets activity, as well as deposit favorability and loan growth, and fixed rate asset repricing also benefited NII.

With regard to interest rate sensitivity, on a dynamic deposit basis, we provide a 12-month change in NII for an instantaneous shift in the curve. So that means interest rates would have to move instantaneously another 100 basis points lower than the 4 cuts already expected and contemplated in the April 10 curve. On that basis, a 100-basis point decline would decrease NII over the next 12 months by $2.2 billion. And if rates went up 100 basis points, again, more than the forward curve, NII would benefit by roughly $1.0 billion.

With regard to a forward view of NII, given the uncertainty of announced tariffs, we've seen expectations for more cuts and interest rates and more variability now in the market expectations for economic growth. So let us provide a few thoughts for you using Slide 12 to illustrate. In Q4, we provided our expectation that we could exit Q4 of 2025 with NII on a fully-taxable equivalent basis in a range of $15.5 billion to $15.7 billion. And that included an acceleration of NII growth in the second half of the year. Our assumptions underlying the NII belief then included an interest rate curve, which anticipated one rate cut in the middle of the year and modest loan and deposit growth. And while the interest rate environment has changed a little, our current expectation for the exit rate of NII in Q4 remains unchanged. Using the first quarter '25 as the base, the waterfall gives you some idea of our assumptions to bridge to our Q4 '25 expected exit rate. First, we pick up 2 additional days of interest, one in each of the next couple of quarters. Fixed-rate asset repricing also benefits our NII, and it takes into account the impact of the current interest rate curve. There are 3 primary buckets for that benefit: securities, mortgage loans, and cash flow hedges. Security paydowns are running about $8 billion to $9 billion a quarter. Mortgage loans are another $4 billion to $5 billion a quarter, and each gains a little more than 200 basis points as they're replaced. Cash flow swap repricing benefits are a little more staggered in their roll down and make up the rest of the benefit here. We assume the early-April interest rate curve, which reflects 4 cuts and a couple are later in the year. So that will have some negative impact near term on our expected NII growth, but it improves as the funding costs more fully reflect those cuts. The best proxy for that impact is our asset sensitivity, which again assumes instantaneous rate reductions, even below the rates cuts currently in the curve. We provide our best estimate using the timing of those cuts. And at the same time, with lower rates, we would expect just a little more loan and deposit activity, and we estimate the NII impact of that growth would offset some of the interest-rate impact from lower rates. We already saw modestly better deposit growth in the first quarter than we expected. In addition, we believe our liability-sensitive Global Markets business will also likely benefit NII more as we move through the year. And that obviously depends on the way clients choose to trade with us. Bottom line, our fourth-quarter exit rate expectation for NII is unchanged at $15.5 billion to $15.7 billion from our previous expectation. And that means we're still expecting strong full year NII improvement this year of 6% to 7%.

Here’s another way to think about the NII evolution at BAC.

From 2013 to 2019, BAC’s effective net interest margin, NIM (as calculated in the model here) averaged 3.3%. Post COVID, their NIM has averaged 2.8%. This year it will likely come in at 3.1%. If you believe that the fed funds rate will come down over time, but the 10yr yield will stay above 4%, they should be able to go back to a 3.3% NIM in a few years. This 0.3% increase in yield on their assets would increase net interest income by ~$6B.

Well Fargo is already at a 3.3% NIM (calculated the same way), so this doesn’t seem like a big stretch.

Even if none of the growth in NII comes to pass, BAC common shareholders currently earn about $28B in net income. At a $316B market cap, the stock today is trading at only 11x net income. It’s hard for me to see it going below 10x over the next few years given the strength of the deposit franchise and the balance sheet. You may not make money buying this stock, but you also are very unlikely to lose any. Having said that, all banks are something of a black box. There could very easily be a blow up in their markets business that loses them $5-$10B in a given year. I do worry about this risk and other unknowns, so I own puts that are about 10% out of the money to hedge against this risk. The cost of these puts is only about 5% if you factor in the dividend yield over the next year, so the drag on returns is not too high.

There are several key assumptions here -

Short rates go down

I’m quite convinced inflation is a thing of the past.

House prices and rent equivalents (which are the biggest component of CPI at 42%) are falling in many parts of the country. This is especially true in the markets that went up the most during COVID. See Austin. Energy prices are also down this year and that feeds into everything in the economy from food to freight to gas for people’s cars.

Between inflation coming down and unemployment potentially going up (as companies tighten their belts), I don’t see how the fed doesn’t cut rates over the next year.

Long rates stay in the current range

The 10 year US treasury yield has fluctuated between 4% and 5% this year. I think this is about the right long term yield for an economy growing 2%-3% with a debt to GDP ratio of 120%. If this yield goes materially lower, it will be difficult for BAC to increase NII, but I think the days of sub 2% yields are a thing of the past. I could be wrong here though.

