You can read this article (almost) entirely for free. If you like what you read, consider becoming a paid member to get access to…

• All in-depth reports (15 companies profiled thus far, and growing)

• Earnings follow-ups

• Other investment related content

• A community of like-minded investors

• Complete access to my portfolio and transactions

• Occasional webinars

The in-depth reports of Stevanato and Deere are free to read to gauge the quality of the research.

Join today:

Subscribe now

It was an interesting week in the market as the Mag 5 (MSFT, GOOG, META, AMZN, and AAPL) reported earnings in the space of 2 days. These companies’ earnings can be bifurcated in two distinct groups, but I’d imagine that a lot of people expected a much more volatile week than we got. Markets are still trading at ATHs and the music seems to have some legs (this might age poorly!).

Without further ado, let’s get on with it.

Articles of the week

I published two articles this week, both earnings digests. The first one was Texas Instruments’ Q1 update.

The company reported outstanding earnings (despite the forecasts of many semiconductor “experts”) and rose to fresh ATHs. It has been a rocky path, but shares have finally responded.

The second article of the week was Amazon’s Q1 earnings update.

The company again reported a significant acceleration, but the acceleration was not isolated to AWS this time. There are reasons to believe that AI is positively impacting each and every one of Amazon’s operating businesses, to which we must add a new revenue stream coming live later this year.

Market Overview

Both indices were up again this week (surprised? ha):

It was a pretty relevant week for financial markets. The Mag 5 reported earnings: Microsoft, Google, Meta, Amazon, and Apple. Someone could’ve claimed that this was a “crucial” week for financial markets, but the reality is that it was a pretty calm week all things considered. Microsoft, Google, Meta, and Amazon reported somewhat “similar” earnings in the sense that they are all spending significant Capex on AI and that they plan to continue doing so in the years to come. Many of these companies claim that AI is “a revolution unlike any other” and that the Capex is money well spent/invested. While this is something that we’ll only know in hindsight, I don’t think that all investor skepticism around this Capex is misguided.

Apple, on the other hand, reported earnings in line with what everyone expected from them (in the Capex sense): very little Capex and strong returns of capital to shareholders. The strategies of Apple and the rest of the Mag 5 are strikingly different, but there’s no denying that Apple holds a large chunk of the hardware through which AI is distributed. Tim Cook claimed that the Mac Mini has seen heightened demand from AI and I believe that Apple is raising prices (maybe led by higher demand as well as higher memory costs). So, Apple is not spending the Capex but it’s “clearly” benefiting from AI. Who will be right long term, Apple or the rest of the Mag 5? I believe that this question is a tad useless because both can be right in owning different parts of the value chain. We’ll see.

Even though this week was important for markets in general, the real important weeks for my portfolio are the next two (especially the one that’s coming up right now). I have around 40% of my portfolio reporting next week and I am excited for earnings season (this might age poorly!). I believe my two top positions will put their respective narratives to (hopefully) rest, although I must say that, for my top position, there are already significant signs that point to a flawed narrative (more about this in the company-specific news section).

In other news, Adobe’s CEO, Shantanu Narayen, sold around $18 million worth of shares this week:

A couple of weeks ago, I published the following on X:

I don’t want to be overly critical on Adobe (as I don’t own it anymore and it can appear to be opportunistic), but this is precisely what I discussed in my post. It might be great that Adobe’s management is repurchasing shares at historical low valuations (we’ll only know in hindsight), but a much stronger sign of management confidence would be if insiders were also putting their money (not yours) where their mouth is. The reality is that Adobe has not seen a single insider purchase over the last year and that the CEO just filed to sell $18 million worth of stock at the historical low valuation (plus the fact that he left without succession, which seemed weird). In my most recent Amazon update I shared two interesting quotes I found in Meta’s and Amazon’s earnings call that “impact” Adobe. There’s food for both the bulls and the bears:

Software had a relatively good day on Friday after Atlassian reported what appeared to be great earnings. Its stock was up almost 30% and the IGV was up 3%. Does this invalidate the fact that Adobe might be in “trouble” due to AI? No, the reality is that, within software, there will be companies that thrive thanks to AI and others that disappear (not claiming Adobe will be in the latter group!). What I do think that many of these SaaS stocks reactions prove is that the market has thrown the baby out with the bathwater and that there are likely interesting opportunities in the sector.

The industry map was mixed this week, coherent with the fact that we are in earnings season:

The fear and greed index remained in greed territory:

One trim and one new position

I made two moves this week. First, I decided to trim one of my long-standing positions. The stock had risen to the #2 spot in my portfolio due to its great performance, and I was not comfortable with that at the current valuation. Peter Lynch would say I “trimmed the flowers” and he might be right, but I believe there are ample opportunities to deploy this capital in.

I also started a fresh new position which I expect to hold over the long term. Management is very aligned with shareholders on this one and has the track record to back their confidence in the model:

Read more

I honestly did not end up doing much (just continued to hold my Amazon shares), but it’s becoming evident that I should’ve and that it’s getting incrementally harder not to own Big Tech. This is what the stocks of Google, Microsoft, Amazon, and Meta have done since the date that article was published (February 10th):

The fate of the Big 4 has been markedly different: only Amazon and Google are up significantly from that date, with Microsoft and Meta falling behind. If one considers that these business are growing at a good pace and are accelerating their top line growth, and the fact that there are no evident signs (at least not yet) that AI investments will deliver sub-par ROIC (more on this later), their risk reward seems to only be getting better (or at least not deteriorating much).

Anyways, this article will review Amazon’s earnings. I hope you understand why I decided to give it the title I did. One could argue that Amazon is one-of-a-kind in terms of being a company that…

1. Is accelerating its growth at a +$700 billion run rate

2. Has so much potential growth ahead despite its $700 billion run rate (something unthinkable several years ago)

It’s a very rare/special combo, but one that’s not a coincidence.

Amazon earnings

Before jumping into AI and semiconductors (because I am going to mostly talk about this today), let’s take a quick look at Amazon’s summary table:

I believe the table speaks for itself: Amazon delivered a great Q1 across all metrics. The only three reds in the table above need some context. Let’s take the easy one out of the way: the operating income guide came 4% below the market’s expectations. Amazon is well known for sandbagging this metric and I must say that I am surprised that the sell-side has not caught up to this sandbagging. The Q2 top-line guide came considerably above consensus but it’s worth noting that Prime Day this year will take place in Q2 whereas it took place in Q3 last year. I’d imagine part of the consensus took this into account, but no clue.

The other two reds are both related and probably sum up the market’s “concerns”: Capex and AWS’ margins. Capex is not a straightforward one because if one believes that Amazon can invest this Capex at high ROICs, a 77% increase shouldn’t be counted as “red” but actually as “green.” A rational investor would want its companies to invest as much as possible as long the ROIC is worthwhile. The only problem here is that the ROIC on current investments requires some qualitative assessments. The question one should try to answer is:

Seeing AWS margins come down 250 basis points as Amazon expands capacity is surely fuel for the bears. These might think that it proves they are right, but the reality is that Amazon is investing significantly ahead of being able to monetize its AWS capacity, which ultimately means that margins are not entirely normalized through the investment cycle. Then, bulls could also argue that a 35% operating margin (or even a 30% operating margin) singlehandedly justifies the increased investment Amazon is undertaking. The ultimate reality, though, is that we’ll only know in hindsight.

It does seem like Amazon’s business is benefitting from AI in many more ways than investors envisioned. The most straightforward and direct one is AWS (+28% YoY). AI workloads take place in the cloud and hyperscalers are very well positioned to monetize their infrastructure. Not only is Amazon generating direct AI-revenue in AWS (which is growing triple digits), but management also argues that AI is invigorating the “core” business. If you want to jump in the AI train and you are not yet in the cloud, then you got yourself a pretty relevant reason to begin the transition. In short, AI is accelerating the shift to the cloud. What all of this means is that AWS is accelerating at a $150 billion run rate (wow):

Amazon also sized its AWS backlog at $464 billion (including the recently announced +$100 billion deal with Anthropic). Even though this sounds spectacular, I would caution against fixating too much in it. This backlog is based on commitments and not take or pay contracts. This means that, even though demand is still very elevated, it could evaporate in the blink of an eye (not saying it will).

Many people were likely surprised by the fact that Amazon stayed put with the Capex guide despite the rise in memory component pricing. Meta, for example, raised its Capex guide claiming that it was mostly related to higher memory chip pricing (not necessarily increased capacity). With much of the market expecting higher Capex figures as a sign of growing demand and seeing what memory prices have done, one could argue that Amazon “implicitely lowered Capex” while Meta ultimately “maintained” it. I believe Andy Jassy would disagree here as he alluded to front-loading their memory chip investments, but the truth is that this is something that AI bears can hold on to. All this said, the post-2026 commentary by most of the hyperscalers was unidirectional: they expect to spend a lot of Capex on AI over the coming years.

These memory pricing comments, however, are not great news for Nintendo (which dropped considerably again in Japan). It seems like it’s not only margins that might be at stake but also availability (which would be much worse):

Nintendo reports earnings next week, so we’ll see then. In a recent podcast, Jensen Huang (Nvidia’s CEO) mentioned that chip shortages should be, at most, a 2-3 year problem. He also claimed that the real long-term bottleneck is power. This ultimately means that, while not taking place at the best time possible for Nintendo, the chip shortage can prove to be a temporary problem rather than a structural one.

I also thought there were some interesting read-throughs in Amazon’s and Meta’s earnings for a past investment of mine: Adobe. I believe these comments by Amazon and Meta, by the way, hold things for the bears and the bulls. Amazon claimed that creating digital assets is now more accessible than ever, which will lead to a huge rise in advertisers:

Meta, on the other hand, claimed that they are seeing traction with the gen AI ad creative tools across their advertisers:

A bull would say that creative assets are exploding (which is true and part of the Adobe thesis), and a bear would point out that (at least for individuals) the surfaces on which these assets are created might be shifting (might also be true). The more Amazon and Meta continue outgrowing the ads industry, the most likely it is that an independent creative tool gets disintermediated (although one could argue there’s still a long way to go until this happens).

Amazon’s “other” businesses

A growing subset of AWS revenue is in-house chips. Amazon shared some interesting data around its chips business: it’s already at a $20 billion run rate, growing triple digits year over year, and 40% quarter over quarter. The future looks even brighter: commitments for Trainium are already +$225 billion. Andy Jassy also claimed that the business would be at a +$50 billion run rate if Amazon were to be selling Trainium racks to third parties, which they interestingly plan on doing going forward:

Now, I honestly don’t know what competitive advantage will Trainium racks have against Nvidia’s across the “independent” neoclouds (as Trainium’s competitive advantage rests on the fact that the customer’s data is already on AWS), but it’s interesting optionality nonetheless. The good news is that Trainium doesn’t “need to work” with external providers because it’s already delivering measurables benefits to Amazon and its customers:

Continuing on the topic of AI, I think it’s becoming increasingly evident that AI (and technology in general) is impacting Amazon’s entire business (not just AWS). Take retail. The eCommerce business posted above-average growth and margins (and this despite lower prices YoY). It’s impossible to know for sure, but one could attribute a portion of the accelerated top-line growth to better AI recommendations and initiatives like Rufus or Amazon Now.

One could naturally think (if Meta is any guide) that the Ads business should also improve its performance thanks to AI. Ads growth has not accelerated meaningfully like it has for Meta, but the business continues to grow at +20% rates despite its growing scale. A valid question to make here is whether AI is accelerating the shift to eCommerce by being able to provide better digital experiences that take increased wallet share from shoppers. Based on what we are seeing lately, it surely seems to be the case!

So, while the bears argue that Amazon’s AI investments will not bear fruit, the reality is that Amazon is…

• Enjoying accelerated growth across all of its business lines (especially, but not only, AWS)

• Seeing margins of the entire business expand while those of AWS remain “stable” considering the investment cycle

Bears will always point to the future as the timeline when they’ll be right, but the facts are not currently supporting their narrative. Will this change? Could be, but nobody has a crystal ball. Now, we should ask ourselves what would happen if bears are right. Let’s assume AI demand eventually cools down. In that scenario, Amazon could potentially stop investing as much in capacity, which would result in significant Free Cash Flow generation. P&L margins would most likely be pressured over the short term, but this would not be something new for Amazon (remember the excess capacity period in eCommerce in the post pandemic period?). Overall, I am not overly worried long-term. I suspect that those who should be more worried are the companies whose business model is currently based on monetizing the capacity that the hyperscalers can’t meet (as those would most likely be the first ones to go).

It’s also worth noting that AI (and everything AI brings with it) is not Amazon’s only optionality. The company an accelerating retail business and initiatives like Amazon Leo. Amazon announced a couple of weeks ago its intention to acquire GlobalStar. GlobalStar gives Amazon two relevant things: scarce direct-to-device capabilities and a strong relationship with Apple (not a small feat considering the installed base).

Now, management also shared several relevant highlights. First, they expect to generate the first Leo commercial revenues in a couple of months. This will be good both for the top line and P&L margins. Amazon is currently incurring P&L expenses related to Leo despite this being a “pre-revenue” initiative. This changes in a couple of months. I am not an expert on satellite networks, but I do believe that Leo comes with some differentiation points unique to Amazon (among the other providers):

All in all, outstanding earnings by Amazon which trades at an EV/EBIT of around 35 while it accelerates its growth and margin expansion and in the verge of yet another revenue stream (Leo). Does Amazon seem incredibly cheap at current levels? No, it doesn’t. Is there enough optionality to support the current valuation? I believe there is.

Have a great day,

Leandro

• Revenue of $4.83 billion (up 19% YoY) beat analyst expectations by $300 million (7% beat)

• EPS of $1.68 beat analyst expectations by $0.32 (24% beat)

Even though these beats are outstanding in their own right, it would not be the first time that Texas Instruments benefits from a pull forward which allows the company to take analysts off-guard. This is why the beats should be understood in the context of the outlook. There were also good news here.

