This week’s company is DoorDash, Inc. (NASDAQ: DASH), the ~$76b market cap company that delivers food to your doorstep. DoorDash is particularly interesting because they managed to outcompete its rivals to become the king of food delivery in the second largest market in the world, the United States of America. Enjoy!

My idea of the Company Snapshot series is to offer a quick dive into a business, highlighting what makes them special. Rather than a lengthy deep dive, this format focuses on a high level overview, providing readers with digestible insights. Each Company Snapshot will follow this structure:

• Business Overview

• Competitive Landscape

• Key Financials

• Opportunities

• Risks

Business Overview

Founded in 2013, DoorDash operates a logistics platform that connects merchants, consumers and dashers. The company’s offerings include the DoorDash Marketplace, Wolt Marketplace and Commerce Platform. Their marketplaces operate in over 30 countries globally and provide an integrated suite of services that help merchants establish an online presence, connect with consumers in their communities, and solve mission-critical challenges, such as customer acquisition, demand generation, order fulfilment, merchandising, payment processing, and customer support.

DoorDash typically earns a fee from merchants for the services provided based on the size of each transaction. The company also offers advertising as a value-added service through their marketplaces to help merchants and consumer packaged goods companies increase consumer engagement and drive incremental revenue.

Their marketplaces compete for consumers based primarily on the selection, convenience, quality, affordability and service provided. DoorDash typically charge consumer fees for each transaction, inclusive of a fixed delivery fee and a service fee that varies based on the size of the transaction. Further, the company offers consumer membership programs, DashPass and Wolt+, which aim to lower transactional friction by reducing the delivery and service fees charged, while providing additional membership benefits. At the end of 2024, the marketplaces served over 42 million monthly active users, and had over 22 million DashPass and Wolt+ members.

The Commerce Platform is a suite of services that help merchants grow, run, and operate their businesses on their own channels. DoorDash Drive On-Demand and Wolt Drive are white-label delivery fulfillment services that generate the majority of revenue within the Commerce Platform. Additionally, the company also provides services that help merchants establish online ordering, build branded mobile apps, and enable tableside order and pay, and improve customer support.

The following diagram shows the DoorDash flywheel taken from their S1 filing, which is typical of a food delivery business: more consumers means more merchants, which leads to more Dashers, increasing the efficiency and speed of deliveries, causing more orders from consumers.

Competitive Landscape

The competitive landscape for the food delivery market is highly competitive and fragmented. Given that majority of DoorDash’s revenue comes from the US (~88%), it’s main competitors are Uber Eats and Grubhub. Here’s a chart showing how the food delivery market share trended in the US from 2016 to 2023:

DoorDash had a meteoric rise over that time period, growing from under 10% in 2016 to approximately 67% of market share in the US in 2023, the second largest market for food delivery behind China. It should be noted that this growth wasn’t all organic though, as DoorDash acquired Caviar from Square for $410 million in August 2019. Caviar was a premium food delivery service known for partnering with upscale restaurants and operating in select metro areas like New York City, Los Angeles and San Francisco. This is particularly interesting because Uber Eats seems to have struggled to grow market share despite acquiring Postmates (yellow line) in 2020.

Perhaps part of the reason for DoorDash’s success, aside from their execution, could be due to their suburban focus. The company has strategically focused on suburban markets and smaller metropolitan areas early on, which they believe has given them a competitive advantage as these markets were historically underserved.

The other aspect could be its merchant-first approach. DoorDash focuses on being inclusive to all types of merchants, regardless of their scale, business model or location. Their platform is designed to integrate seamlessly with merchants existing processes and workflows. This also means DoorDash integrates into existing workflows through which merchants receive their orders, including website, email, tablet, phone and even fax through the use of direct API integrations, middleware platforms and hardware/software solutions. Beyond POS integrations, the company also provides merchants features such as payment processing, customer support, data analytics such as menu optimization insights, and their white-label delivery service, via DoorDash Drive, which essentially enables merchants to use DoorDash’s logistics while keeping their own branding and customer relationships.

Key Financials

Opportunities

• Continued expansion into verticals beyond food such as grocery, convenience store, pharmacy and pet supplies. DoorDash has moved to expand into non-food verticals to take advantage of their logistics network and expand their total addressable market (TAM).

• International growth. DoorDash operates in over 30 countries along with its Wolt brand in countries such as Australia, Canada, Germany, Israel and Finland. Growing market share in existing countries and expanding into new countries would greatly expand their TAM.

Risks

• Intense competition: The food delivery market is highly competitive and can be disrupted by shifting user preferences and frequent introduction of new services. Increased competition could lead to pricing pressure which could affect profitability. New entrants could potentially grab market share especially if DoorDash slacks, but that doesn’t appear to be the case given DoorDash’s continued market share growth in the US.

• Retention and acquisition of merchants, consumers and dashers: In order to retain the three constituents, DoorDash has to ensure that using their platform is advantageous to each of them, as failure to do so would cause the constituents to switch to another platform offering better options

Conclusion

Since its listing in 2020, DoorDash has shown strong growth and has turned profitable in 2024. The company’s focus on merchants and managing their three constituents (merchants, consumers and dashers) are bearing fruit. Their business only gets stronger as they scale. The company’s valuation seems quite rich at a P/S of 6.5, and the company has only turned a profit in 2024. Time will tell if they manage to maintain their leadership, but for now they are in an enviable position, dominating the US food delivery market.

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Disclaimer: Please note that none of the information provided constitutes financial, investment, or other professional advice. It is only intended for educational purposes.

This week’s company is on Paycom Software Inc (NYSE: PAYC), a ~$12b market cap human capital management SaaS company that’s focused on automating solutions for the small to mid-sized companies in the US.

This founder-led company caught my attention last year when it faced what appeared to be self-inflicted revenue headwinds after introducing its BETI product. BETI helps customers reduce payroll expenses by minimizing filing errors — which, in turn, reduced Paycom’s revenue. At first glance, this seemed counterintuitive, but it struck me as a smart long-term move. By prioritizing customer outcomes over short-term gains, Paycom is strengthening its alignment with clients and reinforcing the durability of its business. Enjoy!

My idea of the Company Snapshot series is to offer a quick dive into a business, highlighting what makes them special. Rather than a lengthy deep dive, this format focuses on a high level overview, providing readers with digestible insights. Each Company Snapshot will follow this structure:

• Business Overview

• Competitive Landscape

• Key Financials

• Opportunities

• Risks

Business Overview

Founded in 1998, Paycom Software Inc provides cloud-based human capital management (HCM) solution delivered as a Software as a Service (SaaS) for small to mid-sized companies in the US. Paycom offers functionality and data analytics that businesses need to manage the employment life cycle from recruitment to retirement.

Paycom’s software is based on a core system of record maintained in a single database for all HCM functions, including payroll, talent acquisition, talent management and HR management and time and labor management applications. Paycom’s software requires no customization and is user-friendly for easy adoption by employees, enabling self-management of their HCM activities in the cloud, reducing administrative burden on employers and increasing employee productivity.

Their software was developed in-house and is based on a single platform so there’s no need for clients to integrate, update or access multiple databases, which are common issues with competitor offerings that use multiple third-party systems in order to link together their HCM offerings.

Paycom’s revenue can be categorized into recurring and other revenues (~93%) and interest on funds held for client (~7%):

• Recurring revenue: Derived primarily from payroll, talent acquisition, talent management, HR management and time and labor management applications, fees charged for tax form filings and delivery of client payroll checks and reports, and revenues associated with background checks and income and employment verification services.

• Other revenues: Implementation fees for the deployment of their solution and revenues from sales of time clocks as part of our time and attendance services. Non-refundable implementation fees are charged to new clients at contract inception. These fees generally range from 10% to 30% of the annualized value of the transaction.

• Interest on funds held for clients: Paycom earns interest income on funds held for clients. Funds held for clients are amounts collected from clients in advance of either the applicable due date for payroll tax submissions or the applicable disbursement date for employee payment services. These collections from clients are typically disbursed from one to 30 days after receipt, with some funds being held for up to 120 days. We typically invest funds held for clients in money market funds, demand deposit accounts, certificates of deposit, commercial paper and U.S. treasury securities until they are paid to the applicable tax or regulatory agencies or to client employees.

Paycom’s revenue is generated from fixed amounts charged per billing period plus a fee per employee or transaction processed; and fixed amounts charged per billing period. The billing period varies by client based on when each client pays its employees, which could be weekly, bi-weekly, semi monthly or monthly.

The payroll application is the foundation of Paycom’s offering and all clients are required to utilize it in order to access other applications. As a result, most of the company’s revenue was generated through payroll applications, but this revenue mix is evolving as Paycom develops more non-payroll applications. The vision for Paycom is that companies should not have to perform payroll- and HCM-related tasks that systems can automate.

At the end of 2024, Paycom has approximately 37,500 clients, with an annual revenue retention rate of 90%.

Competitive Landscape

The market for HCM software is highly competitive and fragmented. Paycom’s target client size is small to mid-sized organizations with 50 to 10,000 or more employees. Based on 2023 data, Paycom is the second-largest payroll software vendor by market share, behind Automatic Data Processing (ADP). And Paycom has been taking market share over the years. Since its 2014 IPO, Paycom grew revenue around ~30% annually, significantly faster than the overall market (~5–10%).

Some of Paycom’s key competitors are Paylocity, Paycor and ADP. Paycom’s differentiation revolves around the simplicity of their technology and platform. Paycom’s functions are seamlessly integrated with each other using a single database and platform, rather than relying on integrating multiple databases or third-party platforms. This means that Paycom is able to roll out innovations quickly, provide real-time updates, and simplifies IT complexity for their clients. The downside of this approach though, is that it could be a more closed system. Some customers may prefer a more open ecosystem with the option to plug and play into third-party apps and features, depending on their needs. With Paycom, the customer would have to only use their built-in tools.