Witness the 10 yr yield for Portugal at around 2.5%. The yield was over 12% in 2012 when the world worried about these bonds defaulting. If the U.S. can get the budget deficit under control and people stop worrying about the country’s fiscal health we could easily see a ten year yield in the 2s. This would make it much harder for BAC to increase NIM, unless the fed funds rate also went down to about 1%.

Credit holds up

If there’s a big spike in defaults because the economy tumbles into a recession all bets are off on bank equity values. Bank stocks will get crushed. I think with BAC in particular, credit will hold up well even in a recession. If you look at the last 10 years, there’s been almost no grown in BAC’s loan portfolio even though deposits have grown about 50% in that period. All those excess deposits have been invested into risk free securities like treasuries and MBS, so the actual risk of meaningful defaults, I believe, is much lower today than its historically been for banks. Even in 2008, BAC had only $16B in losses on a similarly sized loan book. That’s only about half current run rate net income.

13x is the right multiple on net income

Banks have historically traded on a multiple of book value. I find this to be a bit silly given 45% of the revenue is fee based and about half the NII is from risk free assets. Given the very low growth rates of the large banks, I do think a multiple between 12x and 16x is about right. 10x feels too cheap, because there is some growth and 20x is too expensive because of the low growth rate. This is no science, but 13x is about an 8% yield (pretty good in a 4% risk free world) and in line with where Wells Fargo traded before their sales practice scandal.

TLDR

I expect Nike’s stock to compound at 8-12% a year over the next 5 years

The Setup

Here is Nike’s five-year stock chart –

This is one of the best illustrations of why the price you pay when you buy a business matters.

Five years ago, Nike could do no wrong. Revenue growth was a steady 6 to 7% from 2016 to 2019. Operating margins were steady. And investors were willing to pay 40 times free cash flow at the beginning of 2020 for a company that was growing earnings at about 5% a year. You could argue this was insanity, but we’re seeing similar insanity with companies like Walmart and Sherwin-Williams today.

The difference between five years ago and today is that interest rates have moved up sharply and as Warren Buffet has famously said "Interest rates are to asset prices what gravity is to the apple".

In a world of 2% T bond rates, I can somewhat understand paying 40x earnings with the expectation that earnings will grow and you’re getting a 2.5% return in the form of buybacks and dividends. In today’s world, where you can make 5% without taking any risk, paying 40x earnings for a business growing earnings at 5% makes no sense to me.

To buy any stock today, I’d want to compound at 10% a year in my base case, with very low downside risk. Ideally, you’d want to find investments where you expect to earn at least 15% a year over the next five years.

Five years ago, Nike investors were not wrong about revenue growth continuing (it’s grown at 5% a year on average since then) and margins staying about the same. The problem is the multiple on earnings has fallen from 40x to 22x, so you’ve lost money over five years, while the S&P 500 has almost doubled in the same time period.

Here is the question for today - is Nike a good investment at 22x trailing earnings?

Like other businesses we’ve looked at in the past, it comes down to two primary metrics. Revenue growth and operating margins. Let’s start with the former.

Revenue Growth

In the first half of fiscal 2025 Nike’s revenue is down 9% YoY. This seems like the kitchen sink year where the new CEO is purging inventory and setting up the business for long term growth.

The focus going forward is going to be on sports and going back to Nike’s roots of creating great products for athletes. I could see this working and so I model revenue growing about 5% a year starting next year. This is back to pre-COVID levels of growth.

I don’t think this growth will come easily given the competition from HOKA, ON Running, Adidas, New Balance and Lululemon (in apparel), but it doesn’t seem like a crazy stretch.

Feel free to use your own assumptions in the model here.

Operating Margins

From 2015-2017, Nike’s operating margins were 14%. For fiscal 2024 they were 12%. From the last earnings call, it sounds like there was quite a bit of discounting on Nike’s direct sales channels. As the products and inventory management get better, I’m inclined to believe margins will improve too, so I’m modeling a 15% operating margin in 2030. To provide some context, Deckers (which owns HOKA and UGG) has 20% operating margins. ON Running which only does a little over $1B in revenue has 15% operating margins.

Valuation

With the above assumptions, Nike will earn about $7.5B in net income (NI) in 2030. I expect NI will equal free cash flow as it has for the last few years, so I think this is the right number for shareholders to focus on. I struggle to assign more than a 20x multiple to this. Deckers trades at less than 20x today and is growing 10% a year. Retail is a hard business and consumer preferences can turn on a dime.

A 20x multiple gets us to a market cap of $150B, which is 5% a year in annualized upside. You could argue for a higher multiple given the stickiness of the brand. A 22x would give you 7% a year in gains.