Texas Instruments guided for Q2 revenue of $5.2 billion, $330 million ahead of consensus expectations. The EPS guide for Q2 of $1.91 also came significantly above the consensus of $1.57. The market reaction was one would expect after seeing these numbers: Texas Instruments’ stock rose almost 20% to fresh new ATHs and is now up more than 50% YTD:

Texas Instruments is a great example of how the stock market rarely grants investors with linear returns. The past 5 years have been pretty rough for TI shareholders. The destocking took longer to play out than expected and, when it was over, many end markets were already in a downturn. This eventually translated into flat returns for the past 3 years or what Wall Street would coin “dead money.”

The recent run has changed things pretty significantly. The stock is now up 82% over the past 3 years, delivering a 22% CAGR (total return). Let’s take a look at my particular case. I started a position in TI on May 2022. This position had been flat for a pretty long time and was honestly quite exhausting because it was pretty volatile. After the recent run (and including dividends), the position has compounded at around a 15% CAGR. Patience was needed and the path was rocky, but the outcome was the one that was intended in the first place. Where am I going with all of this? Where the stock price has been in the past and what it’s doing in the current time says little about the CAGR one can realize in the future: stock returns are typically non-linear.

Texas Instruments is also a great example of how the investment world “lives off” opportunism (because it sounds very smart at the time). I remember that when the pull forward took TI’s management by surprise and led them to miss earnings (barely a couple of Qs ago), many (opportunisitically) claimed that management had run shareholders over a cliff and that TI “had lost the plot.”

While this might or might not have been true, TI acknowledged their lack of visibility due to their short lead times. The outcome that investors should’ve cared about (even though being an opportunist sounds smart) was that the timing was irrelevant for long-term investors (pretty evident at the time). These people, however, did not miss the opportunity to sound smart (aided by the stock price). Unsurprisingly, one can’t find these same people discussing TI’s earnings today (maybe has to do with the stock price, shocker).

This doesn’t mean that they’ll not return. Management acknowledged again their lack of visibility but mentioned that they had embedded conservativeness in the Q2 guide (which is astonishing considering the magnitude of the beats):

They also alluded to holding their pricing expectations (LSD to MSD decline) unchanged but that the year is constructive of better pricing (another upside lever).

The goal of the article is to briefly go over the earnings and to discuss the valuation. In the last update on TI, I concluded with the following:

With the shares today trading around 30% higher, it begs the question:

I believe the answer to this question is not as direct as it seems, and I’ll aim to explain why in the second section of the article. Now, one thing that I wanted to discuss before jumping into the article is the relative attractiveness of cyclical (but secular) companies for long-term investors. I believe that, in the short-term oriented world that we currently live in, these business can provide pretty appealing opportunities to the patient investor.

For these kind of businesses, investors tend to forget (mostly during downcycles) that operating leverage cuts both ways. When numbers are dropping everyone (including Wall Street analysts) is likely to focus on reported numbers and forget that things can improve relatively quickly once the cycle turns. Many wait until the inflection is already here, but by then, the market has already realized that profits also use the elevator to go up. Texas Instruments is also a good example of this, let’s see why.

Texas Instruments’ quarter

I believe TI’s summary table clearly portrays how good the quarter was:

The first thing that jumps out from the table is that growth is back in full force, which seems to indicate that the cycle has improved materially. TI reported yet another double-digit growth quarter after an encouraging few quarters of double digit growth, but this one was the first that suffered significantly tougher comps (as TI was already growing DDs in Q1 2025):

Management argued that the strength was driven by industrial (+30% YoY) and data center (+90% YoY). They gave several interesting details around these two end markets. On industrial (which recall is the company’s largest end market), management mentioned that (despite the ongoing strength) the company remains 15% below the 2022 peak. If you believe (like I do) that this is a secular market, one would think that the 2026-2027 peak should be around 30%-40% higher than where the company currently stands (the 15% below peak + the secular growth on top). This ultimately means that, despite the recovery, there’s still a long way to go.

On data center, management explained why they believe they have a right to win:

This great growth evidently resulted in considerable operating leverage. For the past two years, I’ve discussed numerous times that TI is a fixed-cost business. This ultimately means that when revenues drop, margins drop significantly, and therefore profits drop considerably more than revenue. I also claimed that the good news was that operating leverage cuts both ways, and this is what we are (positively) experiencing now: operating profits rose 37% on a 19% YoY revenue increase. It seems like operating leverage will continue next quarter: management expects a 35% operating profit increase on a 17% revenue increase.

This profitability improvements are being further amplified on the company’s cash flow statements through lower Capex (as the capacity buildout gets to an end) and unwinding inventory. Recall that both of these things were discretionary hits to cash conversion. Management decided to undertake a massive capex cycle during the downturn due to the belief that its markets are secular and also aided by the fact that the US government was “kind enough” to pay for part of this expansion plan. This expansion phase is now ending, and therefore Free Cash Flow is naturally improving.

The other sleeve of the strategy is inventory. TI ran through the downcycle with an elevated inventory level, for two reasons:

1. The company’s inventory has a low obsolescence risk (i.e., they can carry significant inventory)

2. Management trusted the secular nature of its markets and believed it would allow them to gain share once the market turned

The second thing is already happening: inventory days were down sequentially following the market’s shift and allowed TI to gain share from more capacity-constrained competitors.

Inventory days coming down means better cash flows, which seems pretty evident in the numbers: operating cash flow rose almost 80% this quarter. If there was one misleading metric for TI throughout this entire downcycle, that was Free Cash Flow (and I hope it’s clear why).

These better FCF trends can have potential implications for the 2026 targets set by management during the Capital Management Update. Management believes that, at current growth rates, $8 in FCF per share is probably a tad conservative…

So, what does this imply for the valuation? Let’s take a look.

Is TI still a good deal at current prices?

Read more

You can read this article (almost) entirely for free. If you like what you read, consider becoming a paid member to get access to…

• All in-depth reports (15 companies profiled thus far, and growing)

• Earnings follow-ups

• Other investment related content

• A community of like-minded investors

• Complete access to my portfolio and transactions

• Occasional webinars

The in-depth reports of Stevanato and Deere are free to read to gauge the quality of the research.

Join today:

Subscribe now

It was an interesting week in the markets as momentum continued to drive certain pockets of the market. I explain what I mean by this and give some thoughts about it in the market commentary. It was also an intense week content-wise.

Without further ado, let’s get on with it.

Articles of the week

I published several articles this week. The first one was an article on a fairly unknown company, Rosebank Industries.

I explained where the company comes from (key to understand where it’s going), what it does, the investment thesis, and the valuation. It’s a pretty interesting business with a proven “track record” despite being newly formed.

The second article of the week was Danaher’s earnings digest.

The stock fell after reporting what appeared to be “meh” earnings.

The third article of the week was the second edition of “On The Radar.”

I profile three interesting businesses, one in the resources industry, a nordic serial acquirer, and a testing business that I have started to look more in-depth (as it looks pretty interesting, it’s cheap, and run by an outsider).

Finally, the fourth article of the week was Medpace’s earnings digest.

The stock dropped significantly again after a very strong earnings report (it’s been two times in a row that this has happened). I try to explain why many misunderstand Medpace’s leading indicators.

Without further ado, let’s see what the markets did this week.

Market Overview

Both indices were up this week, but just like last week, the performance divergence between the Nasdaq and the S&P 500 was stark:

The reason behind this divergence is that the AI trade continues to work wonderfully. Many AI-related companies (you can pretty much choose any subsector you want) are at or close to ATHs. Take a look at where the SOXX and the SMH (semiconductor indices) are trading at and what they’ve done over the past couple of weeks. Amazing:

Now, despite semiconductors being a great industry (because it is) and despite AI being a high-growth technological disruption (because it is), many are starting to wonder whether the rally has gone too far. The reality, though, is that nobody knows the future and there are many scenarios in which one could imagine that semis and AI-related companies are appropriately priced here, despite the run. We shouldn’t ignore that Anthropic/OpenAI etc are the fastest-growing businesses in history, and whether you believe that these businesses have defensible (or not) competitive advantages (we’ll only know in hindsight), that kind of growth is arguably valuable.

Another thing to consider is that of momentum. Momentum is a factor that has been working great for a pretty long time. It simply refers to “buying what’s working” and “selling what’s not,” pretty much without needing to have an opinion on fundamentals and/or valuation (momentum is purely based on past price performance). Take a look at the performance of the SPMO (the S&P 500 index with a momentum skew) compared to the “normal” S&P 500:

The SPMO rebalances the S&P 500 constituents every 6 months according to a momentum score based on the price action over the past 12 months. It has gone vertical over the past few weeks, which pretty much demonstrates that the current rally is being driven by things that enjoy momentum (i.e., what has been working). We have other ways to know whether momentum is driving the markets currently. I found this post interesting:

I’ve run a backtest (thank you Claude and Python) on my portfolio to see how it would’ve performed if I had applied the SPMO strategy to my portfolio, and the results are unsurprising: if I would’ve rebalanced my portfolio every 6 months according to a momentum score, the results would’ve been better. Now, two things are worth noting:

1. This exercise ignores transaction costs and taxes, which I would imagine would be material with two yearly rebalances

2. It’s evident that it would result in better performance because I know for a fact that the momentum factor has worked, but what if it suddenly stops working?

The reality is, though, that I have a hard time chasing momentum. In fact, I have a hard time remaining invested in something just because it’s benefiting from momentum. Keysight Technologies (KEYS) is a good example. When Keysight reported very strong earnings a couple of months ago, shares rose 20% to fresh ATHs. The stock was up 100% in around a year, and imho did not offer an appealing risk-reward anymore. It had become a large position in my portfolio so I decided to trim half of it at $298. I also trimmed my position three months earlier at $211. You see where this is going, right? I trimmed against momentum in the semi/AI industry, and that did not play out well, as the shares are trading today at $346 (hey, at least I still hold a smaller position):

Trimming against momentum sucks, but honestly not doing so feels even worse (even though I’ve been wrong before). The other thing you can do to benefit from momentum is to buy all the best performing stocks. Now, this is something that I also don’t feel comfortable with, and not because I believe that something that has performed well has necessarily to do bad, but because I feel that there are very interesting things in the other side of momentum (the negative one, I mean).

Momentum can be great when it’s working in your favor, but it can be terrible when it’s working against you. Common sense would say that if there are flows going into everything that’s working (i.e., that the momentum factor is alive and well) then flows are likely coming out of what’s not working (i.e., the other side of momentum). This, in my view, creates inefficiencies in both sides of the market.

I personally feel better buying in the second pond even if it doesn’t feel great over the short to medium term. One thing worth considering is that, as momentum is purely based on stock prices which sometimes don’t even move with fundamentals, it can change on a dime. You might go from being in the wrong side of momentum to being in the right side relatively quickly, with the cause being a change in the stock price. The price to pay for being early is “opportunity cost” and the pain of being in the wrong side.

Wow, that was a pretty long way of saying that I am not invested in most things that are going vertical (unfortunately).

The industry map was coherent with what I have just discussed: many AI related industries were up significantly, but outside of that the market was meh:

The fear and greed index remained in greed territory:

My additions this week

After a month or so of nothing moving much in the portfolio, I added to one of my positions this week. I feel that the company is posed to deliver (at least) a 15% CAGR going forward and it has been a while since the company has been in cheap territory (according to my estimates):

Read more

Medpace’s fate in Q1 was not too dissimilar to that of Q4. The company reported outstanding earnings but dropped pretty much by the same magnitude as it did three months ago (22%). Medpace’s stock is not for the faint of heart, but it becomes easier to digest when you understand what’s going on:

The drop seems to have been caused by the go-forward looking indicators, to which management added their fair share of skepticism through pessimistic commentary. Just like last quarter, August decided to begin the call on a positive note (I am being ironic, in case you don’t get it):

I have a theory as to why management (particularly August) turns every data point or qualitative commentary that is nuanced and could be considered “grey” into a black one to downplay the earnings, and I already shared this theory in my Q4 earnings digest (‘It’s all part of the plan’). The theory is pretty simple and doesn’t require a galaxy brain. If we consider the $657 million Medpace has in cash and the +$100 million in OCF (Operating Cash Flow) generation per quarter, together with the fact that Medpace only returns cash to shareholders opportunistically through share repurchases ($800 million left in the authorization), it’s not tough to understand that management has no incentive for the stock to go up right now, no matter how good the results are. There’s also a track record of management using this same strategy in the past, so it’s not like I am completely making this up.

One thing that I believe that this quarter also portrayed is that not many people understand Medpace’s forward-looking indicators. This becomes evident in the fact that most consider the book-to-bill ratio as Medpace’s “north star” and an unequivocal indicator of the company’s future (spoiler: it’s not Medpace’s north star and neither does it portray what will happen next year). The goal of this article is threefold, although I don’t expect to follow a strict guide:

1. Briefly go over the quarter

2. Explain Medpace’s forward-looking indicators in a way that they are understandable

3. Go over Medpace’s valuation (contrary to what many believe, Medpace doesn’t need to grow at 20%+ rates to work from here)

Medpace’s quarter

Medpace’s quarter was exceptional and the company delivered (again) a beat-beat quarter. The beat on the bottom line was pretty significant:

• Revenue of $706.6 million beat estimates of $697 million (1.2% beat)

• EPS of $4.28 beat estimates of $3.88 (10% beat). Just for context, Medpace has beaten EPS estimates 16/16 quarters, not a bad track record

The company started the year growing revenue 27% YoY, which is significantly ahead of the full year guide provided barely three months ago (9% to 13% YoY growth). Despite this delta, management decided to stay put with the guide and simply reconfirmed it. It was likely this plus a relatively “weak” book to bill ratio (0.88x) that caused the violent downward reaction of the stock. Jesse Geiger (Medpace’s President) announced its intention to retire in May, with August taking the position as they look for a replacement. This might have also worried investors because I believe Jesse was considered the “natural” replacement to August, but August calmed the waters claiming that he remains passionate about Medpace and will be at the reins for long (ofc, if his health allows).

Besides Jesse’s departure, everyone seemed to be hyper focused on two metrics: backlog and book to bill. Many believe that the direction of these two metrics portray that Medpace’s growth is about to decelerate significantly and that revenue is at the verge of a cliff. The former (the deceleration) is a pretty logical assumption to make as I don’t believe anyone believes that Medpace will continue growing at a 25% clip forever. A very different (but key) question is whether 25%+ growth is needed for the current valuation to make sense (something I’ll discuss in the last section).