This means that Paycom would need to constantly roll out innovative products that add value to the customer to prevent churn. And they’ve done this well. The annual revenue retention rate has generally been over 90%. Further, they often introduce industry first features, such as BETI (Better Employee Transaction Interface), the self-service payroll system that launched in 2021. BETI changed the game by allowing employees to review and approve their own paychecks, improving efficiency by reducing HR’s workload and greatly reducing errors. BETI was so successful that it became a headwind to Paycom’s revenue as it additional fees clients previously paid for re-submitting tax form filings due to payroll errors. This move is a classic example of short-term pain for long-term gain, ensuring that the value to the customer is prioritized.

Key Financials

Opportunities

• Upmarket expansion into larger enterprises

• International expansion (Canada, UK, Ireland, Mexico)

• Price increase: Charging a premium for features like BETI that saves clients money by reducing payroll errors, or further increasing the value of the platform to the client by adding more features

Risks

• Competitive pressure: If competitors are able to copy Paycom’s best features, Paycom could struggle to maintain differentiation and lose deals to cheaper or more flexible competitors

• Larger companies moving downmarket: Large HCM companies can bundle payroll with other services, locking them into the ecosystem and increasing switching costs

Conclusion

Paycom’s a company with strong historical growth, has a strong balance sheet with zero debt. While the company is still growing, it’s currently facing some growth headwinds due to the reduced payroll revenue from BETI. If Paycom continues to deliver value through both payroll and non-payroll features, it has room for further growth. While the industry remains highly competitive, its long-term success will ultimately depend on its ability to maintain a strong client focus and differentiate through innovation.

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Disclaimer: Please note that none of the information provided constitutes financial, investment, or other professional advice. It is only intended for educational purposes. I have a vested interest in Paycom Software Inc. Holdings are subject to change at any time.

While accounting fraud and corruption may be more visible in China, fraud risk exists in every market. Investors should always maintain a level of skepticism, and China is no exception.

To be clear, these businesses are not fantastic; most operate in a low-technology manufacturing industry, have structural headwinds and low or no-growth potential, and are very small caps. But I was just fascinated with the market valuation so I thought I’d share them here. At best, these could be a cigar butt investing play and at worst, a value trap.

China Starch Holdings Limited (3838.HK)

China Starch is a company that manufactures and sells cornstarch, lysine, starch-based sweeteners, modified starch, and ancillary corn-based and corn-refined products in China. They operate in two segments: Upstream, and Fermented and Downstream products. The Upstream segment is the main business but there’s a lot of cyclicality in their pricing due to the demand and supply of their products, leading to fluctuations in margins over the years. Management has announced plans to increase production capacity of cornstarch from 1 million to 1.55 million tonnes, and a thermal power project to provide steam and electricity without relying on third parties and lowering operational costs over time.

China Starch’s revenue has reached new levels with their expansion in production capacity with a 10-year CAGR of 10.9%. However, in recent years, growth has been rather muted, with revenue showing a 3-year CAGR of 2.7%. Operating margins are generally low, ranging between 3-5%. The dividend yield is about 3.3%.

So what’s the valuation? China Starch trades at a market cap of HKD1.3b (USD175m), with a P/E of 3.6. Their net cash position is HKD1.09b (USD140m), or ~80% of market cap. Cheap, but subject to the volatility of the market prices of cornstarch and cornstarch derived products.

Emperor Watch & Jewellery Limited (887.HK)

Emperor’s business is in retailing European-made watches and self-designed fine jewelry products under the Emperor Jewellery brand name. Most of their customers are in China, with 53% in Hong Kong, 28% in the PRC, 13% in Singapore and Malaysia, and 6% in Macau.

Revenue has rebounded from Covid lows with a 3-year CAGR of 10.6%. The business runs with operating margins at 7-8%. Recently, management announced plans to acquire the remaining floors of a five story building on a prime street in Hong Kong with plans to transform it into a flagship mega store for a luxury watch retailer.

Emperor’s market cap is HKD1.24b (USD160m), with net cash of HKD280m (USD36m) and high insider ownership (~63%). It trades at a P/E of 3.8 and a dividend yield of 7.6%.

Cirtek Holdings Limited (1433.HK)

Cirtek manufactures and sells printing products in Hong Kong, Macau, PRC, Bangladesh, Vietnam, the US, and internationally. The company offers apparel labels and trim products, such as hang tags, woven and printed labels and heat transfer products. Some examples of their products below:

Cirtek mainly sells to apparel manufacturers which handle the manufacturing process for the apparel brands. There’s an increasing trend of embedding the hang tags and labels with RFID and NFC tags to facilitate inventory management of apparel manufacturers or apparel brands, which is a more efficient way of managing inventory in warehouses and retail stores. The application of RFID and NFC tags would enhance data management and supply chain management for global apparel brands.

Cirtek is a newly-listed company that had its IPO in 2020 to raise funds to upgrade their factory in Bangladesh. Cirtek has production facilities in the PRC, Bangladesh and Vietnam, as well as a supporting production line for encoding RFID products in the US.

Previously, Cirtek had some issues with securing contracts from apparel brands due to the fact that the company’s Bangladesh factory operated in a shared factory building and limited variety of machine types. The upgraded factory would have a total gross floor area of approximately 10,600 sq. m, up from 3,300 sq. m. Management expects a payback period of approximately 7.3 years after the new factory commences operations, with an expected IRR of 22%. The company announced that this factory has commenced operations at the end of 2023.

What’s interesting about Cirtek is that their 3-year revenue CAGR was essentially flat at 0.69%, from 2021 to 2023. However, in 1H of 2024, taking into account the impact of the new factory, revenue increased by 65.1%. While writing this analysis, management recently guided to a profit before tax of HKD65m (USD8.36m) for the full year 2024, up from a loss of HKD19.7m (USD2.53m) in the previous year (And the stock jumped 30% the next trading day!).

Even after the jump, the company trades at a market cap of HKD229m (USD30m), with a net cash of HKD15m (USD1.93m), no dividends paid in 2024, and a P/E of 9.1.

Hyfusin Group Holdings Limited (8512.HK)

Hyfusin is in the business of designing, manufacturing, and selling candle products in the US, UK and internationally. The company provides daily-use candles, scented candles, and decorative candles as well as other products including diffusers. It primarily serves department store operators and buying agents.

Hyfusin customers are mainly outside of China, with majority of sales to the US (93%) and the remaining to the UK (7%). The company’s valuation metrics are interesting: market cap of HKD284 (USD37m), net cash of HKD234m (USD m), no dividend yield and a P/E of 2.4. The business has a high insider ownership of ~70%, with ~15% net margins.

There’s a similar expansion story here with their 3rd factory expected to commence in the second half of 2024. However, there’s significant customer concentration risk though, as most of their revenue come from their top three customers: Customer A (63%), Customer B (10%), and Customer C (7%).

Final words

I find it interesting that these are cash generating, profitable businesses, that are trading at really cheap valuations. I’m treating this more as a case study, as I’d personally need to know much more about management to be able to bet on them. But it’s funny how market inefficiencies start to appear especially when you swim around the small/micro caps in an unloved market.

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Disclaimer: Please note that none of the information provided constitutes financial, investment, or other professional advice. It is only intended for educational purposes.

This week’s company is Intuitive Surgical (NASDAQ: ISRG), a ~$170b market cap company that produces robotic products for minimally invasive surgery.

The company follows a “razor and blades” model by selling a surgical system (razor) and the related instruments, accessories and services (blade). While ISRG does make a profit from its system sale, most of its revenue is recurring from the instruments and accessories that need to be replaced, and the services to maintain the system. Let’s dive in.

My idea of the Company Snapshot series is to offer a quick dive into a business, highlighting what makes them special. Rather than a lengthy deep dive, this format focuses on a high level overview, providing readers with digestible insights. Each Company Snapshot will follow this structure:

• Business Overview

• Competitive Landscape

• Key Financials

• Opportunities

• Risks

Business Overview

Founded in 1995, Intuitive Surgical (ISRG) develops, manufactures and markets the da Vinci surgical system, which is a robotic platform that allows surgeons to perform complex, minimally invasive surgeries with greater precision and dexterity, using a surgeon's console to control robotic arms that move like a human hand with a larger range of motion.

While minimally invasive surgery (MIS) has helped to reduce trauma to patients by allowing surgeries to be performed through small ports rather than large incisions (e.g. a nose or boob job), the da Vinci surgical systems enable surgeons to extend the benefits of MIS by using computational, robotic, and imaging technologies to overcome many of the limitations of conventional MIS and traditional open surgery.

With the da Vinci system, surgeons can operate while being comfortably seated at a console, viewing high-definition imaging of the surgical field, therefore reducing surgeon fatigue. Further, the technology is designed to provide surgeons with a range of articulation of the surgical instruments used that is analogous to the motions of a human wrist, while filtering out the tremor inherent in a surgeon’s hand.

I’m not medically trained, so do bear with my oversimplification — but the da Vinci surgical system generally comprises of the following:

• Surgeon Console: This is where the surgeon sits and controls the robotic arms using hand movements, which are translated into precise surgical action. In the newer models, there’s even an option for a second surgeon console to provide assistance;

• Patient-Side Cart: Holds the robotic arms that move surgical instruments inside the patient;

• 3DHD Vision System: Provides a high-definition 3D view of the surgical area, able to digitally zoom and magnify the surgical field of view;

• FireFly Fluorescence Imaging: Uses a special dye and camera to highlight blood flow and tissue in real time; and

• Da Vinci Integrated Table Motion: Coordinates the movements of the da Vinci robotic arms with an advanced operating room table to enable managing the patient’s position in real-time while the robotic arms remain docked.

The Ion endoluminal system, which was cleared by the FDA in 2019, is a flexible, robot-assisted catheter-based platform that utilizes instruments and accessories for which the first cleared indication is minimally invasive biopsies in the lung. The system features an ultra-thin, ultra-maneuverable catheter than can articulate 180 degrees in all directions and allows navigation far into the peripheral lung and provides the stability necessary for precision in a biopsy.

The company also provides a suite of stapling, energy, and core instrumentation for its surgical systems; progressive learning pathways to support the use of its technology; a complement of services to its customers, including support, installation, repair, and maintenance; and integrated digital capabilities providing unified and connected offerings, streamlining performance for hospitals with program-enhancing insights.