It’s important to remember that Nike has a long history of buying back shares and paying a dividend. They’ve consistently returned about $5B a year to shareholders since 2018. Assuming this continues, that’s about a 4% yield at the current share price.

Adding the stock price appreciation to the shareholder yield gets you about 10% a year for the next five years.

In today’s environment where you can make 7% in a relatively risk free structured credit ETF like JBBB, this certainly doesn't seem that compelling.

I’m going to buy a small position to follow the company and add more if the investment proposition gets more compelling.

Risks

1. About 60% of Nike’s revenue is international. The recent strength of the US dollar is going to be a headwind to revenue in the short term

2. Tariffs. This has been the topic du jour for the last week and it’s anyone’s guess how things will actually play out. As you can see below, Nike’s manufacturing exposure to China is not very high, but if similar tariffs were to be imposed on Vietnam, that could be a drag on margins.

For fiscal 2024, factories in Vietnam, Indonesia and China manufactured approximately 50%, 27% and 18% of total NIKE Brand footwear, respectively.

For fiscal 2024, factories in Vietnam, China and Cambodia manufactured approximately 28%, 16% and 15% 2024 FORM 10-K 3 of total NIKE Brand apparel, respectively.

Background

Pinterest was founded in 2011 and went public in 2019. Revenue grew over 50% a year in both 2020 and 2021 and the stock peaked at $85 (about a $50B market cap) before collapsing to $19 a year later as revenue growth slowed to 8%. In the most recent quarter, revenue growth accelerated to 18% and the company had a lot of positive things to say about how AI is going to drive sustainable growth going forward. If you believe revenue will grow at 15% a year over the next five years, there’s a good chance the stock doubles in that period.

Here's what Pinterest does – from their most recent 10k.

Pinterest is a visual search and discovery platform, positioned at the intersection of search, social, and commerce. We offer a unique and differentiated experience that enables people to go from inspiration to action all on one consumer internet property. Pinterest can be accessed through our mobile application or the web.

People use Pinterest to find useful, relevant ideas—and then bring them to life. People don’t always have the words to describe what they’re looking for, but often know it when they see it. As they browse Pinterest content (called “Pins”), they fine-tune their tastes and find the perfect idea. Users interact with the platform in dynamic multi-session journeys to find inspiration, curate their latest look, plan their next project and shop from great brands. This happens at a massive scale, with billions of searches and saves per month.

The unique, first party, intent-based signal we receive from user actions on Pinterest helps power the AI based recommendation systems that we use to surface relevant and engaging content to our users.

AI also plays a central role in how we drive value for our advertisers, who come to Pinterest to reach our users with high commercial intent. The inspiration-to-action journey on Pinterest aligns with the advertiser marketing funnel, allowing us to help brands reach customers at every stage, from discovery to purchase, through digital ads.

We believe users and advertisers intentionally choose Pinterest because of our efforts to create a positive and more brand safe environment. As a result, we make deliberate decisions through our policies and product development and aim to deliver on that experience, creating value for advertisers who can showcase their product and services in an inspiring and positive environment.

Analysis

Like any platform, the number of active users is critical. But users that translate into ad revenue matter more. As you can see below, Pinterest appears to be quite saturated in the US and Canada.

Unfortunately, the US and Canada provide about 80% of Pinterest’s revenue.

A bullish argument here would be that over time Pinterest will get as much revenue from the rest of the world as they do from the US and Canada today. This alone would essentially double their revenue. This is certainly possible and is an area of focus for them.

Revenue Growth

I model revenue growth declining from 15% in 2025 to 10% in 2029. In 2024, which was a banner year for internet advertising businesses, they added 0.5B in revenue. It’s hard for me to see them adding meaningfully more than that going forward. This is a fiercely competitive space and only getting more so. Feel free to include your own assumptions in the model here.

Operating Expenses and Multiple

Pinterest, like many other tech companies, has shown remarkable cost discipline over the last couple of years. Despite this, they barely eked out a 3% operating profit in 2024. Assuming the focus on costs continues, it’s not inconceivable that in five years their EBIT margin is 25% and they’re making 1.4B in net income and a similar amount of FCF.

It’s anyone’s guess how fast Pinterest will be growing in five years from now, so I don’t feel comfortable assigning more than a 25x multiple to net income.

In this scenario, the company will be worth $35B vs the $27B today. That’s only 27% in upside, so I’m going to take a small position here and wait to see how things evolve.

Risks

1. The biggest risk to me is that Google could just create Pinterest by adding a ‘pin it’ option to their image search page. Unlike Meta, there seems to be no content created for Pinterest. They just pull it in from various parts of the internet, so its hard to see what makes them so uniquely valuable.

2. From using the platform over the last couple of days, it feels very saturated with ads, so its unclear they have meaningful room to grow ad impressions unless engagement improves.