So, why are both the backlog and (especially) the book to bill ratio ill-suited as Medpace’s go forward indicators? Let’s give it a shot, starting with the book to bill. Medpace reported a sub 1x book to bill ratio in Q1. What this ultimately means is that the company is eating into its backlog because it was not able to replace the entire Q1 revenue with net new awards. Management attributed this to higher cancellations than usual and also to lower than expected gross backlog bookings. They however believe that “initial award notifications and win rate were strong” (more about what this means later on):

A lot of analyst questions were around the future rate of cancellations, to which management answered that they don’t view these as structural but rather as business as usual:

This is interesting because the current guide is based on the current level of cancellations, but if these were to abate and with Medpace having grown 27% in Q1, the guide seems sandbagged (again, management has no incentive to not sandbag it if they want to repurchase shares).

Management also believes (and I fully agree with them here), that the book to bill needs context and that it’s actually not a great metric. The main reason is that, yes, Medpace delivered a sub 1x book to bill, but it did so in a quarter where it delivered 27% growth. This means that net new awards (the other variable used to calculate the book to bill alongside revenue) were actually up 24%. Not only does this seem sufficient to singlehandedly cover the full year guide, but management also believes that it’ll get better throughout the year. Now, “getting better” has three potential implications:

1. Revenue growth decelerates

2. Net new awards accelerates

3. Both

I don’t know which one will happen, but if the guide is legit (which honestly doesn’t seem so), then it’s logical to think that the book to bill will improve as revenue growth decelerates throughout the year. Will a book to bill over 1x in the face of revenue deceleration make Medpace a better business? I’ll leave this question unanswered and as food for thought in terms of interpreting the importance of the book to bill metric. August somewhat agrees:

Let’s now turn to backlog and the famous “revenue cliff.” The market’s bear case claims the following: Medpace’s backlog is growing significantly slower than revenue which means that Medpace will eventually face a revenue cliff. In plain English this means that Medpace’s engine is not being fed enough gas so there will come a time when it abruptly stops. The numbers seem to support this thesis. Medpace’s backlog grew a paltry 2.9% YoY in Q1 to $2.93 billion. While $2.93 billion seems like a large number, the reality is that Medpace’s TTM revenue is around $2.7 billion. This ultimately means that the backlog is not (supposedly) covering more than 1 year’s worth of revenue.

Now, this bear case started getting traction last year, which led management to disclose (opportunistically and has not been since numerically disclosed) its pre-backlog figure. This is what management said back then:

In Q1 they simply said that the pre-backlog is generally comparable in size to the backlog and that it grew during the quarter (even though they did not quantify it). They remain, however, optimistic in terms of the pipeline that’s flowing into the pre-backlog:

This changes the landscape pretty significantly. The bear case is that Medpace’s reported backlog is insufficient (both in terms of size and growth) to cover future revenue (i.e., a revenue cliff is coming). The reality, however, is that Medpace’s actual total backlog is likely closer to $6 billion and likely growing faster than the reported backlog (albeit we don’t know at what pace).

One could ask themselves why Medpace doesn’t simply report this number, and the answer lies in conservativeness. Management is very conservative in terms of what it includes in the backlog due to the risk profile of its customer base. We could argue that projects that are included in the backlog have significantly lower risk than those of pre-backlog as the first patient already needs to be flowing through. This means that things only go into the backlog when Medpace is already generating revenue from the project.

This is very important because I’d imagine that most people believe that the true definition of “backlog” is actually the pre-backlog and not the reported backlog. In fact, I highly doubt that other CROs report backlog as Medpace does (which also makes sense if they are exposed to large pharma). Anyways, just to clarify how this all works, I decided to work on the following chart:

Only the last two stages of this funnel (backlog and revenue) are reported to the market, but Medpace’s qualitative commentary around the first two were positive and somewhat invalidates (or reduces the risk) of the revenue cliff bear thesis. In fact, cancellations in the early stages of the pipeline were lower than in the backlog (which bodes well for future work flowing into the backlog):

What one needs to understand is that the total opportunity set is pretty large and that it’s simply a matter of timing that makes projects flow to the “reportable” segments:

Management also made a pretty interesting comment about the early stages of the funnel. They mentioned that they are working hard to improve the win rate and that they expect measurable benefits this year:

So, with all the context behind us, let’s take a look at the valuation.

Is Medpace (finally) a buy again?

Read more

1. A troubled retailer (in essence a turnaround story)

2. An interesting healthcare business

3. An above-average aerospace business trading at a reasonable valuation

Today’s issue brings 3 companies that are significantly different to those shared in the first issue (remember that only the first one is free to read, with the remaining 2 being reserved to paid subscribers), namely…

1. A repair and maintenance business with more recurrence than one would suspect (albeit less than management claims)

2. A Nordic serial acquirer that went from favorite to hated relatively quickly

3. A testing business operated by a proven outsider that just revealed something interesting related to its valuation

I was going to write about another business for the third spot (a capital markets intermediary), but an interesting business that I have been following for a while reported earnings and I decided to switch it up. I will most likely write about the other business in the future.

So, without further ado, let’s jump with today’s issue!

Tasmea (ASX:TEA)

Brief description of the business

Tasmea offers specialized repair and maintenance services to customers that operate primarily across the resources industries (mining, oil, energy, water…). The company operates across 4 segments (electrical, mechanical, civil, and water & fluid) and a wide variety of “brands:”

Source: Tasmea Investor Relations

The business grows both organically and inorganically (integrating specialized services businesses) and its track record is exceptional: 34% revenue CAGR since FY 2021. What Tasmea ultimately does is sell labor to keep the operations of its customers up and running.

Why it caught my attention

Tasmea caught my attention for several reasons, but the three most important ones were…

1. Management’s alignment with shareholders

2. The company’s growth opportunity (both organically and inorganically, albeit the former needs context)

3. The apparently undemanding valuation

Insiders own a significant chunk of the business and continue reinvesting their dividend proceeds into new shares. Simultaneously, the company’s growth doesn’t seem to be slowing down, and all while it trades at 17x pro-forma 2026 NOPAT. Now, this doesn’t seem like a bargain multiple for a services business operating in the resources industry (one could assume these industries have low organic growth and are cyclical), but its growth track record in terms of organic growth and resilience surely backs it up. I would have assumed organic growth would be much lower, and even though it’s high (the company strives for >15% organic EBIT growth), it requires context.

What I like

In no particular order, here are some things I like about Tasmea:

• The business was not publicly traded during the GFC in the same shape or form as what it is today, but it seems to have grown through commodity downcycles. This portrays that the maintenance and repair services the company provides are mission-critical for its customers operations and relatively independent from commodity pricing

• Management is aligned with shareholders and plans on retaining a significant stake going forward

• The compensation structure is decentralized and focused on organic EBIT growth of 15%+

• Tasmea’s industry is fragmented, which not only means there’s less “credible” competition to chase organic growth but that there’s also a significant inorganic opportunity

• The production of many resources that Tasmea’s customers are exposed to and the electrification trend seem secular (resources are not going away anytime soon)

• The company seems to be trading at a decent valuation all things considered

What gives me pause

There are a couple of things that gave me pause and that require additional research on my side: the Workpac acquisition, the fact that I don’t think the business is as recurring as many (and management) claim, and the fact that we don’t have a clear organic growth number (not saying it really matters at the current valuation). Let’s take a look at these individually.

The Workpac acquisition: Tasmea’s (and peer’s) main factor constraining growth is labor. The reason is that there’s a lack of specialized technicians, a shortage that is only compounded when the repairs and maintenance have to be conducted in remote areas (Tasmea’s bread and butter). To “solve” this problem, Tasmea diverted from its typical acquisition target and acquired Workpac, a company that focuses on “acquiring” this talent and later subcontracting it to Tasmea and its peers/customers. Management believed that insourcing this capability would result in a competitive advantage in terms of technician availability. While this makes perfect sense, the reality is that Workpac is a different beast to what Tasmea has historically acquired and operated, so it introduces execution risk, cyclicality, and less recurrence.

The recurrence of the business: management claims that, due to the mission criticality of its services and the fact that these are focused on production and not capacity expansion, makes the business pretty recurring. Management explicitly shares that 80% of the business is recurring (according to their own definition), but their definition of recurring differs from what I would consider recurring because it includes brownfield investments/upgrades. I would not say these are as recurring as the company’s maintenance activities, but it’s also true that they are driven by regulatory tailwinds (electrification). To this we must add that the inclusion of Workpac makes the business less recurring as well. I do believe it’s a decently recurring business, but not to the extent that management shares (and I believe the market is also aware of this and it’s fed into the multiple).

No clean organic growth number: even though Tasmea boasts a 15% organic EBIT growth target, the reality is that this target is inclusive of acquisition synergies. When Tasmea acquires a business, they typically use it as a platform to cross-sell the services of other subsidiaries. While this growth is definitely counted officially as “organic” the reality is that it’s dependent on a continuous stream of acquisitions. This is not a problem yet, but it might become a problem in the future and the reality is that there’s no way of knowing what true organic growth (ex-acquisitions) would be in that scenario.

What I am watching

There’s nothing too specific that I am looking for, I just need to do more research to get comfortable (or not) with the three things I shared in the “what gives me pause” section.

Let’s jump to the second business.

If you want to have exclusive access to On The Radar Issues and…

• All in-depth reports (15 companies profiled thus far, and growing)

• Earnings follow-ups

• Other investment related content

• A community of like-minded investors

• Complete access to my portfolio and transactions

• Occasional webinars

(The in-depth reports of Stevanato and Deere are free to read to gauge the quality of the research.)

Consider becoming a paid subscriber:

Subscribe now

Read more

• All in-depth reports (15 companies profiled thus far, and growing)

• Earnings follow-ups

• Other investment related content

• A community of like-minded investors

• Complete access to my portfolio and transactions

• Occasional webinars

The in-depth reports of Stevanato and Deere are free to read to gauge the quality of the research.

I published yesterday an article on a relatively unknown business: Rosebank Industries. You can read that here:

Rosebank Industries

Join today:

Subscribe now

Danaher reported decent Q1 earnings yesterday. There was nothing too surprising or worrying in them, but there were two good news:

1. Management (very) slightly raised the 2026 EPS guide from a midpoint of $8.43 to $8.45 (I know, it’s honestly not very meaningful)

2. Management confirmed that Q1 trends are encouraging and openly shared what needs to happen for the company to end up in the high end of the core revenue growth guide for the year (more on this later)

The reality is that Danaher has faced several headwinds that haven’t allowed the company to grow at an acceptable pace for a while. The company saw a huge pull forward (both in consumables and equipment) during the pandemic which ended up resulting in a bust once customers began to draw down their inventory. Besides the destocking, the company also faced subdued biotech funding. When these headwinds finally began to transform into tailwinds, the company experienced two additional headwinds:

1. The VBP (Volume Based Procurement) situation in China (primarily impacting the diagnostic segment)

2. Lower Capex spending by customers driven by geopolitical uncertainty. This impacted equipment revenue while consumable orders improved post-destocking. Management, however, believes this will transform into a headwind in due time:

There was also, btw, “good” (or at a minimum, “encouraging” news) for Judges Scientific:

So, let’s take a quick look at the results. Here’s the summary table:

The main things I would highlight from this table is that revenue growth remains “meh” but that earnings are growing significantly faster than the top line, driven by cost containment measures and DBS. Management believes that EPS can grow HSD/LDD this year even while remaining at the low-end of the core revenue growth guide (+3% YoY). One can only ask themselves what would happen to EPS growth if Danaher manages to be at the high-end of the guide (+6% YoY). Let’s not ignore that operating profit margins (adjusted) rose 60 bps in a no-growth quarter.

So the question here should be: what takes us to the high end of the core revenue guide? Management explained that Q1 was off to an encouraging start in terms of trends, something that would suggest that growth is trending ahead of the low end:

Biotechnology and Life Sciences strength compensated for the lower-than-expected respiratory season (i.e., diagnostics came in below expectations with respiratory revenue down 25% YoY). The weaker respiratory season made management lower their expected respiratory revenue from $1.8 billion to $1.6 - $1.7 billion. They, however, expect the other segments to fully offset this drop.

Management also shared what caused Biotechnology and LifeSciences to perform ahead of expectations. There was a common driver for both: China. Equipment is also getting better and showing encouraging signs in Biotechnology, but it’s not showing in the numbers yet:

Management is not assuming these orders convert to revenue over the short term (i.e., it theoretically doesn’t impact the 2026 guide), but they do believe it’s great news for the post-2026 period.

Most analyst questions were focused on 2026 numbers (surprise!): will Danaher be able to be at the top end of its 3%-6% growth guide? Management did not provide an answer but did share what needs to happen (albeit not quantifying anything and simply providing directional comments). It comes down to 5 things:

1. Further improvement in life sciences: management admitted being encouraged by Q1 trends but they need these to continue throughout the rest of the year

2. China: even though China was off to a good start in Q1, management believes the high end of the guide requires additional acceleration

3. Biotech funding: management wants to see improved funding convert quicker into orders

4. Bioprocessing: requires higher than HSD growth (which seems possible if equipment improves and orders start converting to revenue)

5. Respiratory season: after a slow start to the season, they will probably need an “above normal” Q4 respiratory season

So, lots of things need to happen for Danaher to grow its top line 6% this year, but with #1, #2 and #3 trending better than what was expected at the start of the year, I’d say that Danaher should end the year above the low end of the guide.

This is important because 3% core revenue growth is where Wall Street is currently anchored. Anything above the low end of the core revenue growth guide should translate to LDD EPS growth, which is not exceptional considering where Danaher comes from but I’d define it as constructive considering the ongoing headwinds. This is arguably a feature (not a bug) of diversified businesses: it’s tough for everything to work at the same time and it sucks when one segment’s poor performance is obfuscating the good performance of the others, but that can also become an advantage when things are not going great (and if not one simply has to look at the charts of pure-play bioprocessing businesses through the destocking).