ISRG follows the Quintuple Aim as its guiding principle:

1. Better Patient Outcomes – Products are designed to improve patient results, supported by rigorous, peer-reviewed evidence.

2. Enhanced Patient Experience – Innovations help patients recover faster with fewer complications, less pain, and greater predictability.

3. Support for Care Teams – Technology enhances clinician skills, reduces fatigue, and increases efficiency and reliability.

4. Lower Healthcare Costs – Solutions aim to reduce the total cost per patient episode compared to traditional treatments, delivering value for hospitals and payers.

5. Expanded Access to Care – Partnerships with hospitals, healthcare systems, and advocacy groups help overcome barriers to minimally invasive treatment.

ISRG generates up-front revenue from the placement of da Vinci surgical systems through sales or sales-type lease arrangements and recurring revenue over time through fixed-payment or usage-based operating lease arrangements. Said another way, ISRG sells the da Vinci system through sales, fixed repayment, or a “pay as you use” method. ISRG also earns recurring revenue from the sales of instruments, accessories, and services.

The selling price for the da Vinci surgical system and the Ion endoluminal system is between $0.7 million and $3.1 million and $500,000 and $815,000, respectively. Their instruments and accessories have limited lives and will either expire or wear out as they are used in surgery, at which point they need to be replaced.

For the da Vinci system, ISRG generally earns between $800 and $3,600 of instruments and accessories revenue per surgical procedure performed, depending on the type and complexity of the specific procedures performed and the number and type of instruments used.

Besides the sale of the system, ISRG also generates revenue from service contracts from the da Vinci system and the Ion endoluminal system, with an annual fee between $100,000 and $225,000 and $55,000 and $80,000 respectively. ISRG typically enters into a five-year service contract, with the first year provided for free.

ISRG’s recurring revenue, which consists of instruments and accessories revenue, service revenue, and operating lease revenue, makes up 84% of total revenue, in 2024. Instruments and accessories revenue has grown faster than systems revenue over time, reflecting the continued procedure adoption.

ISRG’s revenue is largely based in the US at approximately 67%, with the remaining 33% in international markets. As of end 2024, ISRG’s installed base of da Vinci surgical systems is approximately 9,902.

Competitive Landscape

When looking at ISRG’s competitive landscape, several key factors stand out:

• Alternative Treatment Options: Robotic-assisted surgery isn’t the only option. Open surgery, conventional minimally invasive surgery (MIS), drug therapies, and radiation all compete with robotic procedures, depending on the type of condition being treated.

• First-Mover Advantage & Market Leadership: Being the pioneer of robotic-assisted surgery and a strong reputation built over decades, reliability is a key advantage — especially in surgery, where precision and safety are critical. Additionally, extensive regulatory approvals worldwide create a high barrier to entry for competitors trying to catch up.

• Installed Base & Ecosystem Lock-In: Hospitals that invest in da Vinci systems aren’t just buying a machine — they’re committing to an entire ecosystem. Each system costs millions of dollars and switching to another platform means additional costs for training, support, and upgrades. Since surgeons and staff need time to master the technology, hospitals have strong incentives to stick with ISRG rather than switch to a competitor.

• Regulation: ISRG operates in a heavily regulated industry, with approvals required from the FDA in the U.S. and equivalent agencies worldwide.

  • Regulatory approvals are essential – Without clearance for its da Vinci and Ion systems, plus related instruments and accessories, ISRG can’t sell its products. The process is often long and unpredictable.

  • International complexity – Regulations vary by country, meaning ISRG must secure separate approvals for each market.

  • Pricing & market access hurdles – Some countries restrict how much hospitals can charge patients for robotic surgery or impose quotas on new surgical robots, making international expansion more challenging.

Key Financials

Opportunities

• Worldwide procedure volumes continue to rise due to several drivers such as aging population, growing chronic disease cases and better healthcare access. Aligning with the Quintuple Aim, striving to improve patient outcomes, patient experience, care team experience, expanding access to MIS, and lowering the total cost per patient ensures ISRG to be well positioned in the long term

• Other additional applications for the Ion endoluminal system, which the company plans to seek further regulatory approvals for it outside the US

Risks

• Rising Competition from New Entrants: While ISRG has been the dominant force in robotic surgery for over 25 years, more companies are entering the space, developing their own robotic surgical systems. Further, the healthcare industry is experiencing consolidation, which could intensify competition and result in pricing pressures

• System failures: IT system failures, cybersecurity issues would lead to significant harm and reputational damage of the business. Unlike a social media platform or e-commerce website, downtime could potentially be a life or death issue for patients

• International operation risk: ISRG’s operations outside the US subject it to a variety of risks relating to failure to protect intellectual property, compliance with foreign laws, tariffs and trade barriers

Conclusion

ISRG is a strong and solid compounder that has proven the strength of its business model over decades. ISRG continues to benefit from the increasing global procedure volume as they grow their installed base of systems in and outside of the US. I’d imagine that the switching costs of ISRG’s ecosystem would make it difficult for competitors to penetrate, especially if hospitals have been using their system for years. So far, they’ve been doing very well, with 10-year revenue and earnings CAGR of about 14.6% and 17.9%, respectively. Such stellar financial metrics unfortunately come with a high price tag, trading at 77 P/E. Proven and great businesses rarely trade cheaply, especially with their solid track record and long term growth potential.

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Disclaimer: Please note that none of the information provided constitutes financial, investment, or other professional advice. It is only intended for educational purposes.

This week’s company is dLocal Ltd (NASDAQ: DLO), a ~$2b market cap payment processor that’s focused on handling payments for global enterprise merchants in emerging markets. This is a fairly young company, having IPO-ed on the NASDAQ in 2021. Considered to be one of the “pandemic darlings”, its stock price fell from a high of $69 in 2021 to around ~$9 today, while revenues grew approximately 3x. I hope you enjoy!

My idea of the Company Snapshot series is to offer a quick dive into a business, highlighting what makes them special. Rather than a lengthy deep dive, this format focuses on a high level overview, providing readers with digestible insights. Each Company Snapshot will follow this structure:

• Business Overview

• Competitive Landscape

• Key Financials

• Opportunities

• Risks

Business Overview

Founded in 2016 and headquartered in Montevideo, Uruguay, dLocal provides a payments platform designed for global enterprise merchants operating in emerging markets. Through a single API, platform, and contract — known as the One dLocal model — the company enables businesses to seamlessly receive payments (pay-ins) and make payouts (pay-outs) worldwide. Here’s some examples of how it works:

• Pay-in: A US-based merchant receiving payments from a customer in Brazil. The merchant could be receiving the funds in the US (cross border) or to their Brazilian entity (local-to-local).

• Pay-out: The same merchant paying suppliers or logistics providers in Brazil. Similarly, the merchant could be paying the suppliers from the US (cross border), or from their Brazilian entity (local-to-local).

• Platform: A ride-sharing or e-commerce platform collecting payments from customers while paying drivers or sellers.

dLocal's fully cloud-based platform supports cross-border and local transactions in 40 countries (as of end 2023) and connects merchants to 900+ local payment methods across financial institutions and emerging markets. dLocal works with 600+ enterprise merchants, including: Microsoft, Spotify, Salesforce, Deel, Wish, Expedia, Shein, Tencent, Telegram, Bolt, Rappi, PedidosYa. On average, global enterprise merchants utilizing dLocal's platform operate in eight different countries and leverage 70+ payment methods. The company serves a wide range of industries, including e-commerce, SaaS, financial services, streaming, ride-hailing, gaming, crypto, travel, and on-demand delivery.

As global businesses expand into emerging markets, they face unique payment challenges, seeking to partner with processors with high acceptance and conversion rates for local cards and alternative payment methods (APMs), FX management and compliance with local regulations, and fraud and tax management across different geographies. Unlike traditional payment providers focused on developed markets, dLocal offers deep local expertise to help merchants navigate complex payment infrastructures.

Beyond payment processing, dLocal is also expanding into value added services. The company's latest product, dLocal for Platforms, streamlines onboarding, verification, and global payments for marketplaces and multi-sided platforms. By optimizing funds management, cash flow, and customer experience, this solution helps platforms reduce costs and scale efficiently.

The company makes money by charging fees to merchants for processing cross-border and local payments in emerging markets. These fees are typically based on a fixed fee per transaction, or a percentage of the transaction amount. The other types of fees charged are as follows:

• Processing fees: Standard charges for handling transactions.

• FX service fees: Earned when payments involve currency conversion and fund transfers (e.g., converting local currencies to USD or EUR).

• Installment fees: For transactions that allow customers to pay in installments.

• Chargeback & refund fees: Applied when transactions are disputed or reversed.

• Other minor fees:

  • Setup fees for onboarding new merchants.

  • Monthly maintenance fees for account management.

  • Small transfer fees for low-value transactions.

While dLocal operates in developed economies such as the United States, Europe, and China, its revenue is primarily derived from emerging markets, where it enables global merchants to accept payments and make payouts. Its revenue is largely driven by key regions such as Brazil (24%), Mexico (18%), Nigeria (13%), Argentina (12%), and Chile (9%). In January 2025, dLocal expanded its operations into the United Kingdom by acquiring an Authorized Payment Institution (API) license from the UK Financial Conduct Authority (FCA), strengthening its presence in the European market.

Competitive Landscape

Single API improves performance

dLocal’s single API streamlines global payment processing, offering multiple advantages for merchants:

• Pricing transparency

• Easier reconciliation & refunds

• Seamless expansion as merchants can quickly add local payment methods in new markets

• More reliable system availability with reduced downtime and transaction failures

• Higher conversion rates with features like automatic retries and fallback transactions

• Lower fraud & compliance risks from built-in security and local expertise reduce regulatory issues.

Direct connections with merchants

Large enterprise merchants go through rigorous vetting when selecting a payments provider, often taking months to onboard due to security, compliance, and regulatory checks. However, once integrated, these merchants gain instant access to dLocal’s full payment network across emerging markets — without the need for additional contracts or integrations.