Positives

1. Insider sales have been very small over the last year ($22m in total sales) - https://www.dataroma.com/m/ins/ins.php?t=y&&sym=PINS&o=fd&d=d

2. They could be included in the S&P 500 in a couple of years if profitability endures and they keep growing

3. It may turn out Pinterest is early in their monetization journey and revenue growth keeps accelerating from there. Like Google, in the last couple of years, the growth may come from a combination of increased impressions and higher price per impression. There is a world in which each of these grow 10% a year on average leading to 20% annual revenue growth for the next five years. Two thirds of their users are women, which is unlike any other large social media platform, so this could be a uniquely attractive place for advertisers.

Here’s what Bill Ready (the CEO) had to say on this topic on the latest earnings –

First, is continuing to grow our user base and deepen engagement, and bring back users more frequently through our efforts in actionability and curation. As we stated many times, relevant ads can be great content for our users and additive to the user experience, particularly when they're in commercial context. And as such, we see room to further grow our ad load, particularly in high-intent surfaces and verticals on our platform, and for those users that, again, are in a commercial mindset. Secondly, we'll continue to drive improved performance for advertisers through lower funnel product innovation and ad platform efficiencies. Performance+, which we just rolled out late last year, will continue to be enhanced through features like ROAS bidding and Performance+ creative. As I've always said, we expect Performance+ to be a steady build with a multi-year product and adoption cycle. No hockey stick in growth in one particular quarter, but a steady build over a multi-year product and adoption cycle. And finally, we'll continue to complement our strong and growing first-party business through new sources of demand as you've seen us do through the launch of resellers and third-party partners. And we'll continue to optimize and test with incremental sources of demand over time.

Salesforce is one of the largest software companies in the world and continues to be run but its founder Marc Benioff. His track record has been spectacular. Revenue has grown from $5B ten years ago to $38B today.

Unfortunately, revenue growth has slowed dramatically in the last couple of years. See historical financials here. Fortunately, operating margins have improved equally dramatically going from 6% in fiscal 2023 to 19% in fiscal 2025.

Assuming AI doesn’t pose an existential threat to Salesforce (I don’t think it does), there are really two things investors need to think about.

1. What does revenue growth look like over the next five years

2. How do margins evolve over the next five years

Revenue Growth

In my base case, I assume revenue will grow at 7-9% a year for the next five years. It’s possible this is conservative because Agentforce ends up being a massively successful new business, but I don’t feel comfortable making this assumption in my base case.

There are also a couple of other drivers that could accelerate revenue growth.

1. Salesforce could start to raise prices. Historically, most of the growth has come from new accounts and upselling existing customers. If they start to raise prices for existing customers by 3% a year, that would provide a boost to revenue growth and be very accretive to margins.

2. International expansion. Currently about two thirds of revenue is from the Americas. As they invest in their international GTM motion, international revenue could easily equal American revenue.

Operating Margins

The last time I looked at Salesforce, I naively assumed operating margins would top out at 10%. Boy was I wrong!

Benioff has shown remarkable cost discipline over the last two years keeping operating expenses almost flat while revenue has increased 20%. Operating margins now stand at about 19% and I think they could easily get to 30% in five years.

There’s also a world in which they could get to 40%. Microsoft has a 45% operating margin, so its not inconceivable that Salesforce could be at 40%. If they can get margins to this level, they could be earning $20B in FCF in five years. If the multiple stays where it is today, you’d double your money.

Downside

From a downside perspective, if revenue growth slows to 6-7%, they should still be able to grow earnings 10% a year for the next five years. Applying a conservative 20x multiple to $15B in earnings five years out, you likely don’t lose money.

Conclusion

This doesn’t feel like a slam dunk investment at the current price, but it certainly seems worth owning a small position and potentially adding on weakness.

Notes

1. I don’t love the 8% in customer attrition every year, but this seems to be relatively stable over the last ten years.

2. It appears that Mason Morfit of ValueAct (he’s on the board of Salesforce) sold $350M worth of stock in December last year at $340 a share. He bought $100M of shares at $230 in June 2024, so maybe he was happy to take the quick win, but I’d think he’d have held on to his shares if he saw huge upside from here.

TLDR – This feels like a hyped meme stock, so I’m staying away. Insider selling is massive.

Palantir’s stock has been on a tear recently. It’s up from $17 a year ago to $80 today. The last $40 of the move has come since their November earnings release, which happened to coincide with Trump’s reelection. While the earnings were certainly strong, they were not materially better than the previous quarter, so why has the stock doubled since then?

My sense is that the market now thinks revenue growth can be sustained at 25-30% for the next five to ten years and that margins will continue to get better. I think there’s also a view that the new administration will result in more government contracts for Palantir.