Management also talked about other relevant long-term topics. The first one was the implications of AI in the business (I wrote an article about why I consider healthcare to be positively skewed to AI here):

The second relevant topic was M&A. Danaher recently announced its intention to acquire Masimo (I wrote a detailed article on the acquisition here) and I was surprised to see management not rule out additional M&A over the short term:

All in all, not much has changed for Danaher in Q1. Things are getting constructive to end above the high-end of the guide, but the market remains in “show me” mode.

Have a great day,

Leandro

Even though serendipity is involved in 100% of business success stories, I am specifically referring to serendipity in the context of investment discovery. So, this begs the following question: how did I end up studying Rosebank Industries (LON:ROSE)? Maybe my impression is misplaced, but I’d say Rosebank is a relatively unknown business (thus far, nobody who I’ve spoken to about the company knew about it). I got to Rosebank in an “unconventional” way, but it was honestly a way that typically happens more often than we realize.

In my quest to look for appealing investments that operate in attractive industries (such as aerospace), I came across Melrose Industries (LON:MRO). Melrose Industries is a publicly traded pure-play aerospace business that looks appealing in its own right, but its history can be clearly subdivided in two phases, one of which led me to Rosebank.

Melrose was founded in 2003 by David Roper, Christopher Miller, and Simon Peckham. Even though the official slogan of Melrose’s strategy was “Buy, Improve, Sell” the reality is that this was just a “fancy” way of saying that it was a publicly-traded PE (Private Equity) vehicle. Melrose strategy was based on acquiring troubled industrial businesses, improving their operations, and selling them. The only slight difference between Melrose’s strategy and a pure-play PE strategy was arguably leverage. Melrose typically ran its acquired companies at 2x-3x leverage, which significantly trailed leverage levels set by its previous owners (who typically run them with >5x leverage). The playbook was simple yet effective:

1. Buy a good business for a reasonable multiple that was underperforming due to x,y,z internal reasons (i.e., find a “fixable” business)

2. Improve the business’ margin profile and cash conversion through operational improvements

3. Sell these businesses to the highest bidder 3-5 years down the line

4. Return capital to shareholders

5. Rinse and repeat

The “rinse and repeat” step is where the model differed from what we could consider a pure serial acquirer. After exiting, Melrose either deployed the funds in a new venture (if available) or returned the funds to shareholders. The strategy worked (put mildly), and both shareholders (and executives) were well off. From 2003 to 2024 (the year when Melrose’s founders departed), the stock enjoyed a total return of 3,200%, or roughly an 18% 21-year CAGR:

It’s worth noting that, besides achieving a great CAGR up until 2024, the Melrose founding team did not leave a business “starved for value”: Melrose is today a pure play aerospace business with pretty interesting future prospects (I’ll most likely write about Melrose in the coming weeks).

Despite having successfully applied its playbook since 2003, everything changed for Melrose in 2018. After having sold most of its investments (5 until that date), management set its eyes on the golden egg: GKN. GKN was a decent and (somewhat) vertically integrated automotive and aerospace business that was significantly underperforming profitability-wise. GKN was generating at the time of acquisition more than 10 billion in revenue but enjoyed slim operating margins of 6-7%. Melrose believed it would be able to significantly improve these margins and turn the business around, so they decided to pay 8.1 billion pounds, 4x Melrose’s revenue at the time.

The deal soon encountered “problems,” but these were not operational in the purest sense. They were related to GKN’s geopolitical relevance and mission-criticality. Airbus (a long standing customer of GKN) COO publicly stated that it would be “practically impossible” to award GKN new work under short-term owners. This is when Melrose’s founding team realized that, for the first time in almost 20 years, they would not be able to implement their “buy, improve, sell” strategy, at least not without encountering significant obstacles along the way. The UK government also set some limits around what could be done in terms of cost efficiency (EU-related countries are not a big fan of efficient operations, shocker).

Realizing that the GKN turnaround would only be able to be conducted by long-term owners and that this was not their expertise, the founders left Melrose in 2024 to start a new venture and Melrose became an independent pure-play aerospace business (and a relatively interesting one).

Rosebank Industries: new vehicle, same strategy, fewer constraints

Read more

You can read this article (almost) entirely for free. If you like what you read, consider becoming a paid member to get access to…

• All in-depth reports (15 companies profiled thus far, and growing)

• Earnings follow-ups

• Other investment related content

• A community of like-minded investors

• Complete access to my portfolio and transactions

• Occasional webinars

The in-depth reports of Stevanato and Deere are free to read to gauge the quality of the research.

Join today:

Subscribe now

US indices had a great week, driven by (supposedly) positive news flow from Iran. I discuss why remaining fully invested is arguably the more sensible long-term choice and share why it seems like the trend between semiconductors and software seems to have changed somewhat (can both go up at the same time?).

Without further ado, let’s get on with it.

Articles of the week

I published two articles this week. The first one was Hermes’ Q1 2026 earnings digest.

The company reported a strange quarter (for Hermes’ standards) that requires significant context. It’s arguably the first time in a while that a quarter was not completely under management’s control.

The second article of the week was ASML’s earnings digest.

The company reported again a very good quarter, not necessarily because quarterly numbers were good (which they were), but because the go-forward indicators look as good as they’ve ever had. I explain what I think about the 2030 guide and what this means for the valuation.

Without further ado, let’s see what the markets did this week.

Market Overview

The indices had a great week due to the “positive” news flow from Iran. The S&P 500 was up more than 3% whereas the Nasdaq was up more than 5%:

Not long ago, I was discussing in the NOTW how both indices were close to (or even suffering) a correction, but two weeks was all we needed for indices to go climb to ATHs:

There’s a lesson here somewhere. If one is in full cash waiting to time the market, they might end up losing on quite a bit of the upside just because the upside can happen very fast (markets tend to take the elevator both up and down). There’s a relatively well-known chart which shows that the impact of missing the best days in the market can be terrible over the long term:

Some people will say that missing the worst days would also result in a much better return than remaining fully invested. While this is mathematically true, the only (but not minor) caveat is that remaining fully invested requires no supernatural forecasting ability, while missing only the worst days does require this superpower (it’s something that 99% of the population can’t do accurately and recurringly). So, what I get from this is that:

1. Missing the best days can be very damaging for long term returns

2. Being able to forecast the worst days with accuracy many times in a row is pretty much impossible

So what’s the conclusion? Remaining fully invested seems like the rational choice over the long term. If anything we are seeing this is the case time and time again with every drop. Of course, during every market cycle you’ll see people that have forecasted it correctly, but the only “problem” or “flaw” is that these people are rarely the same people that forecasted it right the last time around (weird, right?).

The industry map was coherent with things (supposedly) getting better in the Hormuz Strait, pretty much everything was up except energy and materials:

It was a very interesting week because both software and semiconductors were up quite a bit:

I say this is interesting because we’ve become used to seeing these two “factors” move against each other. If the “AI trade” was doing well then you’d see semis up and software down (due to AI-disruption fears). The opposite happened when the “AI trade” took a breather. Both things seem to be moving lately in the same direction (which might or might not have to do with the fact that everything is going up):

The fear and greed index improved notably and is already in greed territory:

If there’s one thing to take away from this is that sentiment changes very fast and that it’s always darkest before dawn (although I don’t think it got really dark, tbh).

Company-specific news

Read more

Secondly, ASML typically reports earnings just before its main customers (TSMC, Intel, Samsung, and the memory players) do. Even though ASML shares some context around the demand environment, the market typically waits for its main customers to share their Capex plans. TSMC, for example, reiterated today that they expect Capex to be “significantly higher” in the coming three years than it was over the past three years (around $100 billion). A portion of this money will flow directly to ASML and confirms the company’s qualitative comments.

Customer comments are now more important than ever because ASML has stopped sharing quarterly order numbers (now that they would probably be beating the most optimistic projections, I know).

I’ll not focus much on the quarterly numbers and you should know why if you’ve read my past research on ASML (all of which is available here): quarterly numbers are mostly noise, more so now without leading indicators. The reason is that ASML’s revenue is getting increasingly skewed toward higher ASP products (EUV) so any minor delay/revenue recognition of an EUV order can make the quarterly numbers move significantly without a fundamental meaning. The only highlight I’d make from the quarterly numbers is that (once again) gross margins topped management’s expectations due to (once again) higher than expected IBM sales:

Seeing IBM (Installed Based Management) sales outperform management’s expectations so recurrently has two potential readings, with both probably being true simultaneously:

1. Management is being conservative with the IBM business: I believe this is true and that it has implications for the 2030 guide

2. Demand still outpaces supply and therefore customers resort to upgrades to try to meet the heightened demand

Pretty much the entire earnings call was focused across three main topics, namely:

1. The 2026 and 2030 guides

2. Capacity to meet future demand

3. Technology development

Let’s take a brief look at these.

1. The 2026 and 2030 guides

Management raised the midpoint of its 2026 revenue guide (interesting considering it’s just Q1) while leaving the range for gross margin unchanged. ASML now expects 2026 sales of €38 billion (midpoint) which would result in 16% year over year growth. More importantly, this is a 4% guidance raise from the expectations they had just a quarter ago (€36,5 billion midpoint) and is also ahead of the market’s expectations. So, what changed? Management attributed (interestingly) the raised guide to the immersion DUV franchise ex-China. They expected the non-EUV business to be flat this year, but now they expect it to grow.

They also shared some qualitative comments around demand:

The most interesting part (in my view) of this quote is the “medium-term demand” part. It seems like ASML is increasingly gaining visibility on its 2030 guide and that they might end up closer to the high end. They refused to change the 2030 guide BUT they did argue that when they set these objectives they did not believe DRAM would be so strong. This potentially means they’ll come up with a “raise” guide or maybe more confidence on the high end, but this is something we’ll only know in next year’s CMD.

Seeing ASML raise the 2030 guide in 2027 (3 years in advance) would be great, but I believe that what we should take away from the above is that the current 2030 guide seems pretty achievable and that ASML is likely trending towards its high end (I’ll discuss more about this in the valuation section).

The strong demand is ultimately being driven by the AI infrastructure buildout, where demand remains above capacity. ASML flagged that both logic and memory customers (especially the latter) have told them that they expect the shortage to persist beyond 2026 (which honestly doesn’t bode well for Nintendo but already seems to be discounted to an extent in its stock price). For more context on Nintendo’s memory woes, you can read this article).

The AI infrastructure buildout and the memory shortage are somewhat shifting ASML’s geographic and product distribution. EUV sales are now account for 2/3rds of total sales, memory for half, and South Korea for a little less than half:

Despite being pretty much sold out, ASML claims that they are not the bottleneck. It seems like the current bottleneck revolves around energy and memory producers, with their stocks reflecting this situation. Note that, at first, many claimed that this time around memory players would not expand capacity and would milk customers to oblivion. Even though this seemed to be the case during the first few months, memory players eventually decided to expand capacity (benefiting semicap players). It’s interesting because even though ASML holds arguably the strongest position in the semi supply chain, the company has a policy of not milking customers:

This, imho, is one of the pillars of the company’s moat. Not only are customers more likely to share the roadmaps with ASML (therefore giving it an “unfair” advantage over competitors) but it also makes them less likely to pursue other alternative technologies (should these present themselves).

2. Capacity to meet future demand

ASML’s management rightly pointed out that capacity should be looked at from two angles: units and productivity/throughput. Customers can meet their increasing wph (wafer per hour) needs either by buying more units, upgrading existing units to gain productivity, or both. ASML is focused on…

1. Being able to provide an increasing number of units going forward (capacity investments)

2. Making said units more productive (technology investments)

Let’s start with (a). Management shared that they expect to be able to produce 60 low-NA EUV units this year and at least 80 units next year. ASML shipped around 43-45 low-NA EUV units in 2025, so they expect to increase capacity by 25% in 2026 and an additional 33% in 2027. Recall that when ASML’s stock was at the lows, everyone was worried about demand. With ASML at ATHs, everyone started to worry about the company’s capacity to meet increasing demand (funny how this works). ASML’s developments in terms of its ability to ship units not only makes the company able to potentially meet the increased demand but also derisks somewhat the 2030 guide.

Now let’s turn to point (b) in the following section.

3. Technology development

There was a lot of news regarding technology, but let me kick this section off talking about capacity. Management shared two highlights regarding productivity improvements. First, they increased the output of the NXE:3800 from 220wph to 230 wph. Secondly, they announced that the 1,000 watt source will enable them to extend the use of low-NA EUV for many years as it will be capable of a throughput of 330 wph. These productivity improvements have several implications:

• They allow ASML to meet industry capacity without needing to focus too much on units (evidently more productive tools come with a higher price tag and therefore it’s very profitable business for ASML)

• They protect ASML from future competition. This business is not about how much an “equivalent” system costs but about what “equivalence” means. It’s not enough to have a system that can do the same, it must need to be able to do the same at a similar pace. Increasing productivity can only done through data, and to do so you need an installed base, so it becomes the chicken and egg problem

We should not forget that ASP (average selling price) correlates strongly with increased throughput, so more productivity means higher prices and higher prices likely translate into improved profitability for ASML.

They also expect high-NA to be a long lasting system:

All in all, a very good quarter from ASML, but is it still a good risk/reward?

Is ASML a good buy?

Read more

• All in-depth reports (15 companies profiled thus far, and growing)

• Earnings follow-ups

• Other investment related content

• A community of like-minded investors

• Complete access to my portfolio and transactions

• Occasional webinars

The in-depth reports of Stevanato and Deere are free to read to gauge the quality of the research.

I’ll publish an ASML update tomorrow and an article about a relatively unknown company early next week.

Join today:

Subscribe now

A couple of weeks ago, I published an article about Hermes titled “The Stock is down 40%, the business isn’t” sharing some thoughts around the current state of the luxury industry, Hermes’ main bear case, and the stock’s valuation (you can also read my in-depth report here).

The stock rose somewhat from the price it was trading at when I published that article but is “cratering” today (-9% as of the time of this writing) after reporting relatively weak Q1 2026 earnings. Now, “cratering” might be a strong word when a stock is down less than 10% (I’ve definitely seen worse), but it’s undeniable that this is a very rare occurrence for Hermes: over the last 20 years, the stock has only suffered a comparable one-day drop (the pandemic). The stock price is at a somewhat similar level today than it was when I published that article, so I would refer you back to it if you want to know what I think about the valuation (my thoughts have not really changed).