By establishing direct connections with merchants instead of relying on third-party intermediaries, dLocal secures long-term relationships, making it difficult for competitors to displace. Merchants can choose to process all or part of their payment flows through dLocal, reinforcing its role as a strategic payment partner.

While the payment space is competitive, dLocal has carved out a unique niche. Unlike global players like Stripe or Adyen, which prioritize developed markets first and expand later, dLocal specializes in helping enterprise merchants from the U.S., Europe, and China navigate payments in emerging economies like Latin America, Africa, and Asia.

These regions pose significant challenges, including high payment fragmentation, complex regulations, and limited financial infrastructure. dLocal’s deep expertise in local tax, compliance, and FX management allows global merchants to expand seamlessly while overcoming regulatory hurdles.

Key Financials

Opportunities

• Increasing digital commerce and payments

  • Emerging markets in LATAM, Africa and Asia are seeing rising e-commerce adoption

  • Consumers are shifting to cashless payments

• Expansion into new markets

  • Recent UK license supports the expansion for UK-based merchants

  • While dLocal already has a strong presence in LATAM, they are expanding into Africa and Asia

  • 85% of the world’s population resides in emerging markets, 2/3 of global growth by 2035 will come from there

• Innovation pipeline for value-added services, which would increase retention and gain more share of wallet

  • New growth vectors like stable coins

  • New products and innovation

Risks

*Update: A new risk, "Potential Integrity Issues" has been added; thanks to Heavy Moat Investments for pointing this out.

• Potential integrity issues*

  • In 2022, Muddy Waters released a short report on dLocal, alleging conflicting disclosures, accounting issues, and the skepticism of their take rates relating to their margins from partnering with other acquirers and FX gains, and corporate governance deficiencies.

  • dLocal was spun off from AstroPay, a payment processing service that operates mainly in Brazil, Latin America and India and is focused on industries such as online gambling, forex trading and adult entertainment. These industries are legally considered to be in a grey area, and even illegal in certain jurisdictions. While there was a change in management, currently, there are at least two directors that are also major shareholders of AstroPay: Andres Bzurovski Bay and Sergio Enrique Fogel Kaplan. Bay and Kaplan both hold a combined ownership of ~36.76% of dLocal.

• Competition

  • Global payment processors like Stripe and Adyen are expanding in emerging markets, where dLocal could lose market share if they don’t keep prices competitive or provide sufficient value to merchants over the competition

• Customer concentration risk

  • dLocal generates a significant portion of its revenue from a few large merchants

  • In 2023, dLocal’s top 10 customers represented 60% of revenues

• FX risks

  • Many LATAM countries have volatile FX, which can significantly impact dLocal’s profitability

Conclusion

dLocal offers a compelling solution for global enterprise merchants expanding into emerging markets, a region expected to drive long-term global growth. By focusing on this niche, dLocal helps merchants navigate payment complexities, simplifying market entry. However, competition in this space is heating up. In order for dLocal to compete with global payment processors like Stripe and Adyen, dLocal needs to compete on the value it delivers. Value can be defined as the net benefits derived from their services and problem solving capabilities relative to its pricing.

One key distinction between dLocal and a competitor like Adyen, lies in their operating models. While Adyen is a full-stack payments processor, controlling the entire payment chain, dLocal acts more as an aggregator, partnering with local processors and acquirers. This means Adyen has greater end-to-end control and visibility, while dLocal leverages local expertise and infrastructure. Competing effectively would require dLocal to differentiate not just through its reach but through the depth of its services, merchant support, and ability to drive conversion rates in complex emerging markets.

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Disclaimer: Please note that none of the information provided constitutes financial, investment, or other professional advice. It is only intended for educational purposes.

This week’s article is on Sony, the Japanese entertainment powerhouse behind the famous Playstation brand. Have a good weekend ahead.

Business Overview

Sony Group Corporation was founded in Japan in May 1946 as Tokyo Tsushin Kogyo Kabushiki Kaisha. Over the decades, it transformed from an electronics manufacturer into a global entertainment and technology powerhouse. In September 1970, Sony expanded its global footprint by listing on the New York Stock Exchange (NYSE).

From pioneering personal entertainment with the Walkman and Discman to shaping the future of gaming, film, and music, Sony has left its mark across multiple industries. Today, it’s best known for its PlayStation, TVs, audio headphones, digital cameras, movies and music.

But Sony’s reach extends beyond entertainment and consumer electronics. It has also ventured into insurance, banking, electric vehicles, and medical imaging. Though it has exited some of these industries, Sony once produced batteries, chemicals, and PCs, even playing a key role in lithium-ion battery innovation before shifting focus.

Today, Sony operates across several seven business segments, including:

1. Games and Network Services

2. Music

3. Pictures

4. Entertainment, Technology & Services

5. Imaging & Sensing Solutions

6. Financial Services

7. All Other

1. Games and Network Services (“G&NS”)

Sony undertakes product research, development, design, marketing, sales, production, distribution and customer service for PlayStation hardware, software, content and network services. The G&NS segment is divided into three key areas:

• Digital Software and Add-on Content: Distribution of software titles and add-on content through the network by Sony Interactive Entertainment;

• Network Services: Network services relating to game, video and music content; and

• Hardware and Others categories: Home gaming consoles, packaged software, game software sold bundled with home gaming consoles, peripheral devices and first-party software for third-party platforms.

2. Music

Sony’s music segment is divided into three areas:

• Recorded Music: Covers both physical and digital music distribution, as well as revenue from artists’ live performances. Sony Music Entertainment (SME) operates globally (excluding Japan), focusing on developing, producing, marketing, and distributing music across all formats and genres. Meanwhile, Sony Music Entertainment Japan (SMEJ) handles the Japanese domestic market, producing recorded music and music videos in partnership with artists across various genres;

• Music Publishing: Manages and licenses song lyrics and compositions. Sony Music Publishing (SMP), based in the U.S., owns, administers, and acquires rights to musical works. It markets and licenses these compositions to generate royalties and fees from their use; and

• Visual Media and Platform: Covers animation production and distribution, game applications, and services for music and visual products.

3. Pictures

• Motion Pictures: Covers the production, acquisition, and global distribution of both live-action and animated films. Its major production studios include Columbia Pictures, Screen Gems, TriStar Pictures, 3000 Pictures, Sony Pictures Animation, Stage 6 Films, AFFIRM Films, and Sony Pictures Classics. Sony also operates Sony Pictures Imageworks, a leading visual effects and animation studio, and Sony Pictures Studios, which houses post-production facilities;

• Television Productions: Focuses on the production, acquisition, and distribution of TV programming worldwide. It includes everything from scripted series, reality shows, daytime serials, game shows, animated series, TV movies, and miniseries;

• Media Networks: Runs TV channels and direct-to-consumer (DTC) streaming services worldwide. This includes:

  • SPNI (Sony Pictures Networks India) – Operates TV channels across India;

  • Game Show Network (GSN) – A U.S.-based network available on cable, satellite, and other platforms;

  • Crunchyroll – A leading anime-focused streaming service in North America;

  • SonyLIV – A general entertainment streaming service in India.

4. Entertainment, Technology & Services (“ET&S”)

• TV & Audio/Video: Sony undertakes product research, development, design, marketing, sales, production, distribution and customer services for televisions and video and audio products;

• Still & Video Cameras: Sony is a leader in digital imaging, producing interchangeable lens cameras, compact digital cameras, and professional video cameras. The company handles research, development, manufacturing, and sales, catering to both casual users and professional filmmakers;

• Mobile Communications: Sony develops and sells mobile phones, accessories, and applications. It also operates internet broadband network services and provides content distribution through its portal services, making Sony devices more connected across PCs, mobile phones, and other electronic platforms.

5. Imaging & Sensing Solutions (“I&SS”)

This segment handles the research, development, design, manufacturing, marketing, and sales of complementary metal oxide semiconductor (CMOS) image sensors, along with other semiconductor-related products like display devices, lasers, and large-scale integration systems (LSIs). Sony’s CMOS image sensors are widely used in smartphones, but they also power digital cameras, security cameras, factory automation systems, and automotive applications.

6. Financial Services

Sony Financial Group Inc. (SFGI) operates insurance, banking, and financial services primarily through:

• Sony Life – A Japanese life insurance company.

• Sony Assurance – A Japanese non-life insurance company.

• Sony Bank – A Japanese internet-based bank.

All three are wholly owned by SFGI and serve as Sony’s key financial businesses.

7. All Other

This segment includes various business operations outside Sony’s core industries, such as disc manufacturing (outside Japan) and recording media and storage solutions.

Sony operates a well-balanced and profitable portfolio across multiple business segments, with G&NS (31%) as the largest contributor, followed by ET&S (18%), Financial Services (13%), Music (12%), I&SS (12%), and Pictures (11%). Each segment is generating profits, showcasing Sony’s operational strength and resilience across industries.

Geographically, Sony maintains a strong global presence, with its largest markets being the U.S. (29%), Japan (23%), and Europe (20%). The Asia-Pacific region (excluding China) contributes 13%, while China alone accounts for 8%, and other regions make up the remaining 7%. This well-distributed revenue base helps Sony mitigate regional risks while capitalizing on opportunities across multiple.

Competitive Landscape

Strong brand with market leadership

Sony is a globally recognized brand in entertainment, gaming, and technology, with a strong presence across PlayStation, TVs, music, film, and digital cameras. It has successfully positioned itself as a premium brand, leading in multiple industries.

G&NS

Sony continues to dominate the gaming industry through its PlayStation ecosystem, which remains a market leader in both hardware and software. The PS5 has significantly outsold the Xbox Series X/S, with estimated November 2024 sales reaching 4.12 million units, compared to 0.77 million for Xbox Series X/S. As of January 2025, over its lifetime, PS5 sales have hit 67.7 million, more than double Xbox’s 31.2 million. This success is driven by PlayStation Studios' first-party games, including globally renowned franchises like The Last of Us, God of War, and Spider-Man. These exclusive titles continue to be a key differentiator, reinforcing PlayStation’s dominance in the gaming market.