To justify today’s valuation of $180B, you need to believe revenue will grow at 25% for the next 5 years and that operating margins will improve from about 20% to 45%. This would put Palantir’s operating margins at the same level as Microsoft’s. In addition, you’d have to assign a 50x multiple to those earnings five years out. While revenue and margins could certainly get to these levels, a lot must go right.

I’ve built out a simple model here. Feel free to use your own assumptions for revenue growth, margins, and a PE multiple five years out.

Palantir is not a simple business to understand. Here is what they do (from their latest annual report) -

We build software that empowers organizations to effectively integrate their data, decisions, and operations at scale.

We were founded in 2003 and started building software for the intelligence community in the United States to assist in counterterrorism investigations and operations. We later began working with commercial enterprises, who often faced fundamentally similar challenges in working with data.

We have built four principal software platforms, Palantir Gotham (“Gotham”), Palantir Foundry (“Foundry”), Palantir Apollo (“Apollo”), and Palantir Artificial Intelligence Platform (“AIP”).

Gotham and Foundry enable institutions to transform massive amounts of information into an integrated data asset that reflects their operations, and AIP leverages the power of our existing machine learning technologies alongside large language models (“LLMs”) directly within Gotham and/or Foundry to help connect AI to enterprise data. For over a decade, Gotham has surfaced insights for global defense agencies, the intelligence community, disaster relief organizations and beyond. And Foundry is becoming a central operating system not only for individual institutions but also for entire industries.

Apollo, which we began offering as a commercial solution in 2021, is a cloud-agnostic, single control layer that coordinates ongoing delivery of new features, security updates, and platform configurations, helping to ensure the continuous operation of critical systems. Apollo allows our customers to run their software in virtually any environment.

In 2023, we began deploying our newest offering, AIP, which is designed for customers across the commercial and government sectors, enabling them to derive value from recent breakthroughs in artificial intelligence via the combination of our existing software platforms with LLMs. We believe AIP uniquely allows users to connect LLMs and other AI with their data and operations to facilitate decision-making within the legal, ethical, and security constraints that they require.

There’s a narrative that Palantir has no competitors. I can’t profess to be an expert in this space, but based on the digging I’ve done over the last week it seems that both Snowflake and Databricks are real competitors. Databricks has the same revenue as Palantir, but is growing at 60% YoY. See recent press release. They also recently raised $10B at a $62B valuation. It’s hard to see why Databricks is worth just one third of Palantir given its growing revenue twice as fast.

Databricks is private, so it could be argued this comparison is irrelevant. Snowflake, however, is public and their revenue is growing at the same rate as Palantir from a bigger base ($4B vs $3B). Snowflake’s NRR is 127% vs Palantir’s 118%. In spite of this, Snowflake’s market cap is about 1/3^rd of Palantir’s at $58B.

I don’t believe in valuing companies relative to each other. My goal is to buy good businesses at a fair price, but it stands out when a company in a sector is trading at 3x the price of similar firms. Palantir is without doubt a great company, but the stock is way too rich for my tastes. If it drops to a valuation closer to $60B, I may be a buyer.

I’ll be looking at Snowflake in detail next.

Some other thoughts –

1. Palantir spends $400m on R&D each year vs Snowflake’s $1.6B. Maybe Palantir’s engineers are just that much better, but I struggle to believe that

2. In the last year, Palantir insiders have sold $4.2B in stock. Yes, the market cap expansion has been massive, but this number really stands out. Below is a list of insider sales at other companies over the last year along with rough market caps.

a. SNOW - $270M ($60B market cap)

b. NOW - $105M (200B market cap)

c. TSLA - $286M ($1.3T market cap)

d. GOOG - $49M (2T market cap)

3. Snowflake and Databricks were founded almost ten years after Palantir, but do about the same revenue. This would indicate that Palantir’s products and management team are likely not exceptional enough to justify a 3x premium to similar businesses. If anything, Snowflake and Databricks should trade at a premium to Palantir.

I have aggregated this group level data going back five years and the trends are fascinating.

It’s clear that growth in online store sales has slowed meaningfully in the last couple of years. About 5% annual growth for the last two years vs mid-teens growth pre pandemic.

Physical stores (Whole Foods) have always been slow growers and will be irrelevant for the purposes of this analysis because the size of the business and margins don’t have a meaningful impact on Amazon’s earnings.

Third Party seller services are still growing nicely (albeit in the mid-teens) vs 25-40% pre-pandemic.

Advertising is also growing at 20+% even as advertising services have gone from $10B in revenue in 2018 to $47B in 2023.

Subscription service growth has slowed meaningfully as Amazon has become a mature company with few large markets it can meaningfully penetrate going forward.

AWS continues to grow well and is at a $100B+ revenue run rate in 2024.