The goal of this article is to share a brief note about Hermes’ Q1 earnings, sharing the most important details, what I thought about this, and what the market might be worried about.

As you may know, the war in Iran promised to be disruptive for luxury companies, which would be theoretically impacted across two fronts:

1. Asian tourist flows to Europe: fewer flights and more expensive

2. The disruption in the Middle East itself: inability to operate normally

Hermes’ business was disrupted by both this quarter. Despite the group’s organic growth of 6% in Q1 (not bad considering China is also subdued and suffering tough comps), Hermes reported unusual drops in France (-3%) and the Middle East/Other (-6%):

Management shared during the call certain details to help contextualize these drops:

• Owned stores’ sales growth was 7% but sales at concession stores (airports/the middle east) dropped 7%. This tells us that the conflict in Iran mainly impacted the Middle East region and tourist flows. France was particularly impacted by the conflict because sales to concession stores and airports are typically bundled in this geography. Sales in France would’ve dropped “only” 1% ignoring these

• Sales grew double digits in France outside the main tourist destination (Paris), so management can “confidently” claim that the drop excluding concession store sales was driven by fewer tourists

• Sales were growing double digits in January/February in the Middle East but ended up dropping significantly in March. I.e., it does seem that all the weakness was caused by the conflict

Overall, the impact of the war in Iran was estimated by management to be 150 basis points to total group growth. This means that, excluding the conflict, sales would’ve grown more than 7%. This would’ve been pretty acceptable considering the state of the industry and the fact that two other growth levers that should accelerate in the quarters ahead:

1. Store openings and remodels: Q1 was a particularly soft quarter in this front, but management expects store openings and remodels to pick up in the coming quarters and to end up contributing 1% to total yearly growth

2. Leather growth: leather grew 9% in Q1 but management maintained its 12% YoY growth guide for 2026. They explicitly claimed that leather should accelerate throughout the year and that it’s lumpy due to its artisanal nature

So, assuming these levers play out and that the impact of the conflict in the Middle East eases somewhat through the remainder of the year (management claimed that April showed improvement due to stores being open again), then we could think that Q1’s 5.6% organic growth might be a trough. Management also claimed that, excluding the Middle East, trends were improving in March, which bodes well for the overall health of the business. Part of me wants to believe this will be the case, but at the same time I can understand why there might be skepticism around how the next few quarters will look like (which was likely represented in the stock price drop).

The conflict in Iran began at the end of February/beginning of March. This means that it “only” impacted one month of Hermes’ Q1. This one month impact created a 3% drop in France, a 6% drop in the Middle East (with the rest of geographies growing at a good/great pace), and an overall headwind to group growth of 150 bps. We are currently only 15 days into Q2, but with the conflict in Iran ongoing, the market is likely worried about what the potential impact for Q2 numbers might be. Now, there are certain caveats to discuss here that should stop us from blindly extrapolating Q1 trends to Q2 (i.e., assuming that the conflict will be a 4.5% headwind to group growth in Q2).

First, it’s highly likely that the conflict in Q1 took management by surprise, leaving little options to react. This will not be the case for Q2 as the conflict is already “advanced” or at a more mature stage. Secondly, it’s likely that the early stages of the conflict are much more disruptive than the later stages, and there are reasons to believe we might be transitioning to the latter (recall that April already showed improvement compared to March). I highly doubt that the conflict in Iran will be as disruptive in Q2 as it was in Q1 (I don’t even expect the conflict to last the entire Q2) so directly extrapolating makes little sense in my view although I can understand why one would be inclined to do it. Now, this doesn’t mean that Hermes is out of the woods in Q2.

Management also gave some context around growth in the APAC region in Q1. The main highlight was that China grew despite facing tough comps (Chinese New Year in Q1 2025) and that trends are somewhat improving. So, what’s my take? Hermes is currently suffering several concurring headwinds:

• A strong euro: note that this is excluded from the organic growth number I shared above but ultimately impacts organic growth because it reduces tourist flows (i.e., it becomes more expensive to buy luxury goods in Europe)

• A weak China that seems to be recovering but is still not there yet

• The conflict in the Middle East that shaved 1.5% off of quarterly growth in one month

Despite all of this, the company still managed to grow 6% organically, which is pretty impressive. I believe there are reasons to expect an acceleration in growth over the coming quarters (discussed above) but that this is also contingent on things outside of the company’s control (like the war in Iran). Do I think earnings were -14% worthy? No, but I shared what I think about the valuation in my most recent article, so I recommend reading that if you are interested.

Before ending the article, I wanted to say that these earnings have implications for Shift4’s Global Blue. Recall that Global Blue makes money when a tourist is eligible for a VAT deduction. Less tourists mean less transactions and therefore less revenue and profits for Global Blue. I don’t think this matters a lot seeing where Shift4 is trading, but worth having it in mind.

Have a great day,

Leandro

You can read this article (almost) entirely for free. If you like what you read, consider becoming a paid member to get access to…

• All in-depth reports (15 companies profiled thus far, and growing)

• Earnings follow-ups

• Other investment related content

• A community of like-minded investors

• Complete access to my portfolio and transactions

• Occasional webinars

The in-depth reports of Stevanato and Deere are free to read to gauge the quality of the research.

Join today:

Subscribe now

Markets went back to their regular programming this week (I’ll explain what I mean in the market commentary). The conflict in Iran seems to be finally winding down, and markets are enjoying it. In the company-specific news section I share news about three portfolio companies:

1. A notable insider purchase

2. The resolution of a risk

3. Great context on heightened Capex investments

Without further ado, let’s get on with it.

Articles of the week

I published one article this week, the first edition of a brand new Best Anchor Stocks series: On the Radar.

Best Anchor Stocks

(NEW) On The Radar #1

Welcome to the first issue of On The Radar, a new Best Anchor Stocks recurring section! The initial idea is to publish an “On The Radar” article once every two weeks, probably at or around the end of the week (Thursday/Friday). Even though I’ll share more information below, the goal of “On The Radar” is to openly share much more of my investment process in a way that’s useful to you. Let me explain a bit further…

Read more

23 days ago · 15 likes · 2 comments · Best Anchor Stocks

I recommend reading that article to understand what the new series is all about, but in short, the goal is to share three interesting companies every week, explaining what I liked about them and why they might potentially make it into the portfolio (or not) upon further research. This week’s article features:

1. A struggling retailer (turnaround story)

2. An interesting healthcare business

3. An exciting aerospace company with somewhat complex accounting

Interestingly, the third company has led me into another company that might end up profiled in the second edition of On The Radar.

More to come in two weeks!

Market Overview

In last week’s NOTW, I wrote that Iran and Trump (or the US, for that matter) had hinted at negotiations to wind down the conflict in the Middle East. This week we got some more (good) news about the topic: a ceasefire was announced (and later breached apparently by both Israel and Iran). Markets reacted positively to the continuous stream of good news (it doesn’t always work this way, though):

Many argue that even if the conflict ends today (which doesn’t seem to be the case), there will be mid and longer term repercussions for the global economy. The argument goes as follows: a lot of energy infrastructure has been destroyed and it’s still uncertain if Iran will have a say on who goes through the Strait of Hormuz. While I do agree with this, it’s also true that markets tend to bottom not when we are out of danger, but when things start to incrementally get better (which undoubtedly seems to be the case here).

With the conflict now in the “rearview mirror”, markets went back to their regular programming: buying everything that has to do with AI, and selling pretty much the rest. Software probably deserves a special mention. The industry had had a rather peaceful conflict as the market forgot about AI, but things went back to “normal” this week. The IGV (software ETF) was down considerably, while the SOXX (semiconductor ETF) was up considerably. Takeaway? Investors continue to buy AI and sell short the AI “counterparties:”

Two beliefs can be held simultaneously in the software/AI debate. First, that AI is 100% going to render many software businesses obsolete. Second, that AI is not going to render all software businesses obsolete and many will even benefit from AI. With the market believing that AI will pretty much render all software businesses obsolete, there’s likely an opportunity to make money throughout this sell off (I own two software businesses which I evidently believe are in the latter camp).

Now, all this said, there are also very lazy “bull” arguments out there that definitely don’t help the cause. The first one is that AI will help create much more software at a lower cost and that, therefore, the software industry will thrive. I think the main flaw of this thought process is that it ignores the economics…are software businesses going to be able to generate the same historical returns in this scenario? I believe this is where the focus should be and I am not necessarily claiming that the answer is “no.”

Momentum (like it or not) is a very strong factor, and it’s a pretty easy tell where momentum currently lies (hint: it’s not in software). Even though being on the wrong side of momentum sucks, I must say that things can change pretty fast and one can find themselves on the right side of momentum when they least expect it to. We’ll see what happens here but some (not all) software businesses do seem to be pretty beaten down. Others are astonishingly still expensive after the massive drawdown, which makes me think: “what the hell was the market thinking about here?”

The industry map was coherent with what I just discussed, pretty much everything that “smelled” software was down this week:

The development of the healthcare industry continues to be interesting: despite apparently being an AI beneficiary (in most cases) and top lines slowly but steadily accelerating, it remains a laggard.

The fear and greed index improved notably with the “resolution” of the conflict:

Company-specific news

Read more

What exactly is “On The Radar”?

The idea of this new recurring section is to share three companies/investment ideas which I believe are interesting, explaining why I believe this to be the case. The goal ISN’T to share an in-depth report on each, but simply a small text explaining why I am considering researching these businesses in more depth after having conducted some initial (and thorough) filters (both quantitative and qualitative). This is what you should expect for each idea:

1. A brief description of the business

2. Why it caught my attention

3. What I like

4. What gives me pause

5. What I am watching/looking to analyze further or why I ended up discarding the business (most will fall in the former category, but I also consider some discarded companies interesting)

But… “Why” On The Radar? If you are used to doing your own analysis, you’ll know that the journey between getting initially interested in an idea and making a portfolio inclusion is not typically fast. The reality is that one can’t (or better said: “shouldn’t”) force a portfolio inclusion, which doesn’t mean one should simply sit down without doing any work. I take a look/analyse at A LOT of companies each week, and these tend to end in several buckets:

• Immediately discarded after a quick look

• Discarded after some more work

• Watchlisted to do more work in the future as I deem there are more interesting things out there or there’s something I don’t feel quite comfortable with yet

• Immediately start doing more in-depth work

• Discarded after more in-depth work (sucks, but it happens pretty often)

• Portfolio inclusion

As you’d imagine, the last of these is the least likely outcome. I tend to view any investment process like a funnel. A lot of companies go in at the top, but only a few make it down the bottom (portfolio inclusion):

This doesn’t mean that there are no interesting companies within the funnel. On the Radar focuses primarily on the third and four stages described above: “Watchlisted to do more work in the future” and “immediately start doing more in-depth work.” Each “On The Radar” issue will bring three ideas that primarily belong to these two buckets and which have the potential (over time) to make it to the last stage: portfolio inclusion.

So what’s the value add for you? You’ll get a constant stream of potential ideas that have already been significantly filtered by me. This is work that I was already conducting either way, but I also get some value: writing down these ideas will help me structure my process more clearly.

As to what kind of companies you can expect here…the answer is pretty much anything. I take a look at a lot of situations every week and try to stay open minded as to where there might be interesting investment opportunities. This week’s issue is a good example as I’ll be profiling three very different businesses and situations:

1. A European retail turnaround

2. A very stable and interesting healthcare business (with an appealing growth profile)

3. An interesting aerospace business with some messy accounting

Every “On The Radar” issue will openly share one of the companies, with the remaining being reserved for paid subscribers.

If you want to have exclusive access to On The Radar Issues and…

• All in-depth reports (15 companies profiled thus far, and growing)

• Earnings follow-ups

• Other investment related content

• A community of like-minded investors

• Complete access to my portfolio and transactions

• Occasional webinars

(The in-depth reports of Stevanato and Deere are free to read to gauge the quality of the research.)

Consider becoming a paid subscriber:

Subscribe now

So, without further ado, let’s jump with today’s issue!

1) B&M European Value Retail (LON:BME)

Brief description of the business

B&M is a UK-based discount retailer that operates in the UK and France. The company owns more than 1,000 stores which carry FMCG (Fast-Moving Consumer Goods) and General Merchandise items, almost in exact proportions (50/50).

The company’s operations can be divided into three segments (1) B&M UK (786 stores), (2) B&M France (135 stores), and (3) Heron Foods (343 stores). The model is straightforward: open as many stores as possible at attractive returns (typically less than 1 year payback) while pursuing sustainable LFL (like for like) growth. The value proposition rests on remaining an attractive place for value-conscious consumers to find great deals.

Why it caught my attention

The valuation was the main reason why B&M caught my attention. I had looked into the company before but had not fallen “in love” with the business. That said, everything (or pretty much everything) has a price, and B&M seems to be trading pretty cheap considering its risks/drawbacks. But, why?

After a pandemic boom (B&M stores were considered “essential” during the pandemic), UK LFL growth weakened quite considerably.

Source: Made by Best Anchor Stocks

It seemed a bit harsh for the stock to be down so much in the face of such deceleration (some of which could be considered a return to normal). This said, it’s also true that the company seemed to have been run for margins during Alex Russo’s (former CEO) tenure. This resulted in significant execution issues and an unsustainable margin level.

The company is now a turnaround play and has a new management team that is implementing an improved operating model (Back to Basics). Should the management team manage to turn the ship around (namely LFL sales growth in the UK), the shares should significantly rerate higher. To this, I must add that the company remains cash generative and is in the process of redomiciling to Jersey (from Luxembourg), which should allow management to conduct buybacks, a tool that has historically been absent from the capital allocation framework.

What I like

There are a couple of things I like about B&M, namely the following:

• Discount retail is secularly gaining share and is more insulated from macro pressures than traditional retail

• Despite the troubles one can see in the financials, the customer perception of B&M’s value proposition does not seem to have changed materially (very relevant in any retail turnaround)

• The new management team has openly discussed the areas of underperformance and is working on solving these

• The stock is cheap IF the model is not broken

• The opportunity in France seems to be significant and early signs are encouraging (i.e., the model seems to be exportable, even though it failed in Germany)

• It bears some resemblance with Five Below’s (FIVE) turnaround, a business I know well

What gives me pause

There are two things that give me pause. First, the fact that the underlying business doesn’t appear to be great even in a normalized environment. I’ve calculated the LFL sales CAGR in the UK over the past decade (so considering the post pandemic boom and posterior bust) and the result is a 2.5% CAGR. I am pretty sure this signals that there’s been no real growth over the last decade. It’s true, though, that the UK economy has seen better days and it’s not entirely B&M’s “fault.”