Pictures

Sony Pictures Entertainment (SPE) holds a unique position as the only major independent Hollywood studio, giving it flexibility in distribution and partnerships. The studio manages a rich content library, including over 4,000 movie titles and 400 TV series, making it a key player in film and television production.

In television, Sony Pictures Television (SPT) is producing major streaming hits, demonstrating its growing influence in the industry. The Night Agent became Netflix’s most-watched TV series in 2023, while Dark Matter debuted as the top show on Apple TV+ worldwide in 2024. This success highlights Sony’s ability to create and distribute premium content across multiple streaming platforms.

Sony also dominates the anime industry through Crunchyroll, which surpassed 15 million paid subscribers as of July 2024. The platform continues to expand its anime offerings while growing its experiential entertainment initiatives, further strengthening Sony’s foothold in this fast-growing segment.

Music

Sony is a dominant force in the music industry through Sony Music Publishing (SMP) and Sony Music Entertainment (SME). SMP holds the #1 position in the global music publishing market, while SME ranks #2 in recorded music worldwide, showcasing Sony’s influence across the industry.

Sony’s music catalog has seen significant growth, now managing 6.24 million copyrighted songs as of March 31, 2024, a 1.7x increase over the past decade. The company’s streaming business is rapidly expanding, with streaming revenue from recorded music and publishing growing 19% y/y. This reflects Sony’s ability to adapt to the digital music era and leverage streaming as a key growth driver.

SMP’s songwriters played a crucial role in global hits, contributing to #1 songs in 37 out of 52 weeks on the Weekly Spotify Worldwide Chart in 2023. Additionally, Sony’s share of new songs in the U.S. has increased for five consecutive years, reinforcing its influence over the modern music landscape. The company continues to expand its streaming catalog, with the number of new tracks released on digital platforms growing 24% compared to FY2019.

I&SS

Sony is the undisputed leader in CMOS image sensors, holding a 53% global market share in 2023, with a target to expand to 60% by 2025. Its cutting-edge sensor technology powers some of the world’s most advanced imaging systems, making it a crucial supplier in the consumer electronics and industrial imaging sectors.

Sony’s image sensors have experienced continuous growth since the 2010s, primarily driven by mobile devices. The company leads the shift toward larger, high-performance sensors, improving image quality, resolution, and low-light performance. As smartphone manufacturers continue to demand cutting-edge imaging solutions, Sony aims to further expand its market share through continued technological innovation and industry partnerships.

Beyond mobile, Sony is aggressively expanding in the automotive image sensor market, targeting a 43% market share by FY2026. With the rise of autonomous driving and ADAS (Advanced Driver Assistance Systems), demand for high-sensitivity, low-noise, and AI-enhanced sensors is increasing. Sony’s imaging solutions are being integrated into self-driving car systems, in-vehicle monitoring, and smart transportation technologies, helping enhance safety and automation.

Sony is a known supplier of image sensors for Apple, powering the cameras in iPhones with high-performance CMOS sensors that improve low-light capabilities, dynamic range, and autofocus speed. This partnership underscores Sony’s position as the go-to provider of premium imaging technology for the world’s top smartphone brands.

Sony’s advanced CMOS image sensor technology is built on industry-leading expertise in pixel design, signal processing, and AI-driven algorithms. These sensors deliver:

• High sensitivity and low noise for superior image clarity

• Wide dynamic range and high-speed image capture for real-time applications.

• Low power consumption for efficient use across mobile, automotive, and industrial applications.

Sony is also expanding its sensor applications into industrial and retail AI-powered solutions, integrating edge AI processing for logistics, security, and smart automation.

Sony continues to push boundaries with Heat-Assisted Magnetic Recording (HAMR), becoming the first company in the world to mass-produce semiconductor lasers—a key component for HAMR—through a partnership with Seagate Technology. This breakthrough will significantly enhance storage capacity and efficiency in next-generation data storage systems. Additionally, Sony is advancing its AITRIOS™ Edge AI Sensing Platform, which integrates AI-driven image sensing technology for smart automation across retail, logistics, and industrial sectors.

Diversified Business Portfolio

Sony's competitive edge lies in its remarkably diversified portfolio, spanning multiple business segments and geographic markets. The company isn’t dependent on just one industry — its revenue comes from robust divisions like G&NS, Film, Music, ET&S, I&SS, and Financial Services, all of which consistently post profits. This diversified approach not only buffers Sony against market fluctuations in any single sector but also enables cross-promotional synergies among its varied operations.

On the geographic front, Sony has a strong global footprint with significant revenue coming from the U.S., Japan, Europe, and rapidly growing markets in the Asia-Pacific region and China. This global spread reduces dependency on any single region, allowing Sony to tap into diverse consumer bases and adapt to different economic conditions worldwide. Together, these strategic advantages provide Sony with resilience, agility, and a broad platform for sustainable growth and innovation.

Cross-Segment Synergy

One potentially underrated aspect of Sony’s business lies in its highly diversified yet interconnected business segments, allowing the company to leverage its strengths across gaming, film, music, semiconductors, and entertainment technology. Unlike competitors that focus on a single industry, Sony creates a self-reinforcing ecosystem where success in one segment fuels growth in another. PlayStation franchises evolve into blockbuster movies, Sony Music artists feature in films and game soundtracks, and cutting-edge image sensor technology enhances gaming accessories.

One of Sony’s biggest strengths is its ability to leverage its vast portfolio of intellectual property (IP) across multiple industries, including gaming, film, music, and technology. This interconnected ecosystem allows Sony to monetize its franchises in multiple ways, including movies, TV series, gaming adaptations, and merchandising. By integrating its businesses, Sony creates a self-reinforcing cycle where success in one segment drives growth in others. This cross-segment synergy not only strengthens Sony’s market position but also unlocks multiple revenue streams and drives operational efficiencies across industries, ensuring long-term growth, cost optimization, and resilience in an increasingly competitive landscape.

Gaming Meets Film & TV

Sony has successfully translated its PlayStation franchises into major Hollywood productions, expanding their reach beyond gaming audiences. The Last of Us (HBO, 2023), based on Naughty Dog’s best-selling game, became a massive hit, proving that high-quality storytelling from PlayStation Studios can thrive in television.

Similarly, upcoming projects like the Ghost of Tsushima movie and the Horizon Zero Dawn Netflix series will bring more PlayStation franchises to mainstream audiences. Sony has also capitalized on its racing game franchise with Gran Turismo (2023), which demonstrated the potential for adapting non-traditional gaming IP into compelling films.

This cross-segment collaboration benefits Sony Pictures by providing it with proven, built-in audiences from gaming, ensuring box office and streaming success. PlayStation Studios works closely with Sony Pictures to maintain the integrity of these adaptations, ensuring that the high storytelling standards set by the games translate well into film and TV.

Sony Music & PlayStation: Cross-Promotion Through Soundtracks

Sony’s music division plays a crucial role in its entertainment ecosystem, supplying soundtracks for both Sony Pictures films and PlayStation games. For example, the soundtrack for Spider-Man: Across the Spider-Verse (2023) was released under Sony Music, boosting both the movie’s brand and Sony’s artists. Similarly, the Uncharted (2022) movie featured Sony Music artists, showcasing how Sony leverages its music catalog across different entertainment platforms.

Even within gaming, PlayStation franchises frequently incorporate Sony Music artists into their soundtracks — a prime example being The Last of Us, which features original compositions from Sony’s music catalog. This cross-promotion strategy strengthens Sony’s ecosystem, ensuring that its films, games, and music continuously feed into one another.

Gaming Technology & Image Sensors

Sony’s image sensor division plays a key role in gaming innovations, supplying advanced CMOS image sensors for PlayStation’s hardware. PlayStation VR2 (PSVR2) relies on Sony’s high-end image sensors for motion tracking, enhancing the immersive gaming experience. Likewise, the PlayStation Camera incorporate Sony’s imaging technology, showcasing how Sony’s gaming division benefits from its R&D.

Game Engine Technology Revolutionizing Virtual Production

Sony’s cross-segment synergy extends into virtual production, combining its expertise in film, gaming, and imaging technology to push the boundaries of content creation. A key part of this strategy involves Epic Games' Unreal Engine, a leading real-time 3D creation tool widely used in both gaming and film production. Sony holds a minority stake in Epic Games, reinforcing its commitment to advancing real-time graphics technology and interactive media.

Through Pixomondo and Sony PCL, Sony provides virtual production services that utilize large LED screens to display real-time digital backgrounds, allowing physical subjects and virtual environments to interact seamlessly while being shot simultaneously. This technology eliminates the constraints of physical shooting locations and enhances the efficiency, flexibility, and creative possibilities of modern filmmaking.

Maximizing Film IP Through Location-Based Entertainment

Beyond traditional entertainment, Sony Pictures Entertainment (SPE) is expanding into experiential entertainment by monetizing its strong franchises like Jumanji and Ghostbusters through Location-Based Entertainment (LBE). This approach allows Sony to extend its IP beyond the screen, offering theme park-style attractions and interactive experiences.

A major step in this direction was the launch of Wonderverse in January 2024, Sony’s first immersive entertainment destination. By creating physical experiences based on its movie franchises, Sony is diversifying its revenue streams, extending the lifespan of their IP while deepening fan engagement.

Key Financials

Opportunities:

• Expanding into new markets: entry into the electric vehicle (EV) industry through Sony Honda Mobility, with the Afeela EV set to launch in 2025.

• Expansion in emerging markets:

  • Music & Entertainment: Sony is increasing revenue opportunities for its music catalog, ensuring a wider global reach.

  • Japanese Animation & Artists: The company is accelerating global marketing efforts for anime and J-pop, leveraging the growing international demand for Japanese entertainment.