As an investor, the key to figuring out whether Amazon will be a good investment over the next five years is to have a view on how these businesses will grow and what their operating margins will be. Below is my best guess for sales growth for each group over the next five years. As always, you can download my model here and put in your own assumptions.

The next step is to have a view on margins for each of these business groups.

For the online stores and physical stores, I assume a 3% operating margin. This lines up with Walmart, which is one of the best run scale players in retail, so I’d be shocked if Amazon can do meaningfully better.

On Third party seller services I assume a 10% margin because of all the infrastructure costs associated with providing these services. Margins could be higher, but this seems like a reasonable guess to me.

For advertising services, I assume a margin of 30%. This should be much higher in theory, but my sense is Amazon spends a lot advertising on Google, so their ad business is pass through in a sense. The data is hard to come by, but according to Gemini, Amazon spent $10B on Google ads in 2022. It’s possible that as more people go directly to Amazon to search for goods, Amazon’s spending on Google will go down and margins on the ad business will improve.

On subscription services, I once again assume a 10% margin. In theory, this should also be a lot higher, but Amazon gives prime members a lot of ‘perks’ at or below cost, like Prime video, so I don’t think margins here are necessarily great.

With AWS, Amazon explicitly gives investors operating margins. They have averaged 30% over the last six years, so I assume this will continue going forward. In 2024, margins were closer to 38%, but its unclear if this is sustainable or boosted by Amazon investing in companies like Anthropic, which then turn around and spend that capital on AWS.

The “Other” group is too small to matter, but there is huge option value in Amazon building out a medical service provider with One Medical and Amazon Pharmacy.

Put all this together and you get a 14% EBIT margin for Amazon as a whole five years out. The final step is to put a multiple on these earnings. 30x seems reasonable given the scale and stickiness of the business, so investors should expect to compound at about 8% a year for the next five years. While this is not bad, it certainly doesn’t seem worth taking a large position in Amazon today. You can make 5% risk free for the next 10 years in treasury bonds or about 8% with relatively low risk in a structured credit ETF like JBBB (based on the current fed funds rate).

There are many assumptions here which may prove to be wrong, so I encourage you to form your own view, but this is my best guess for the moment. It will be interesting to see what the latest quarters earnings announcements bring.

Growth in Google’s core search ad business is likely to be anemic, but one of its moonshots (likely Waymo) could pay off.

The Thesis

Google needs no introduction. Over 3B people use its search engine each month.

As ChatGPT has soared in popularity (about 2-300M weekly users) many investors have been wondering if Google’s search dominance is finally ending.

Google was earlier to AI than any of the other large tech companies in the US. This is from their 2016 Founder Letter –

Sergey and I are working well together on the overall Alphabet direction and providing guidance to the companies. Sundar is doing great as Google CEO. It’s certainly a big job and we are very lucky to have him. He’ll probably write this letter again in the future as he has in the past, so I won’t speak too much for him on the Google related topics in this one. But, I’m excited about how he is leading the company with a focus on machine learning and AI. We took a big step in that direction with the Google Assistant, and built it into a new family of hardware devices like the Pixel and Google Home. There’s a lot more to come.

Despite their early lead it was OpenAI that took the world by storm with ChatGPT in November 2022. The subsequent explosion in ‘answer engines’ is bringing Google’s whole advertising model into question. Why deal with pesky ads when you’re searching for something on the internet, when you get just get an answer?

These concerns have put a damper on Google’s stock price performance. The stock is up about 36% in the last three years vs 90% for Meta, which is its closest competitor.

Google search is 56% of Google’s revenue and its highest margin business. They don’t disclose the profits from Google search alone, but its margins have to be meaningfully higher than YouTube where they share 70% of the ad revenue with content creators. My sense is that Google.com is responsible for about 70% of Google’s profits.

Any slowdown in this business would obviously be bad. There are two key metrics that matter for Google’s search business -

1. The Number of Paid Clicks

2. The Cost per Click (essentially how much an advertiser pays Google when a consumer clicks on an ad)

Prior to 2022, the number of paid clicks was consistently growing at high double digit rates. It averaged 35% growth per year between 2013-2021. In 2023, growth was 7% and this year it was down to 4% in the most recent quarter. This is a meaningful slowdown.

Now here’s where it gets interesting. Pre 2022, the CPC typically declined each year. Between 2013-2021, CPC fell 10% per year on average. In isolation this would be bad, but because the number of clicks was growing faster than CPC was falling, Google’s search revenue still grew at 19% a year on average between 2013-2021. Since 2022, Google has found a way to increase CPC. It was up 1% in 2023 and 8% in the most recent quarter. As a result, Google search revenue is still growing, but much more slowly. 8% in 2023 and likely 11% this year.

See rows 66 and 67 of the sheet for paid click and CPC data as well as select financials.