The second thing that gives me pause is that retail is very hard and most turnaround promises end up terribly. Will this time be different? I don’t know, but if it is, the shares will most likely do well as the market seems to have priced in a not-ideal outcome (the market, though, has been right thus far). Note that retail concepts can spiral out of control, both to the upside and the downside: if the model works it’s a money making machine, if it doesn’t, it can quickly go bankrupt (many such cases).

Lastly, I would say that after analysing a discount retailer that ended up making it into the portfolio, the bar is very high. Why would I buy B&M when I can simply add to a much healthier and more defensible business that’s “similar”? (it also has its drawbacks, of course). This is a question that I continue to think about.

(You can read the in-depth report of the other company that did make it into the portfolio here.)

What I am watching

I have not yet discarded B&M entirely, but I must say that I have grown increasingly concerned with the underlying business. How much is a business that has not delivered real growth over the last decade worth? Probably more than it’s worth today, but maybe not a return to historical norms. I will continue to watch the company closely in case there’s further evidence of a turnaround, but staying on the sidelines for now.

Let’s jump to the second company.

Read more

You can read this article (almost) entirely for free. If you like what you read, consider becoming a paid member to get access to…

• All in-depth reports (15 companies profiled thus far, and growing)

• Earnings follow-ups

• Other investment related content

• A community of like-minded investors

• Complete access to my portfolio and transactions

• Occasional webinars

The in-depth reports of Stevanato and Deere are free to read to gauge the quality of the research.

WE ARE CLOSE TO THE 200 SUBSCRIBER MARK. Join today:

Subscribe now

Markets continued to grow optimistic about a short-term resolution of the conflict in Iran. Of course, many are claiming that they know what will happen next (both bears and bulls), but the reality is nobody has a clue (hard truth, I know). I also share some news on Nintendo (surprise surprise, the thesis is playing out again).

Without further ado, let’s get on with it.

Articles of the week

I published one article this week: ‘From headwinds…to tailwinds.’

Best Anchor Stocks

From headwinds…to tailwinds

You can read this article entirely for free. If you like what you read, consider becoming a paid member to get access to…

Read more

a month ago · 21 likes · 4 comments · Best Anchor Stocks

Judges Scientific reported definitive 2025 earnings, and while the trading environment is not improving much, it now seems like the risk-reward skew is very favorable. I explain why in the article. Just so you can gauge where sentiment is, I read a sell-side report in which they had a PT of 60 pounds for Judges but outright admitted they were not including any Geotek Coring contract in 2027 and beyond. Read that again: they had a PT of 60 pounds (40% above today’s price) while ignoring a multi-million dollar contract that management expects to happen 3 out of every 4 years. Weird, but I guess they’ll have to eventually raise their estimates significantly.

Without further ado, let’s see what the markets did this week.

Market Overview

It was a short week in financial markets (due to Good Friday), but it was not a boring one (it never is). Both the S&P 500 and the Nasdaq rebounded as soon as Trump and Iran (we don’t know what Iran) hinted at negotiations and a wind-down of the conflict:

Trump addressed the nation on Wednesday in a discourse that honestly seemed like a nothing-burger (i.e., there was not much more new info). I know that we are constantly being bombarded with a lot of information and that a lot of people are making forecasts, but I sincerely have no clue what will happen over the coming weeks/months. Everytime something like this happens I try to go back to prior geopolitical events and remember what I thought back then and what ended up happening. For example, when Russia invaded Ukraine, oil and gas prices rose more than they have risen currently, and even though this was seen as catastrophic, the world eventually made it through. We shouldn’t ignore geopolitical events, but we should also try to avoid thinking what the doomers think: that every geopolitical event is the end of the world.

We are currently in a long weekend and we should already know that Trump likes to shake things up while markets are closed, but I have no clue if this weekend’s announcement will be boots on the ground or a ceasefire. Those people who claim to know what will happen are being incredibly optimistic with their forecasting ability, but eventually some will be right (I guess).

I think that understanding the market structure is very useful to contextualize short-term market moves. If I were to ask you who makes most of the daily trades in the stock market, what would you say? I’d imagine most people think that the “smart money” moves markets (smart money understood as institutions with the big bucks), but the reality is strikingly different. Around 50-60% of daily trades are made by HFT (High Frequency Traders) and market makers, whereas around 20-30% of the trades are made by individual investors. This leaves around 10-20% of the trades to the “smart money.” So, it’s highly likely that stock prices over the short term move for reasons very different to fundamentals. Not claiming I am discovering anything new here, but it’s always a good idea to have this in mind when looking at stock prices and trying to explain what’s moving them. In short, not all stock price moves are signal, most, in fact, are noise. Understanding which is which is pretty much impossible, so independent thinking is a must.

The best thing an investor can do is to acknowledge that there are many things that they don’t know and/or control, and work with what they do know and/or control. Could I spend hours thinking about what the US’ strategy in Iran is? For sure, but I don’t know if that would be the best investment of my time.

The industry map was pretty much the opposite of what it has been the last couple of weeks: most of it green with the exception of the energy industry:

The fear and greed index improved but remained in extreme fear territory:

Company-specific news

Read more

• All in-depth reports (15 companies profiled thus far, and growing)

• Earnings follow-ups

• Other investment related content

• A community of like-minded investors

• Complete access to my portfolio and transactions

• Occasional webinars

The in-depth reports of Stevanato and Deere are free to read to gauge the quality of the research.

You can find Judges Scientific’s in-depth report here:

Best Anchor Stocks

Judges Scientific (JDG.L)

Hi there and welcome to yet another in-depth report…

Read more

a year ago · 17 likes · Best Anchor Stocks

Join hundreds of subscribers today:

Subscribe now

Judges reported (as expected) soft 2025 earnings this week. The “rest” of the business was only just enough to counter the impact of the university funding freeze in the US. Revenue grew 2% organically (excluding Geotek) but orders and profitability struggled:

Source: Judges Scientific

Note that the first half of the year was okayish, with the “severe” problems beginning in H2. This ultimately means that the business will still suffer tough comps in H1 2026 (currently experiencing a 17% drop in orders), but that comps should start to moderate significantly as the year progresses. Management decided to reset expectations back in January when they reported the preliminary results, something that is also coherent with the fact that the company has a new CEO. They now expect adjusted EPS of 225 pence at the midpoint in 2026, which would result in an 18% year over year decrease. This guide, however, includes two important assumptions that should theoretically mean that it “can’t get worse” (famous last words?):

1. The guide doesn’t include a Coring contract

2. The guide doesn’t assume any improvement in the US funding environment

Let’s discuss these two assumptions in a bit more detail, starting with Coring. Management shared that they expect a Coring contract early 2027 and that their expectation now is that they’ll have 3 Coring contracts every 4 years. This, in my view, is good news, or at least good news for me as I expected 1 Coring contract every 1.5 or 2 years. 3 Coring contracts every 4 years means that Judges now expects one Coring contract every 1.33 years (not terrible). Management also noted that their confidence in this new estimate is relatively high because they are in close contact with the few Coring customers (Japan, India, US, and China).

Interestingly, management also noted the following in the earnings report:

Despite not having an impact on cash flows or the current year’s numbers, I believe this restatement is pretty significant. If there’s one thing that shareholders were worried about (besides university funding in the US), it was that Judges might have made a mistake in acquiring Geotek, something that would’ve proven significant considering it was the largest capital deployment in company history. All in all, I’d say that 3 Coring contracts and 4 years and the reversion of the Geotek impairment should serve to calm investors regarding the investment. Now, even though the Coring contract in 2025 served to tame the impact of the reduced university funding in the US, this contract will be non-existent in 2026. This means that things could get worse from 2025, and they did! This, however, should mark the bottom of the cycle for Judges (hopefully).

As in relation to point #2 (university funding in the US), management claimed that (while not taken into account in the guide) they are seeing some green shoots. The key unknown, though, is timing:

It’s anyone’s guess when the restored funding will flow into universities and when these universities will decide it’s time to set new orders, but from our point of view (as shareholders) we should see this as great news for the sole reason that it’s turning from a headwind into a potential tailwind/source of optionality. Once H1 is said and done, comps start to soften and this part of the business has pretty much gone to 0. This means that any incremental improvement should be good for Judges. This is still TBD (to be determined), but things seem to be pointing in the right direction thus far with orders somewhat starting to recover (green line):

I believe that the market is interpreting these two points as an admission that the 2026 adjusted EPS number is indeed consistent with the bottom of the cycle. With Judges trading at 19x bottom-of-the-cycle EPS, I’d say the risk/reward on the shares seems attractive here. Note that, even though a recovery in orders related to improved university funding was not taken into account in the guide, management believes these orders could come at any moment…

Another growth lever that management is not taking into account in the guide (logically due to its lumpiness) is acquisitions. I believe Judges is currently experiencing one of the longest (if not THE longest) periods without conducting an acquisition. The company’s last acquisition took place in August 2024 (Teer Coatings). This acquisitive drought has coincided with one of the longest droughts in terms of organic growth, making the environment a perfect storm for Judges. Management shared why the current environment makes closing acquisitions challenging:

This makes sense and I don’t view it as an excuse considering that it’s not the first time management has shared this with shareholders. The good news on the acquisition front (if any) is that Judges has significant dry powder to pounce on acquisitions when sellers are willing to sell. Gearing (i.e., leverage) calculated as net debt/adjusted EBITDA was 1.5x at the end of the year and the company can take it up to 3x before violating any covenants.

So, what’s the dry powder? Assuming that the company wants to go to 2.5x leverage (3x would be a bit too much) and that Adjusted EBITDA will most likely fall next year by around 10-15% to 26 million pounds, Judges could potentially borrow an additional 26 million pound to fund acquisitions should it need to. To this we must add the cash that the business expects to generate next year (let’s say 25 million pounds), meaning that total dry powder is likely going to be close to 50 million pounds. 50 million pounds deployed at an average EBIT of 5x means that Judges can potentially acquire 10 million in EBIT with its current dry powder (for context, current EBIT is lower than 30 million).

So, if we add everything up we can conclude that the 2026 guide includes…

1. No improvement in US funding

2. No Geotek contract (one of those 4 years in which management doesn’t believe there will be one)

3. Nothing assumed in terms of acquisitions

While Judges’ stock was negatively “exposed” to these three “events” a year ago, I believe it’s now positively “exposed.” What I mean by this is that the company is trading at 19x 2026 EPS, but that this EPS seems to have a very positive skew to good news. I guess we’ll find out soon enough.

It also seems obvious that the new management team wants to increase the focus on the operations of the business, not just M&A. Several things point to this being the case: R&D expenses are increasing, management claimed that they’ve made several changes to the MDs (managing directors) of their businesses, and they also hinted at sharing innovation-related KPIs in the future. I believe David Cicurel correctly understood that Judges has now reached a size where operational excellence matters (more so considering how lumpy acquisitions can be) and that he is better off focusing on M&A and leaving operations to others (former Halma executives).

The last point I wanted to discuss today is the conflict in the Middle East. Direct exposure to the Middle East stands at 2%, although we already know how uncertainty can weigh on Capex spending. Now, this said, management believes that persistently high oil prices can even be beneficial for the business, something which should flow through Coring (as customers look for other hydrocarbon sources) and through the businesses that are exposed to offshore wind farms:

So, all in all, weak current earnings as expected, but things seem to be starting to line up in Judges’ favor. The company has remained very cash generative throughout the “perfect storm” and it does seem like 2026 will be the bottom of the cycle (still TBD). With the company trading at 19x trough EPS and the thesis intact, I view the shares as attractive.

Have a great day,

Leandro

You can read this article (almost) entirely for free. If you like what you read, consider becoming a paid member to get access to…

• All in-depth reports (15 companies profiled thus far, and growing)

• Earnings follow-ups

• Other investment related content

• A community of like-minded investors

• Complete access to my portfolio and transactions

• Occasional webinars

The in-depth reports of Stevanato and Deere are free to read to gauge the quality of the research.

Join hundreds of subscribers today:

Subscribe now

Markets continued to fall this week as the US and Iran did not reach an “amicable” end to the conflict (there were tonnes of rumours about it, though). There were also plenty of company-specific news this week.

Without further ado, let’s get on with it.

Articles of the week

I published one article this week. It was on Hermes, a company that I had not written about in a long time: ‘The Stock is down 40%, the Business Isn’t.’

Best Anchor Stocks

The stock is down 40%, the Business Isn’t

You can read this article (almost) entirely for free. If you like what you read, consider becoming a paid member to get access to…

Read more

a month ago · 15 likes · 3 comments · Best Anchor Stocks

The stock has suffered a meaningful (and kind of unusual) drop of 40% from highs, while the business has continued compounding. This begs the question: is the stock finally attractive? I go over what might have worried the market and the valuation in the article.

Without further ado, let’s see what the markets did this week.

Market Overview

The conflict in Iran continued to weigh on financial markets despite the continuous news flow regarding an “imminent” ceasefire (it seems that TACO also has its limits after all!). Both indices were down more than 3% this week:

The Nasdaq has already entered correction territory (down 11.5% from highs) whereas the S&P 500 is very close to it (down 8.8%):

It does seem likely that the S&P will eventually reach correction territory and that we are in for a rough ride. Now, when sentiment goes to extremes one thing typically happens: bears come out in full force. I don’t blame them, though. A couple of weeks ago I wrote that there’s a very credible (and terrible) bear case for the economy and markets, but we shouldn’t mistake this with the belief that bears can see the future (they can’t).

When things start dropping and multiples start compressing, one starts to feel that there’s no support/bottom, why? Because it’s true, there’s no support. Stocks can ultimately go down to stupid levels that will most likely test even the strongest of convictions. It’s very easy to claim that it was a great time to buy at the bottom of any given correction, but it’s not as simple when one is living the moment (it’s super easy in hindsight, though). The bottom line here (no pun intended) is that the future is unknowable and we can’t judge the past with the eyes of the future.