• Entertainment and Creation-Focused Strategy

  • Shift Towards Creation & Kando: Sony is shifting its management focus toward creation and emotional impact ("Kando") in the 21st century. In the past, Sony delivered Kando through innovative products like the Trinitron TV and Walkman; today, it aims to achieve the same through content and entertainment

  • Spinning off part of the financial segment in 2025 to focus more on entertainment and content creation

  • Investment in Content: Sony has invested approximately 1.5 trillion yen over the past six years to strengthen content creation. Content IP accounts for 57% of Sony’s total 2.4 trillion yen strategic investment, reflecting the company's long-term commitment to entertainment. Including music catalog acquisitions and other expenses, Sony’s total investment in content IP stands at roughly 1.5 trillion yen over six years

    

  • Growth in Entertainment Businesses: Entertainment segments (Games & Network Services, Music, and Pictures) now account for 60% of Sony’s total sales. The proportion of Sony’s total sales from entertainment has grown from 26% in FY2012 to 55% in FY2023.

    

  • Strategic Investments & Acquisitions: Sony continues to strategically invest in content IP and direct-to-consumer (DTC) services. This includes acquiring companies with strong IP assets and investing in IP development & production studios to strengthen its position in the entertainment industry.

Risks:

• Rapid Technological Changes: The entertainment industry is evolving rapidly, with streaming, digital distribution, and AI-driven content creation reshaping business models (e.g. cloud gaming and live-service models)

• Intensifying Competition in Gaming: Sony dominates the gaming industry with PlayStation, but competition is heating up from Microsoft, Nintendo, and emerging Chinese AAA developers. Xbox Game Pass is a major threat, as Microsoft aggressively expands its subscription and cloud gaming model, while Sony lags in cloud gaming infrastructure. Nintendo remains strong in family-friendly and handheld gaming, maintaining a loyal player base despite Sony’s technological edge. Chinese AAA studios are closing the quality gap, with high-budget, visually stunning games like Black Myth: Wukong (Game Science) and Where Winds Meet (Everstone Studio) challenging Western AAA dominance. State-backed funding gives Chinese studios an edge, allowing them to scale quickly and take risks, while Western studios struggle with massive budgets and long development cycles. Tencent and NetEase are shifting from mobile to premium console and PC games, competing directly with PlayStation Studios.

• Film & Music Streaming Challenges: Sony Pictures and Sony Music are strong players in entertainment, but the dominance of streaming platforms presents risks. Netflix, Disney+, and Amazon Prime control global content distribution, limiting Sony Pictures’ ability to own its own platform. Sony lacks a dedicated streaming service, relying on licensing deals that may become less favorable over time. Music streaming (Spotify, Apple Music) lowers profit margins, as these platforms take a significant share of revenue from Sony Music artists and catalogs. Sony may lose pricing power and control over its content, reducing profit margins across its film and music businesses

Conclusion

Sony's diversified business model provides a strong competitive edge and resilience against industry-specific risks. Its leadership in gaming, film, music publishing, and image sensors underscores its market dominance, while strategic investments in content and expansion into emerging markets reinforce its long-term growth potential.

A key pillar of Sony's strategy is its creative shift towards entertainment and content IP, prioritizing proprietary franchises and storytelling across multiple platforms. By leveraging its strengths in gaming, film, and music, Sony is deepening its focus on high-value intellectual property, integrating content across ecosystems to maximize engagement and monetization. This shift is evident in Sony's decision to spin off part of its financial segment in 2025 to prioritize entertainment and content creation, alongside increased investment in content, relative growth in its entertainment businesses, and strategic investments and acquisitions, reinforcing its competitive edge in the media landscape.

However, challenges such as technological disruptions, rising competition, and shifting consumer preferences require continuous innovation. By harnessing cross-segment synergies and expanding into emerging markets like EVs and digital content, Sony aims to sustain its leadership while deepening its focus on creativity, Kando, and long-term value creation.

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Disclaimer: Please note that none of the information provided constitutes financial, investment, or other professional advice. It is only intended for educational purposes.

We’re launching a series of company snapshots to give you a quick, insightful look at businesses we find interesting. The structure of this series will cover:

• Business Overview

• Competitive Landscape

• Key Financials

• Opportunities and Risks

The goal is to provide an overview of companies we find interesting to provide you with insights in a digestible format. We hope this gives you fresh ideas and perspectives to think about.

Business Overview

Lululemon Athletica Inc. was founded in 1998 by Dennis "Chip" Wilson in Vancouver, Canada. The company quickly became a pioneer in the athleisure trend, blending performance wear with everyday fashion to create high-quality, stylish athletic apparel that could be worn both during exercise and in daily life. Today, Lululemon is a leading designer, distributor, and retailer of athletic apparel, footwear, and accessories, marketed under the Lululemon brand.

The company offers a broad range of performance-oriented clothing and gear targeted at individuals leading an active, healthy lifestyle, focusing on activities like yoga, running, and training. Their product assortment includes everything from pants, shorts, and tops to jackets, all crafted for fitness and movement, along with fitness-inspired accessories. They continue to expand their product lines to cater to a wider variety of athletic and lifestyle needs.

Lululemon's core customer base is still predominantly female (64%), with men making up about 23% of their product sales, and the remaining 13% coming from accessories and footwear. Geographically, the company operates mainly in North America (79%), with smaller shares in mainland China (10%) and other global markets (11%), based on 2023 data.

Lululemon does not own or operate any manufacturing facilities; instead, it relies on a network of suppliers to produce its products. The company works closely with these suppliers to source high-quality fabrics and materials that meet the performance standards their products are known for.

Omnichannel Distribution Strategy

Lululemon uses an omnichannel retail strategy to serve customers — referred to as guests — in the ways that are most convenient for them. Their approach integrates digital and physical channels to ensure a seamless shopping experience for customers. Some key elements of their omnichannel strategy include:

• Buy Online, Pick Up In-Store: Guests can purchase products online (website, app) and pick them up at a nearby store;

• Back-back Room: In-store staff— referred to as store educators — can access inventory from other locations to fulfill customer orders, either in-store or online.

• Ship from Store: E-commerce orders can be fulfilled by both distribution centers and retail locations, expanding the pool of accessible inventory;

• Returns Processing: E-commerce guests can return products either online or in-store;

• One Inventory Pool: Inventory across all channels is accessible, allowing for more efficient product allocation

Lululemon operates and distributes products from multiple regions, including the U.S., Canada, and Australia. They own one distribution center in Ohio and lease additional facilities in other regions. Third-party logistics providers help manage warehousing and distribution in other countries where Lululemon operates.

Selling Channels

Lululemon operates through a variety of channels in each market to connect with its guests:

• Company-Operated Stores: Lululemon's stores not only serve as a place to sell products but also as a direct connection to its guests, helping build its brand and expand its product lines. Most of Lululemon’s retail stores are located in high-traffic areas such as street locations, lifestyle centers, and malls;

• E-Commerce: Lululemon believes e-commerce is a convenient way to reach guests, especially in areas where it doesn’t have physical stores. It also helps build brand awareness in new markets. Lululemon serves guests through its website, regional-specific sites, mobile apps, and digital marketplaces. E-commerce sales also include features like buy online, pick up in-store, back-to-back room orders, and shipping from store;

• Other Channels: Lululemon also uses a mix of other channels to increase brand awareness and expand access to its products:

  • Temporary Locations: Lululemon sets up seasonal stores and pop-ups during peak shopping periods in locations where it doesn’t have a permanent store or where demand is high at existing locations;

  • Wholesale: Lululemon sells through partners that provide convenient access to its products, including yoga studios, fitness centers, and campus retailers;

  • Outlets: Lululemon operates outlets where it sells slower-moving and past-season inventory at discounted prices. As of January 28, 2024, Lululemon has 47 outlet locations, mostly in the Americas;

  • Like New: Lululemon’s re-commerce program allows guests to exchange gently used Lululemon products for merchandise credit. These items are then checked for quality and resold online through its Like New platform. This program helps Lululemon reduce its environmental impact and move toward a circular ecosystem; and

  • Licensing & Supply Arrangements: In certain markets, Lululemon partners with third parties who have experience and success in those regions. Under these agreements, third parties operate Lululemon-branded stores and sell its products on websites specific to their countries.

Competitive Landscape

The athletic apparel market sees intense competition from both established companies expanding their product lines and new entrants. Lululemon competes directly with major athletic brands like Nike, Adidas, PUMA, Under Armour, and Columbia Sportswear. It also faces competition from retailers that have expanded into women’s athletic apparel, such as The Gap (including the Athleta brand), Victoria’s Secret (with its sports and lounge offerings), and Urban Outfitters.

The competition in the athletic apparel market is fierce, but Lululemon differentiates itself through a combination of premium branding, technologically advanced fabrics, a feedback-driven design process, and a community-based marketing approach.

Premium Brand and Selective Distribution

Lululemon stands out with its premium brand image and high-quality, advanced materials. The brand’s vertical retail strategy reinforces this by selectively distributing its products through yoga studios and fitness clubs — venues that Lululemon believes are the most influential within their local fitness communities. This strategy helps ensure that Lululemon is not only associated with quality but also with trusted spaces where fitness enthusiasts gather.

Technologically Advanced Fabrics

Lululemon’s fabrics are a key differentiator in the athletic apparel market, combining innovative technologies that enhance performance and comfort. Key innovations include Silverescent, which incorporates silver ions to reduce odor and keep garments fresher for longer, and Everlux, a fast-drying fabric that wicks away sweat quickly, making it ideal for high-intensity workouts. For ultimate comfort and flexibility, fabrics like Luon and Nulu are designed to feel soft like cotton while providing the stretch and support needed for movement. Lululemon also offers Warpstreme, a lightweight, wrinkle-resistant fabric that brings performance to business-casual attire.

These technological advancements, combined with fabrics that are breathable, moisture-wicking, and abrasion-resistant, give Lululemon a significant edge over competitors, ensuring their products stand out for both their functionality and durability in the crowded athletic apparel space.

Feedback-Based Design Process

Lululemon’s vertical retail strategy includes a proactive feedback-based design process. The design and product development teams regularly seek input from guests and local fitness practitioners, ensuring the products meet real-world needs. While Lululemon typically takes 8 to 10 months to bring new products to market, its vertical strategy enables the company to launch select products in as little as one month, allowing for a quick response to customer feedback, shifting market conditions, and new apparel trends. This approach helps Lululemon stay ahead of the competition by allowing the brand to better meet the needs of its guests, advancing product lines and differentiating itself from competitors.