This feels like a mature business and one that is potentially in decline. Even though ChatGPT has about 300m users today, my sense is that their growth as a stand alone app will plateau. Most people already have a habit around Google and aren’t going to switch unless they’re forced to or a meaningfully better product comes along. However, Apple has now begun to integrate ChatGPT into Siri, so Google could see a decline in traffic from their highest value customers as people get answers from Siri instead of having to use Google. This feels like the single biggest risk to Google.

Android users will obviously still get answers from Google, and Android is 70% of the global phone market. Unfortunately, among more affluent shoppers (which most advertisers prefer), the iPhone dominates. In the US, the iPhone has close to 60% market share.

I think Google core business is now mature and will grow at about 5-10% a year at best. I could obviously be wrong. Maybe Gemini drives more engagement on Google and advertisers pay more per click, so growth is closer to 10% than 5%.

In my base case, I see Google’s core services business (advertising plus subscriptions), growing operating income by 7% a year for the next five years. This would imply about $140B in net income in five years. Put a 20x multiple on that (its clearly proved to be sticky), and you get a business worth $2.8T. My sense is Google’s cloud business will begin to approach $100B in revenue by 2028. Assuming a 30% operating margin (same as AWS), you could justify a $1T valuation for that business. Put all this together and Google is worth almost $4T in five years. That’s about 10% a year compounded for the next five years.

What could go better than expected?

1. Waymo. There are about 7m Uber drivers in the US. Assuming half of those are part time, the real number is closer to 3m. If Waymo can replace 1m of those drivers and capture their take home earnings (about $30k on average), Waymo would be bringing in $40B in revenue. This is because Uber has a 30% take rate on mobility, which would now accrue to Google. The margins for this business should be quite good given all the upfront tech investment is now covered, so I would expect $20B in net income is not out of the question. Put a 25x on that and Waymo could easily be worth $500B. Tesla is worth $1.3T today based almost entirely on the promise of FSD. Waymo already operates a service, so this should be worth at least half of Tesla. The wild card here is Google’s ability to execute. They need to get Waymo rolled out across the country before competitors like Tesla catch up.

2. Ad revenue could grow at 10% a year because Google knows more about its users than ChatGPT or any other competitor (outside Meta) ever will, so advertiser’s willingness to pay goes up over time even though number of clicks stays flat or declines.

3. They have further breakthroughs on chips or quantum computing. Its possible Google’s chips are not that different from NVIDIAs for AI workloads. This most likely just translates into increased usage of Google’s cloud, so it may not be that meaningful.

4. Google’s operating margins continue to improve as more of the ad revenue is from their own properties meaning they spend less on TAC. EBIT margins have improved by about 5% in the last 10 years as they have gotten more disciplined on costs. They could also stop paying Apple $20B a year to be the default search engine on the iPhone, and if there’s no real change in usage, that $20B would go straight to Google’s bottom line.

What are the risks?

1. The Justice Department has proposed breaking up Google. Even if none of the ‘remedies’ to their monopoly status come to pass, this could still be a distraction for senior management.

2. People under 16 are increasingly using ChatGPT and many have never used Google. Its possible that in 5 years the whole paradigm for search has changed and Google’s ad business has declined by 50%. I think this is unlikely because old habits die hard, but things can change quickly in the consumer tech space. Just look at PayPal.

Notes

Doing the research for this article just makes me more bullish on Meta. They are growing ad ‘impressions’ (their version of clicks) 50% faster than Google and their Cost per Impression is also growing 50% faster than Google’s CPC. Both companies trade at about 22x next years earnings and AI is more a tailwind for Meta than a threat as it is for Google. It seems unlikely that Instagram or Facebook will just disappear in ten years in the way that Google’s search business could.

TLDR

1. Downside seems limited to about 20% based on recent acquisitions

2. Upside is about 50% if growth re-accelerates

Business

Okta is not a business most people are familiar with. Here’s how they describe themselves –

Okta, Inc. (the “Company”) is the leading independent identity partner. The Company’s Workforce Identity Cloud and Customer Identity Cloud, powered by Auth0, enable customers to securely connect the right people to the right technologies and services at the right time. Employees and contractors sign into the Workforce Identity Cloud to seamlessly and securely access the applications they need to do their most important work. Organizations use the Company’s Identity Platform to collaborate with their partners, and to provide their customers with more modern and secure experiences in the cloud and via mobile devices. Developers leverage the Workforce Identity Cloud and Customer Identity Cloud to securely and efficiently embed identity into the software they build, allowing them to innovate and focus on their core missions. The Company is headquartered in San Francisco, California

That probably doesn’t mean much, but essentially if you work at a company that has multiple applications like Workday or Snowflake, Okta makes sure that users can access the appropriate applications based on who they are (their ‘identity’). This is what their Workforce Identity Product does. The Customer Identity Cloud does something similar for a company’s customers.