With this I am not trying to claim that we are nearing a bottom or that indices have come down a tonne (they’ve not). My advice here would be to do something very simple: try to isolate yourself from the noise (X is a huge echo chamber that goes both ways), do your own work, and focus on the fundamentals. When someone is trying to forecast the future and they’ve got the price action going their way, they’re most likely going to sound very believable, but the reality is that their ability to forecast the future is not better than yours. Timing bottoms is impossible, but trying to prevent yourself from making stupid sentiment-driven decisions at or near the bottom is not.

The industry map was pretty much a sea of red this week with the exception of energy, consumer defensive, and utilities:

One thing that has gotten me by surprise is that, despite being considered a defensive industry, healthcare is getting “destroyed” like many sectors. The healthcare sector (as measured by the XLV) is down 8% this year, not what I would’ve expected in turbulent times!

This is even more confusing when one considers that consumer staples (also considered a defensive industry) is holding up quite well this year and since the conflict started:

Sometimes things are unexplainable. A significant portion of the healthcare industry is currently accelerating its top line and is coming out of the pandemic hangover and the conflict is unlikely to destroy their demand. Strange, but we’ll see how it develops (I’ve been wrong thus far).

The fear and greed index worsened quite considerably again and is now reaching very interesting levels:

I added to one position this week

This week I added to my top position again. I believe the market is getting this one very wrong, but we’ll only know in hindsight:

Read more

• All in-depth reports (15 companies profiled thus far, and growing)

• Earnings follow-ups

• Other investment related content

• A community of like-minded investors

• Complete access to my portfolio and transactions

• Occasional webinars

The in-depth reports of Stevanato and Deere are free to read to gauge the quality of the research.

Join hundreds of subscribers today:

Subscribe now

You may or may not have realized that the stocks of many luxury companies have performed poorly over the last few months/years. Even though I don’t believe that bundling all luxury companies together makes sense, the chart below portrays that the “broad” luxury sector has seen better days:

Three things (in my view) explain why the stocks of these companies have languished over the past couple of years. Let’s go over these briefly.

1. The luxury sector was irrationally valued at the pandemic peak (can’t blame it, though). The reason is pretty straightforward: the population’s purchasing power was not severely impacted during the pandemic, but they faced significant constraints in terms of where they could spend this money. A lot of people who were unable to spend their money on experiences decided to spend it on hard and soft luxury goods, making these companies appear as “hyper growth” businesses. The argument today seems to be quite the opposite; many believe that experiences are a secular headwind for many luxury companies (something I’ll discuss in more detail later). So, point #1: Valuations were inflated to start with.

2. Valuations were not the only thing that were inflated, though; so were fundamentals (in most cases). Most of the luxury industry experienced a post-pandemic hangover which coincided with weakness in China (a key marker for the industry). Luxury sales in China are typically linked to real estate values, which did not do great after the pandemic. Real estate values across the major Chinese cities entered contraction territory in 2022/2023:

The good news is that China seems to be recovering somewhat. Deutsche Bank recently published that, after a weak 2025, the luxury industry in China might be on the verge of regaining its footing:

3. Lastly (and very recent), the conflict in Iran. The Middle East has become a high growth geography for many luxury companies and we all know that it has been severely impacted by the recent conflict. Although I acknowledge this will most likely have an impact on luxury spending in the region over the short to medium term, I don’t view it as a terminal risk for Hermes (or for any luxury company).

These three things have pretty much created a “perfect storm” for the luxury industry. Hermes’ stock is now in a >40% drawdown, a rare feat in its history as a publicly traded company:

The interesting thing is that Hermes has continued compounding at a very good pace despite the noise (something that its peers can’t say). It’s in “perfect storm” periods like these when Hermes demonstrates that it doesn’t have many peers. Just for context, Hermes has grown its revenue at a +9% CAGR since 2023, whereas Richemont (the second fastest-growing company in the peer group) has grown its top line at a meager 3% CAGR. Other companies like Kering and LVMH have experienced revenue contraction over this period:

This resilience is greatly amplified when looking at operating profits. Margins have contracted across the board (including those of Hermes), but Hermes has managed to CAGR its operating profit at a 6% clip through the period. The rest of the peer group has seen operating profits contract, in some cases quite significantly:

This continuous compounding (even if at a slower pace) combined with the stock price’s poor performance has led Hermes to trade at one of the lowest valuation multiples in a very long time. The company’s EV/EBIT multiple now lies significantly below its 10-year average, although this average is likely inflated due to the pandemic:

All this said and despite the 40% drop from ATHs, a 24x EV/EBIT multiple does not seem like a bargain. I’d argue, though, that multiples need some context:

1. Hermes’ market cap multiples are pretty misleading due to the company’s pristine balance sheet. There’s no special dividend coming this year, but the company is known for paying them in the past

2. Earnings are not normalized due to several one-time impacts (primarily related to tax, so this shouldn’t impact EBIT) and frontloaded investments into leather workshops

3. Hermes is a “special” company in terms of durability and predictability, two variables that determine how we should interpret its multiples

To understand what Hermes does and what makes the company special you can read my in-depth report on the company (I won’t go over it here again).

Best Anchor Stocks

Hermès: Capitalizing On Heritage

Performance is important, but resilience is of paramount importance…

Read more

2 years ago · 28 likes · 6 comments · Best Anchor Stocks

The good thing about Hermes is that its in-depth report is unlikely to become obsolete anytime soon.

The goal of this article is two fold. I’ll go over what many consider to be the main bear case (experiences secularly gaining share from personal luxury goods) and I’ll later go over the valuation (both through multiples and through a DCF).

Let’s begin with the former.

Experiences gaining share from personal luxury goods, existential to the story?

The most common bear case that I have read for Hermes goes along the following lines:

This is theoretically bad for Hermes because the company is not really into experiences and derives close to 100% of its profits from the sale of hard/soft luxury goods (aka: personal luxury goods). Now, the first thing we should strive to understand is whether this is true. Well, in the absence of perfect data, it does seem true that experiences are winning wallet share from hard/soft goods.

Bain & Company and Altagama claimed in their 2024 industry report that spending on experiences was pretty much the only growing segment across the luxury industry:

Bank of America also believes this shift is taking place and has credit and debit card data to back it up:

Even though the transition to experiences has enjoyed its fair share of cycles in the past, the shift also seems structural. It’s not the first time that experiences momentarily gain share of hard/soft goods only to give back a good portion of these in the coming years, but the long-term trend appears evident:

Now, I don’t view this as an existential bear case for Hermes, for several reasons. First, personal luxury goods are unlikely to go anywhere even if they continue losing share to experiences in the coming years. The bottom line is that Hermes is likely to continue gaining share of a growing market (even if it’s not the fastest growing market). The fact that experiences will most likely gain share from PLG (Personal Luxury Goods) doesn’t mean that the latter will contract. Several industry sources size the PLG market at roughly $400 billion and forecast a CAGR of 4% up until 2030.

Hermes generated revenue of around $19 billion in 2025, meaning the company holds a sub-5% market share (note that the definition of PLG is critical here, and Hermes is likely to hold a more significant share in high-end PLG). Even if the company’s share gains stagnate (unlikely), Hermes could potentially grow at a MSD clip over the coming years despite the “experiences” headwind. Now, nothing indicates that Hermes should stop gaining share of the PLG market. The company has far outpaced PLG industry growth in the past and one could argue that the future is one with fewer credible competitors. Many companies have failed to “respect” the luxury strategy (I am looking at you, Gucci, Balenciaga…) and have therefore fallen to the bottom of the luxury pyramid. It’s interesting because Hermes’ management also believes that the downfall of many luxury companies has made them a beneficiary of what they term the “flight to quality:”

All this said, the main “flaw” I see in the experiences bear case is the misconception of what Hermes sells. Hermes does not sell PLG, Hermes sells its brand through the sale of PLG. The company has been extremely successful in the past exporting the brand to different categories. Hermes started with leather for horse accessories, but quickly diversified into a wide variety of segments:

Source: Hermes

The size of its leather franchise still dwarfs other métiers, but Hermes’ other sectors have compounded revenue at a 25% CAGR over the last 7 years and now make up 13% of total revenue:

Many believe that the brand would not be “exportable” to experiences, but there’s no reason to believe Hermes could not be successful in experiences should it need to. Two reasons underpin this belief. First, Hermes has done it before. Secondly and probably more importantly: many other luxury brands have successfully undergone the transition. LVMH’s CEO, Bernard Arnault, began the transition in 2019 after acquiring Belmond:

Experiences have grown fast at LVMH but are still far from becoming a significant profit driver, which somewhat demonstrates that PLGs are still the behemoth that is unlikely to fade away anytime soon. Hermes is historically known for being much more measured with “techtonic” shifts, maybe because the company rarely does M&A and builds (almost) everything organically. Now, despite Hermes having the optionality, it’s important to understand that…

1. Hermes doesn’t need to go into experiences to remain successful and relevant

2. Management has shown a preference to stay within hard/soft goods

What’s kind of ironic is that one could attribute Hermes’ success in PLG precisely to its focus. While many luxury houses pivoted to experiences and rushed to capture the aspirational luxury buyer, Hermes remained loyal to its belief that the product is the experience, therefore avoiding spreading itself too thin. This focus has probably been the route cause of the continuous share gains, which are unlikely to end anytime soon. So, no, I don’t really think that the shift to experiences is an existential threat to Hermes’ business. Not only can the company pivot if needed, but it basically doesn’t need it as it gains share in a PLG market that continues to grow at a decent pace.

Unquestionable quality, but is Hermes cheap today?

There are two ways of looking at Hermes’ valuation (or that of any company): through multiples and through a DCF. Even though both should yield equivalent results when done coherently, I believe a DCF is a much more appropriate way of valuing Hermes. The reason is that the durability and predictability of this business makes the multiple an ill-suited metric.

Read more

You can read this article (almost) entirely for free. If you like what you read, consider becoming a paid member to get access to…

• All in-depth reports (15 companies profiled thus far, and growing)

• Earnings follow-ups

• Other investment related content

• A community of like-minded investors

• Complete access to my portfolio and transactions

• Occasional webinars

The in-depth reports of Stevanato and Deere are free to read to gauge the quality of the research.

Join hundreds of subscribers today:

Subscribe now

Indices continued “catching up” this week to the conflict in Iran. I give some thoughts about this topic in the market commentary and also share some company-specific news later.

Without further ado, let’s get on with it.

Articles of the week

I published one article this week: ‘Adobe’s Identity Crisis: Growth Stock or Falling Knife?’.

Adobe is apparently cheap, but the past should never be used to justify its valuation (especially in such a fast-changing industry). I go over both the bull and bear cases and I highly recommend reading if you either have a strong view on either side or if you are watching from the sidelines. People with strong views on either side are probably not going to be transparent with the other side of the coin.

Without further ado, let’s see what the markets did this week.

Market Overview

In last week’s NOTW I wrote the following:

Indices continued “catching up” this week to the conflict and dropped more than 3%:

The Nasdaq is now approaching correction territory, but the S&P remains “far” from it (albeit it could get there fast, we know how this works):

With no material improvement in the news flow coming from the Middle East, I am still under the impression that the market is pricing in a “soft” resolution to the conflict. It’s honestly very hard to know where this will lead us. Some media outlets are claiming that the US is about to send ground troops to Iran, whereas others claim that the resolution will not take long. In the meantime, Iran and the US continue to send contradictory messages. My father always told me that the first War victim is always the truth, and I think he might be on to something!

We’ll only know if the market is right/wrong with the benefit of hindsight, but I must say that I am still leaning into the “everything-will-be-fine-eventually” camp. As discussed in last week’s NOTW, western societies have limited suffering capacity, and so do their political leaders. This means that it’s unlikely that we’ll remain in the “stress zone” for long. Now, all this said, one never knows if things can spiral out of control, but I tend to believe that humanity tends to find its way through, eventually. I would love to get great opportunities in some names to continue adding or to continue making my positions larger.

The industry map was mostly red this week:

The fear and greed index worsened again and is in extreme fear. Together with the VIX rising significantly, it potentially means we are getting to attractive territory in terms of sentiment:

I sold a position this week

This week, I fully exited one position after losing trust in management. The context also matters: I simply believe there are better opportunities across the portfolio to deploy this capital:

Read more

1. AI capabilities have advanced quicker than I previously envisioned and it will take some time for Adobe to disprove the narrative (I was wrong here)

2. With many opportunities across the portfolio, I felt there were better places to put my money in (this is a result of the current market context more than anything specific to Adobe)

The above doesn’t mean I have stopped following Adobe or that I have completely discarded owning it ever again, as I am well aware that I could’ve made yet another mistake selling my shares (wouldn’t be the first time!). I’ve sold 5 shares before selling Adobe, 4 went on to languish, whereas one more than doubled from my selling point. What’s difficult about this game is that I don’t know where Adobe will fall and I’ll only know with the benefit of hindsight.

Last quarter, the company reported Q1 2026 earnings and announced that Shantanu Narayen (18 years at the helm) would be transitioning from the CEO position. My goal with this article is threefold: go over the earnings highlights, share some thoughts about the CEO transition, and explain what I believe are the main components of the bull and bear cases. Regardless of whether you are an Adobe bull or bear, my hope is that this article helps fill your blind spots.

Without further ado, let’s get on with it.

Adobe’s excellent (?) earnings (and what the market is worried about)

If there’s one thing that has remained a recurring overhang for Adobe’s stock (and the stocks of software companies in general), that’s the AI risk (hopefully not discovering anything new here). Even though Adobe was not capable of completely eliminating this overhang last week, I do think it was suffered in a different “environment,” one in which most of Adobe’s KPIs accelerated (just not the one that the market seems to be fixated on).

Adobe reported (for the first time in a while) an apparently flawless quarter, significantly beating analyst estimates and providing little firepower for algos to demolish the shares. Let’s take a look at the top line, which seems to be the only thing that the market cares about (and maybe rightly so).