Lululemon’s design team, made up of researchers, scientists, engineers, and athletes who use the brand’s products, works closely with suppliers to incorporate the latest fabric innovations. The brand also partners with independent testing companies to assess fabric performance in areas like pilling, shrinkage, abrasion resistance, and colorfastness. This ensures that Lululemon maintains high technical standards and develops proprietary fabrics, which are protected through trademarks and trade secrets.

Community-Based Marketing Approach

Lululemon uses an innovative, community-based marketing strategy aimed at building brand awareness and customer loyalty. The brand partners with local fitness practitioners and retail educators to create excitement in the community, often initiating these efforts even before opening a store. Each Lululemon location has a dedicated community coordinator who organizes fitness and philanthropic events that reinforce the brand’s premium image and foster a stronger connection with local communities. Additionally, in-store community boards are used to encourage engagement and foster local connections, helping Lululemon build a grassroots following.

Key Financials

Opportunities:

• Growth in Men’s Products
  In 2023, women’s products made up 64% of Lululemon’s net revenue, while men’s products accounted for 23%. The company sees its men’s line as a major growth opportunity. As more customers discover the high-quality, technically advanced products in the men’s range, Lululemon expects to see continued growth in this segment.

• Expansion in China and New Markets in EMEA and APAC
  Currently, Lululemon’s sales are primarily concentrated in the Americas, which account for 79% of total revenue. However, the company is looking to expand further into China, as well as new markets in Europe, the Middle East, and Asia-Pacific. This presents a significant opportunity to tap into the growing demand for premium athletic wear in these regions.

Risks:

• Difficulty in Differentiating from Competitors
  Lululemon may struggle to maintain its differentiation as competitors, as larger brands increasingly adopt similar strategies — such as direct-to-consumer retail and community-based marketing. Additionally, emerging local brands, especially in markets like China and EMEA, are gaining traction by catering to local tastes with lower-priced products that mimic Lululemon’s design and functionality. These copycat brands pose a risk, as they can undercut Lululemon’s premium pricing strategy while offering similar products at more accessible price points. While these brands may not surpass Lululemon in product quality, their offerings could be "good enough" to appeal to customers seeking comparable athletic wear at competitive prices. As these competitors grow, Lululemon could face more challenges in standing out, especially in price-sensitive markets where the competition offers similar value without the premium price tag.

• Challenges in Expanding into New Markets:
  While Lululemon sees strong potential in expanding into new markets, cultural differences could pose significant challenges. For example, community-based marketing, a key strategy in Western markets, may not resonate the same way in regions like China, EMEA, or APAC, where consumer behavior and preferences can be quite different. In some areas, customers might not be as open to providing feedback or engaging in grassroots marketing initiatives. These cultural discrepancies could make it harder for Lululemon to replicate the success of its Western business model and build the same kind of connection with guests in new regions.

Conclusion

Lululemon faces intense competition, but it has positioned itself well in the premium activewear market, maintaining high profit margins and strong product quality. A key differentiator is its advanced fabric technology, which, based on conversations with friends, is noticeably different — whether the difference is real or perceived, Lululemon has successfully established its brand as a leader in high-performance apparel. Additionally, its fast feedback-driven design process sets it apart from competitors who operate on slower product cycles. While expansion prospects look strong, the biggest challenge will be whether Lululemon can withstand competition from copycats, particularly low-cost manufacturers from China, who have a clear pricing advantage.

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Disclaimer: Please note that none of the information provided constitutes financial, investment, or other professional advice. It is only intended for educational purposes.

Here’s a quick update on Adyen’s earnings report last week. Have a good week!

Adyen Earnings

From Reuters:

Feb 13 (Reuters) - Adyen's (ADYEN.AS) shares rose as much as 15% on Thursday after the Dutch payments company reported full-year core earnings above market expectations, and forecast higher net revenue growth and continued margin expansion in 2025.

The Amsterdam-listed shares were the top gainers on the pan-European STOXX index (.STOXX) at 0345 GMT. Two traders cited the strong set of results and revenue forecast as drivers for the share price surge.

They reached their highest level since August 2022, adding 6.8 billion euros ($7.09 billion) to the company's market cap, based on LSEG data.

Adyen has weathered a post-pandemic drop in online spending that has knocked investor confidence in the digital payments sector thanks to a more diversified customer base and partnerships with companies like eBay (EBAY.O), and Cash App in North America, Zalando (ZALG.DE), in Europe and Starbucks (SBUX.O), in Mexico.

For long-time followers of Adyen, this turnaround is particularly satisfying. Back in August 2023, the company’s stock plummeted 39% in a single day as the market reacted negatively to, in some ways, a perfect storm. As Adyen faced competitive headwinds, Adyen significantly ramped up hiring, taking a short-term hit to profit margins. I wrote then:

While the market was averse to muted net revenue growth, temporarily depressed EBITDA margins and increased investment, I believe Adyen is making the right moves. Adyen has historically made strategic decisions with a long-term perspective; they aren’t afraid of sacrificing short-term margins and they don’t try to optimize for short-term results.

…All in all, Adyen’s in investment mode, has great financial health with no debt and the long-term secular trends appear intact; the market correction could be considered a great opportunity in hindsight…

The market correction, in hindsight, was an incredible buying opportunity. From a low of around €700, Adyen now trades at the €1800 range, reflecting the success of its strategy. Importantly, the recent earnings beat confirms that the company’s long-term approach is paying off. But I think what the article may have missed is why Adyen managed to weather the post-pandemic slowdown in digital payments better than its peers.

Payments is Not a Commodity

In North America, competitors were undercutting each other on price. But this approach overlooked an important point: Adyen already had the lowest cost per transaction due to its single stack platform. Adyen refused to engage in the price war, choosing instead to differentiate through value. Over time, the price war proved to be unsustainable.

A clear example is PayPal’s Braintree, which had aggressively pursued market share through low fees. By December 2024, Braintree was already signaling a shift in strategy; Jamie Miller, PayPal’s CFO on the strategy shift from a Payments Dives article:

“For these really large merchants where we have intentionally gone after very, very significant percentages of their revenue processing, we’re going back to them and having just much more strategic and holistic conversations around this value exchange,” including payment orchestration and risk services, said Miller, who took the CFO seat last year.

“[It’s about] having a different kind of relationship with them, and not needing to process all of their revenue, but being willing to pull back and take lower percentages of revenues…in exchange for having a much healthier margin profile on the overall relationship,” she said.

And the result is that volumes began shifting away. By February 2025, Susquehanna analyst James Friedman explained that Braintree’s payment volumes fell significantly. From Investor’s Business Daily:

Repricing initiatives last year at subsidiary Braintree have pressured revenue growth as well as payment volumes but improved transaction margins. Braintree processes transactions for Uber Technologies (UBER), Airbnb (ABNB), DoorDash (DASH), Spotify (SPOT), Paymentus and others.

Meanwhile, Braintree's payment volume and revenue will be lower if some customers migrate business to other payment firms when contracts come up for renewal.

"Braintree again contributed to transaction margin dollar growth," said Susquehanna analyst James Friedman in a report. "Consistent with the plan, Braintree TPV (total payment volume) growth has fallen from 30% in 2023 to just 2% in Q4 2024 and now looks like it's headed negative as clients transition wallet share. Investors are anxious about perceived market share loss and are worried Braintree will not pivot."

Braintree’s TPV growth plummeted to just 2% — a dramatic shift from aggressively capturing market share to losing it. In hindsight, it’s clear that merchants only shifted their volumes for the lower fees — but that low price strategy was never sustainable. Eventually, Braintree had to improve its margin profile, revealing that the price war was a short-term play. Whether Braintree was even profitable on these low-price transactions remains uncertain, as they could have been subsidizing growth at unsustainable margins.

But the fact that Adyen is priced higher and still continues to grow and capture market share means its value-add and product differentiation are undeniable. Adyen’s Chief Financial Officer, Ingo Uytdehaage, reinforced this point in the company’s H2 2024 earnings call:

Yes, it is very important to have differentiation in our products. U.S. debit is an example. The other example, of course, is what we do around Uplift. In the digital pillar, these products are essential to increase our share of wallet, so that's why we're heavily investing in it. I think it's a clear example why payments is not a commodity, why the added value that we bring is appreciated, and why we continue to increase our share of wallet, so -- in the fourth quarter of this year.

Lowering Total Cost of Ownership

Rather than competing on price, Adyen focuses on lowering the Total Cost of Ownership (“TCO”) for merchants. The approach is twofold: quantitative benefits that are directly measurable and qualitative benefits that are less tangible but could be equally impactful.

The quantitative advantages are straightforward — merchants benefit from lower payment processing costs and higher authorization rates. By leveraging their single platform, Adyen optimizes payment processing at multiple levels. Smart routing and Network Token Optimization ensure that transactions are processed through the most cost-effective route, reducing overall processing expenses. At the same time, by leveraging smart routing and data-driven insights, Adyen dynamically reduces failed transactions, leading to higher conversion rates and ultimately more revenue for merchants.

The qualitative benefits are harder to measure but just as crucial. Many businesses using multiple payment providers face operational inefficiencies — manual reconciliation, chargeback disputes, and fragmented reporting systems create unnecessary overhead. Adyen’s unified platform streamlines these processes, automating reconciliation and fraud management, which reduces workload and complexity. Moreover, a higher authorization rate leads to a better customer experience — fewer failed transactions mean more frictionless checkouts, which helps merchants improve conversion rates, customer satisfaction, and long-term loyalty.

The Adyen Flywheel

All these advantages fuel Adyen’s self-reinforcing flywheel that strengthen its competitive edge. Here’s a simple flywheel diagram showing the concept:

As more merchants join the platform and processing volumes grow, Adyen gains deeper data insights. These insights enhance cost efficiency, improve fraud detection, and boost conversion. Additionally, they enable Adyen to develop more advanced products, such as AI Uplift, Intelligent U.S. Debit Routing and Embedded Financial Products. These innovations further reduce TCO for merchants, reinforcing the flywheel.