Okta’s products are increasingly relevant as more companies move their infrastructure to the cloud where they use a range of different applications. On average, companies in the U.S. have about 105 apps today. Companies also seem to be trying to move away from being a “Microsoft shop” and reduce their dependency on any one single software vendor.

These reasons are likely why Okta has grown revenue from $600M in 2019 to $2.6B today. Okta’s revenue growth has averaged 36% for the last five years, but in the last few quarters that has fallen to 16-18%. This has the market spooked and as a result the stock is down 7% YTD while the S&P 500 is up 28%.

The Set Up for Investors

In theory, Okta is cheap. Smartsheet got taken private a few months ago at 8x gross profits and was growing topline at about the same rate as Okta. A similar take-private acquisition here would imply a 20% premium to the current price.

If a company like Salesforce were to acquire Okta and get rid of all Okta’s salespeople over time, they’d be able to generate $1B in profits from the business each year, so you’d expect an acquirer to pay somewhere between $10B to $20B for Okta. The current market cap is $13B.

The slowdown in revenue growth could also be temporary as a lot of companies laid off employees in 2023. Given the annual contract structure the effect of those reductions in seats would only kick in now and that’s why revenue growth may have stalled. As hiring picks up or at least stops falling, Okta could revert to 20% + revenue growth.

On the flip side, Okta may be cheap for a reason. Zsclaer, which did $2.2B in revenue in its latest fiscal year, is growing 30% YoY vs Okta’s 15%. It’s possible that Okta is struggling to compete against Microsoft Azure AD making acquiring new customers a real challenge. Also, if you believe that in the long term AI is going to displace white collar jobs there may just be fewer licenses to sell as all companies shrink their workforce. This would be a meaningful headwind for Okta.

I’m inclined to put this in the ‘too hard’ pile because it’s not a business I understand well, but it feels like an asymmetric bet here where the downside is about 20% and the upside is 50-100%. The upside case is based on Okta growing revenue about 10% a year for the next five years bringing them to $5B in ARR. At a 20% net income margin, they’d be making $1B in net income and the market would assign a 20-25x multiple to this given the stickiness of the product. In this scenario, you would double your money over five years. That’s a 15% compound annual return.

I have a small position in Okta because I’m a sucker for asymmetrical bets. Select financials here.

Notes

1. Okta may be a cautionary tale for Palantir shareholders. If you bought Okta stock in 2019 you’ve lost money even though revenue has 6x’d since then. That’s because you were paying 30x revenue and it now trades at 5x revenue. Palantir is at 50x revenue currently.

2. Given they’re the dominant identity player they are targeted by hackers. An incident could immediately wipe 10- 20% off the stock price as we saw in October 2023 and with Crowdstike earlier this year.

Everyone in America is likely familiar with The Gap or one of its other brands – Old Navy, Banana Republic and Athleta.

For shareholders, it’s been a real dog. The stock price is down slightly from where it was twenty years ago and down almost 50% from ten years ago. This isn’t the kind of set up that makes investors excited to buy a stock.

However, the company currently trades at about 10 times free cash flow ($8B market cap with free cash flow (FCF) of about $800M) and has no net debt. If you believe, as I do, that the company will be around in roughly the same form for the next ten years, then this could be compelling chance to buy in.

Select financials going back eight years are here.

Assuming the business generates the same level of cash flow for the next five years, they could comfortably retire half of the outstanding shares while paying the 3% dividend. All else being equal, this means the share price doubles in five years.

The company brought in Richard Dickson as CEO in August 2023. If he can deliver on improved margins as he aims to, while also growing topline 3-5%, there’s a path to the company making over $1B in FCF in a few years. A 15x multiple would not be crazy for a company that has proven its staying power for over 50 years. In this scenario, investors would double their money sooner (2-3 years). It doesn’t hurt that Mr. Dickson was awarded over $20M in equity in various forms when he joined the company and hasn’t sold any stock to date. Clearly his interests are aligned with the shareholders.

The downside risks here are the same as they’ve been for the last decade. They get the product assortment wrong. Consumer tastes change and they need to discount aggressively to move product. Lower cost retailers like Shein take market share (Trump’s election may help Gap here). New direct-to-consumer brands, like Mack Weldon, take customers away from the Gap. You could also have a recession (though this would be bad for most consumer companies).

However, given the multiple and new management team, I’m inclined to take a small position here. My sense is this is a leaner, more focused company than they were pre-pandemic. The market cap bottomed at about $4B in 2023 and I think that was a wake up call for management and the Fisher family (they own about 40% of the company). There’s a good chance the next five years will be much better for shareholders than the last five.

As always - disclaimer.