Adobe reported Q1 FY 2026 revenue of $6.40 billion (+12% YoY), significantly beating consensus estimates of $6.28 billion. It’s kind of interesting that Adobe’s most significant beat over the last 4 years has taken place during the AI era (narrative violation? Or maybe a mix shift?):

Adobe not only beat estimates significantly but also showed for the first time in a while a clear acceleration in its top line:

Just so you can gauge how investor sentiment has shifted for Adobe, consider that December 2023 was the last time Adobe was growing at a similar pace, with the non-minor difference that the stock was trading at an EV/EBIT of 43x, compared to today’s EV/EBIT of 11x. One could argue that low double digit growth did not deserve a 43x EBIT multiple, but what’s undeniable is that (absent a significant difference in growth) Adobe has gone from loved to hated.

Now, the company’s growth needs some context. For starters, a greater portion of the company’s revenue is becoming consumption/usage-based rather than pure recurring revenue. Even though I don’t think this is necessarily bad, it undoubtedly makes revenue growth more volatile and likely makes it tougher to identify a trend from just one quarter.

The “good” news is that Adobe has several leading indicators an investor can look at to understand how healthy the business is barring consumption trends. Two metrics are worth highlighting here: RPO and ending ARR. RPO (Remaining Performance Obligations) continued to grow at a good pace. Despite having decelerated from peak levels, RPO has proven resilient and continues to grow ahead of revenue:

Adobe’s core business is pretty resilient, so there’s an argument to be made that any kind of AI disruption thesis would most likely present itself to a greater extent in this metric before showing up in revenue.

The interplay between Current RPO and total RPO is also interesting and portrays how Adobe’s business has shifted over time. Remaining performance obligations to be recognized over the next twelve months (i.e., Current RPO as a percentage of total RPO) has ticked down relatively fast:

This should not surprise anyone. Management has been pretty vocal about its One Cloud strategy and how it’s a tool to become the strategic partner of enterprises. This enterprise focus has made enterprises become a more significant portion of the business over time and one could argue that this is part of the bull case (I’ll share some thoughts on this topic later on) because it lengthens Adobe’s runway. I would say, though, that Adobe’s RPO number doesn’t even make up one year of revenue.

Now, I believe it has become obvious that what the market is worried about is not RPO, but ending ARR growth. Ending ARR growth has decelerated through 9 consecutive quarters:

Source: Adobe Investor Data Sheet

There’s no immediate trend reversion expected either considering that management maintained the ARR growth guide for the full year at 10.2%, 70 bps below the first quarter’s result. The first thing that should come to mind here is the following, which is also a great segue into understanding how Adobe’s business has shifted/adapted over time:

The answer to this question is relatively straightforward: these metrics measure different things across different time horizons. RPO includes multi-year commitments whereas ARR only takes into account the next twelve months. This makes ARR a much “better” leading indicator of next year’s revenue (although Adobe claimed that RPO conversion to revenue should not differ materially from what it has been in the past) and therefore it has become what Wall Street is focused on.

It’s worth noting that consumption-based revenue bypasses the ARR figure entirely (as it’s a usage-based metric). This means that revenue growth can temporarily detach from ARR growth, something that may become the norm in the future as AI-usage ramps across Adobe’s tools.

Wall Street has two options in this new “AI era:”

1. Acknowledge that ARR is less useful as a leading indicator as usage-based revenue streams ramp up

2. Believe that ARR growth will tick up as management monetizes new users (i.e., management’s explanation)

Management shared two explanations for the slowing ARR growth, one of which I believe makes sense and one of which I believe should be taken with a grain of salt. The one which makes sense is the freemium model, although it did not precisely calm investor fears. Management argues that, as Adobe rolls out AI features and goes downmarket, the sales process becomes longer as it involves making customers use the tools extensively and then paywalling features down the line. This means that ARR growth might potentially slow down despite usage indicators being at ATHs (all time highs):

One could definitely give management the benefit of the doubt here, but with the market being in “shoot-first-ask-questions-later” mood this does little to tame the monetization fears. Ultimately, the market believes that AI will translate into higher usage of Adobe’s tools, but that conversion may somewhat languish due to increased competition/alternatives (in the non-professional side at least).

The second reason management shared to explain the decelerating ARR growth was the declining Adobe Stock business:

Ending ARR would’ve grown 11.2% ignoring this segment, 30 bps above the reported 10.9%. This would’ve still been a deceleration, but not to the same extent. I don’t really “buy” this explanation because I do believe that the Stock business is most likely a terminal 0 in a world of generative AI. Now, this doesn’t mean that the underlying shift from Stock to Gen AI subtracts from Adobe’s total opportunity. Adobe should theoretically be compensated through higher consumption-based business and better retention as AI tools are rolled out across its apps.

The bottom line is that, in this new generative-AI era, ARR might just be a less appropriate indicator of Adobe’s health, although one Wall Street is likely to continue focusing on. So, yes, the decelerating ARR growth can potentially be “worrying” and is likely what the market is focused on, but we must understand that businesses shift and adapt and Adobe is no different.

There were also several positive and more qualitative indicators that portrayed that the business is doing very well in terms of top of the funnel. Let me share a couple of these…

• AI-first offerings ending ARR tripled year over year. While this looks good, we should not forget that AI-first ARR is still a very small portion of total ending ARR (around $250 million on a $26 billion total ARR base)

• The top of the funnel continued growing at a good pace with 850 million MAUs growing 17% year over year and with Creative Freemium MAU crossing 80 million and growing 50% year over year. Note that the market’s concern is likely not how many MAUs AI can bring into Adobe’s franchise but more so how monetizable these are in an AI-first creative industry. The fact that ARR growth is decelerating as MAU ramps up only serves to confirm the market’s POV (until proven otherwise)

• Enterprise contracts also grew at a good pace

I believe that these qualitative indicators don’t do much in terms of disproving the bear case. Yes, AI is driving usage across Adobe’s tools and, but this doesn’t mean that it will be a profitable endeavour for Adobe over the long term. As an Adobe bull/bear, one has to try to understand not only whether Adobe’s top of the funnel is getting larger (it is) but whether conversion will remain at the high level it has been in the past (this is still not as clear and the ARR growth slowdown does not tame fears).

A poorly communicated transition

Besides slowing ARR growth, something that probably spooked the market was the announcement of Shantanu Narayen’s departure. I don’t think it was THE FACT per se that spooked the market, but rather the HOW: Adobe doesn’t have, at this time, a successor for Shantanu and has opened up the search to external candidates. This seems like a very strange thing to do for several reasons. First, many (myself included) thought that David Wadhwani (Head of Digital Media) was the obvious and natural replacement. He has been driving the AI strategy in Digital Media so it’s honestly strange to not see him as a candidate (maybe he is, who knows). Secondly, it leaves the impression (doesn’t necessarily mean this is the case) that Shantanu decided to jump ship during this “disruptive” period for Adobe. This should somewhat add to the fears that not many insiders have been buying shares in the open market despite spending billions of shareholder money in repurchasing shares (which I am not saying is wrong).

I only have two explanations for this. First and probably more plausible (Occam’s Razor): Adobe simply made a communication misstep. Second and maybe less probable: the Board believes that David missed the AI-pivot and therefore they don’t think he is the right fit. Either way, it leaves Adobe in a tough spot. Investors might now believe that there’s nobody at the helm in precisely the period where Adobe needs someone at the helm. If the board ends up choosing David, it leaves the impression that they went out to look for something better but could not find it. I don’t think that this episode will matter LT so long as the new CEO is the right fit, but when the stock is trading where it is, it’s something that Adobe can’t afford. Another potential explanation is that Adobe might have wanted to get this over with after reporting a pretty good quarter.

We’ll only find out in hindsight.

Adobe’s bull and bear cases (food for thought)

Like for any other company, there’s a bull and a bear case for Adobe. Judging by the stock’s performance and sentiment surrounding the name, I do believe that the bear case is much louder today than the bull case, which doesn’t mean there’s not a bull case. In this section I’ll go over what I consider to be the bull and bear cases. Let’s start with the good news for Adobe shareholders.

The bull case

Even though many Adobe shareholders use the past to portray the bull case (since 2016 FCF per share has CAGRd at a 22% clip whereas the stock has only CAGRd at an 11% clip), I believe the argument misses the point. While it’s sometimes THAT easy, one can’t deny that Adobe faces a terminal value risk that the numbers have not yet been able to disprove entirely (see my commentary on ARR growth above). Now, this doesn’t mean that it can’t be a good investment opportunity today. For one, Adobe is trading very cheaply if one believes that AI doesn’t permanently impair the business, and there are reasons to be positive going forward. My bull case rests on the following four pillars…

Read more

You can read this article (almost) entirely for free. If you like what you read, consider becoming a paid member to get access to…

• All in-depth reports (15 companies profiled thus far, and growing)

• Earnings follow-ups

• Other investment related content

• A community of like-minded investors

• Complete access to my portfolio and transactions

• Occasional webinars

The in-depth reports of Stevanato and Deere are free to read to gauge the quality of the research.

Join hundreds of subscribers today:

Subscribe now

Both indices were down again this week driven by the conflict in Iran and the impact it might have on oil prices. I discuss this at length in the brief market commentary. There was also other relevant news across several portfolio companies.

Without further ado, let’s get on with it.

Articles of the week

I published two articles this week. The first one was Constellation’s earnings digest.

The company not only reported good earnings but also held its first earnings call since 2018.

The second article of the week was the earnings digest of the latest addition to my portfolio.

The company was able to sustain its 37% 3-year CAGR and continues to gain significant share in its industry thanks to its disruptive nature.

Without further ado, let’s see what the markets did this week.

Market Overview

I am not going to discover anything new by saying that it’s a volatile market and world out there, albeit probably less than one would’ve imagined with the scale of the operation in Iran and what’s going on with energy prices. Indices were significantly down this week after being down considerably last week (the magnitude of the drop should be contextualized acknowledging these are diversified indices):

Despite these drops and the fact that there’s a full blown war in the Middle East that is causing oil prices to rise considerably, indices are “barely” 6% off highs:

Knowing what will happen from now on is pretty much impossible, but 6.6% off ATHs surely does not seem like the drop we’d have if markets expect the conflict and its impact on oil prices to be long-lasting. I believe the market is sort of cautiously pricing in that the conflict will be short-lived, maybe supported by the fact that Trump has shown a tendency to care about markets (i.e., TACO). Now, TACO gained popularity during the Tariff tantrum, but I’d say tariffs were a self-inflicted wound and therefore solvable with just a “simple” shift (I should remind you, though, that many believe that it would be a structural impact). This situation honestly seems much more complex because it involves a war and many more players, meaning that it’s probably not solely Trump’s hands, at least not to the extent all the Tariff situation was (Ps#1: I don’t consider myself an expert on geopolitics so take everything here with a grain of salt. Ps#2: I don’t think anyone is an expert on geopolitics).

The bear case here is that the conflict lasts longer than everyone expects, which creates an upward pressure on energy prices on an economy that is not precisely the strongest it has ever been. This ultimately creates a stagflationary period through which the Federal Reserve (and other Central Banks around the world) is forced to make a tough decision on interest rates. I hate to be the bearer of bad news, but this is something that could definitely happen so we shouldn’t be too surprised if it does (i.e., the probability is above 0). A “less-terrible” case is that the conflict gets resolved relatively soon but that it still has a lingering impact on energy prices (less long-lasting, though). I would imagine it’s this last case that the market is pricing in.

The bull case (or maybe the less-terrible case) is that (once again) the world adapts. Without being an energy expert I believe there are several levers to pull here. First, the Strategic Oil Reserves, both in the US and across the G-7. There have already been rumours that hundreds of millions of barrels might be released from said reserves, which would help tame the supply shock caused by the conflict. Now, this is 100% a short term solution that can’t be prolonged indefinitely.

The second lever is Saudi Arabia’s West Coast. Several sources have confirmed that tankers are now heading to the West Coast to pick up barrels, bypassing the Strait of Hormuz entirely:

Saudi Arabia apparently had built a massive pipeline to be able to transfer oil to the West Coast should they need to, and well, they need it now. This is probably not going to be a long term solution either because the capacity to ship barrels from the West Coast (around 5 million barrels per day) is considerably lower than that of the East Coast (around 20 million barrels per day), but it’s definitely better than nothing. There are also other risks in the West Coast like Somali pirates and the Bab-El-Mandeb strait which the Houthis promise to disrupt if Iran wants, but this definitely seems more manageable than mines and going against Iran’s army. We’ll see how this develops but a potentially terrible scenario here is that both of Saudi Arabia’s export routes get closed down, something that has never happened in the modern economy and which will likely put significant pressure on oil prices.

Even though I know energy “experts” will say this does nothing to reverse the situation, I believe it shows how adaptable the world (and the human being) is when they truly need it and when powerful incentives are in place. I am well aware that the bear case can play out, but we must not forget that there’s no incentive for it to play out and that political leaders will do whatever it takes to avoid a full blown crash. Modern western societies have zero capabilities to sustain suffering and we have midterms coming up. Humans can go great lengths to pursue their interests, will this time be different? Now, with this said, it would not be the first time (nor the last) that humans make a mistake that they can’t reverse, will that be a similar situation today? Only time will tell.

Trump also announced during the weekend that the US had bombed Kharg Island. He was quick to point out that only military bases had been impacted, leaving oil infrastructure “untouched.” Sentiment on X is terrible after this move and everyone is claiming that we are going to have another Global Financial Crisis, which makes me think we are actually not going to have a remotely similar situation. The bear case is always in play, but remember that just last weekend people were saying the same thing: oil above $150 and Black Monday. None of the two things ended up happening but still the same accounts that incorrectly made those forecasts are back at making them again with a high degree of confidence. It’s pretty incredible how macro bears can simultaneously have a high ego with a terrible success rate, but it happens. Of course, they will eventually be right and they will promote the hell out of the times they are right (not many). The bear case is ALWAYS scary, and I must say it does seem scarier today than what stocks are pricing in, but that doesn’t mean that it has to necessarily play out like fear mongers think it will.

The industry map was pretty much red this week:

The fear and greed index worsened again and remains in fear territory:

My transactions this week

This week I added to one position which dropped considerably despite reporting outstanding earnings:

Read more