The Future

You could argue that Adyen is still in its early stages. The company is now aiming to extend beyond its core retail vertical into hospitality and F&B. Meanwhile, in EMEA and North America, Adyen’s entire suite is already in place across all three pillars — Unified Commerce, Digital, and Platforms — while in APAC and LATAM, those capabilities are still being developed. In markets like Japan and India, the real payoff may still be five years away.

Financially, the outlook remains strong. Adyen’s operating leverage, driven by disciplined hiring that trails net revenue growth, should continue to support EBITDA margin expansion, albeit at a more measured pace than in 2023–2024.

And above all, the key lesson here is that payments isn’t a commodity — it’s a strategic enabler. By prioritizing long-term value for merchants, Adyen is strengthening the flywheel, reinforcing the competitive moat that only becomes harder for rivals to breach over time.

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Disclaimer: Please note that none of the information provided constitutes financial, investment, or other professional advice. It is only intended for educational purposes. We have a vested interest in Adyen. Holdings are subject to change at any time.

In this quick dive, we’ll attempt to break down the business of Meta Platforms (NASDAQ: META) and understand what makes this company special. Apologies as this post is slightly longer than expected, but we hope you enjoy it!

Financial Snapshot

About Meta Platforms

Meta Platforms operates as a social technology company. They build products that help people connect and share with friends and family through mobile devices, personal computers, virtual reality headsets, and wearables worldwide. Meta operates in two segments: Family of Apps (“FOA”) and Reality Labs.

The FOA segment comprises Facebook, Instagram, Messenger, WhatsApp and Threads. The Reality Labs segment provides augmented and virtual reality related products comprising consumer hardware, software and content.

Meta generates substantially all of their revenue from selling advertising placements on their FOA to marketers. Ads on their platform enable marketers to reach people across a range of marketing objectives, such as generating leads or driving awareness. Reality Labs generates revenue from sales of consumer hardware products, software and content.

Meta’s ad revenue is broadly a function of ad impressions and ad price. When Meta introduces a new product or feature, such as Stories or Reels, the feature enters a growth stage, where ad impressions surge due to increasing user engagement, while ad prices decline. This initial drop in ad prices occurs because advertisers may be hesitant to allocate significant budgets until they understand the new format’s effectiveness, leading to lower initial advertiser demand and weaker competition for ad slots. At the same time, high user engagement generates a rapid increase in ad inventory, and if Meta hasn’t fully optimized its ad load, this oversupply of ad inventory further depresses ad prices.

As adoption grows, the feature typically drives a substantial share of user activity on Meta’s platforms, making them a primary engagement surface. Over time, as engagement plateaus and adoption stabilizes, the feature transitions into the mature stage, where impression growth slows, but ad prices rise. Advertisers gain confidence, optimize their campaigns, and competition for ad slots intensifies, driving up ad prices and improving monetization efficiency.

Throughout Meta’s history, the company has followed a recurring cycle: launching new features to drive user engagement, then integrating ads, and optimizing the ads for monetization; this pattern drives shifts in ad impressions and ad prices over time, as shown in the diagram below:

The effectiveness of Meta’s ad ecosystem is ultimately driven by its scale. With 3.35 billion daily active users, its network effect amplifies both engagement and monetization.

To put that into perspective, Statista estimates the global internet population at approximately 5.52 billion as of October 2024. However, China’s 1.1 billion internet users (as of June 2024) are largely excluded from the global digital ecosystem due to the “The Great Firewall”, which acts as a digital barrier by restricting access to foreign platforms and censoring the internet for its citizens. Adjusting for this, the effective global internet population is about 4.42 billion. With 3.35 billion users, Meta has about 76% of the effective global internet population across its apps.

Even at this enormous scale, Meta’s network still continues to grow, though at a slower pace than before. Here's Meta’s daily active users for the past nine quarters:

In line with Metcalfe’s Law, with each additional user, the value of Meta’s network increases exponentially, not linearly. The size of this network is not only unparalleled — it’s also often underrated. Even if user growth slows, as long as the user base remains stable and doesn’t decline significantly, there will still be opportunities for revenue expansion.

With billions of users deeply embedded in its ecosystem, Meta benefits from self-reinforcing network effects that strengthen its competitive position. But beyond scale, there’s another key advantage: a part of Meta’s business that appears to be antifragile.

The term “antifragile”, coined by Nassim Taleb, is described as the logical opposite of fragile. Taleb emphasized that antifragile should be distinguished from robust. Something robust can withstand stress relatively well, but will eventually break. In contrast, something antifragile would not only be able to withstand stress, but also benefits from it. The example below illustrates how fragile, robust and antifragile systems react to stress:

Ben Thompson, author of the technology newsletter Stratechery, pointed out an element of antifragility in Meta’s business, allowing it to not only survive but also benefit from disruptive macroeconomic events such as COVID-19.

Given Meta’s ad model operates on an auction-based system, economic downturns tend to reduce ad spending by short-tail advertisers — big brands or a small group of high-spending advertisers — leading to lower ad prices. As brand advertising declines, long-tail advertisers — small to medium businesses or a large number of lower-spending advertisers — are incentivized to increase their ad spend because lower competition reduces costs, making ads more efficient and improving their return on investment.

Consequently, the decreased demand from short-tail advertisers would initially lower Meta’s profits. But as long tail advertisers capitalize on the lower ad prices, Meta’s profits could eventually see more upside than before given the larger proportion of long-tail advertisers on its platform.

Zuckerberg’s Integrity: The Controversies, Misconception and Realities

One of Meta’s biggest competitive advantages is its founder and CEO, Mark Zuckerberg. From being labeled a robot and the ‘Lizard Man’ to his MMA phase and supposed MAGA era, his reputation has been nothing short of controversial.

In investing, a CEO’s integrity is critical. When you invest in a company, you’re trusting management to be a responsible steward of capital. A leader’s values, decisions, and long-term vision can significantly impact shareholder returns.

Zuckerberg’s integrity, however, has been a subject of debate, largely shaped by media narratives and past controversies. Many common perceptions about him may be oversimplified or even misleading. Understanding his true character requires looking beyond the headlines; a deeper dive into these key moments reveals a more nuanced perspective on his integrity.

Winklevoss Twins and Saverin: Early Betrayals or Business Realities?

The first major controversy surrounding Zuckerberg dates back to Facebook’s founding, with the claim that Zuckerberg stole the idea from Cameron and Tyler Winklevoss and Divya Narenda. The Winklevoss twins alleged that Zuckerberg copied their concept for a social networking site and misused the code he was hired to develop for their project, ConnectU.

However, the reality is more nuanced. By the time Zuckerberg was approached to work on ConnectU in November 2003, several social networking platforms already existed — Friendster had launched in March 2003, followed by MySpace in August. Even Harvard itself wasn’t new to the concept; Aaron Greenspan, a junior at Harvard during Zuckerberg’s time, had built houseSYSTEM, a website that included a student directory and used the “Harvard.edu” domain for verification. Further, Stanford had implemented a similar system as early as 1999.

The Winklevoss twins argued that their key differentiator — the idea of a verified, exclusive student network — was stolen. But in truth, this concept was already being explored by others. What Zuckerberg did was synthesize existing ideas, refining them into something more compelling.

That said, young Zuck wasn’t entirely blameless. The infamous AIM chat logs reveal that he deliberately stalled the ConnectU project to ensure Facebook launched first:

“Someone is already trying to make a dating site. But they made a mistake haha. They asked me to make it for them. So I’m like delaying it so it won’t be ready until after the facebook thing comes out.”

“Yea, I’m going to fuck them, probably in the ear.”

While Zuckerberg’s actions show a mix of cutthroat competitiveness and immaturity, they don’t amount to outright dishonesty. His competitive nature led him to make questionable decisions — such as delaying the ConnectU project — but there’s no clear evidence that he outright stole the idea. Instead, he synthesized existing concepts and executed them better. Rather than a case of cheating, it was a young entrepreneur making aggressive, and at times, reckless moves to win — a reflection of his immaturity at the time rather than a lack of integrity.

Another common misconception is Zuckerberg’s alleged betrayal of Eduardo Saverin, Facebook’s co-founder and initial financier. Popularized by The Social Network, the narrative suggests that Zuckerberg ruthlessly betrayed his friend by diluting his shares and forcing him out of the company.

In reality though, the situation was more complex. Saverin had been responsible for securing funding and handling Facebook’s business side, but he struggled in his role. Meanwhile, he launched Joboozle, an online job board that could have competed with Facebook – then he advertised it on Facebook without approval and at no cost. Zuckerberg’s frustration was evident in his emails:

“You developed Joboozle knowing that at some point Facebook would probably want to do something with jobs. This was pretty surprising to us, because you basically made something on the side that will end up competing with Facebook and that's pretty bad by itself. But putting ads up on Facebook to advertise it, especially for free, is just mean.”

Zuckerberg saw Saverin as a liability, repeatedly expressing concerns about his lack of contribution:

“I maintain that he fucked himself…He was supposed to set up the company, get funding, and make a business model. He failed at all three…Now that I'm not going back to Harvard I don't need to worry about getting beaten by Brazilian thugs.”

"Eduardo is refusing to co-operate at all…We basically now need to sign over our intellectual property to a new company and just take the lawsuit…I'm just going to cut him out and then settle with him. And he'll get something I'm sure, but he deserves something…He has to sign stuff for investments and he's lagging and I can't take the lag."

Zuckerberg, who has admitted to being conflict avoidant — especially in his youth — likely mishandled the situation, allowing tensions to escalate. However, his decision wasn’t driven by malice; Saverin had become a weak link, and removing him was a difficult but necessary business move. While Zuckerberg’s approach lacked tact and emotional intelligence, it wasn’t an act of betrayal or dishonesty. Instead, it highlights his ability to make tough decisions when the company’s future is at stake — even when it means cutting ties with a friend.

The Cost of Openness: Facebook’s Recurring Dilemma

From its early days, Facebook was built on the idea of openness — Zuckerberg believed that sharing more, not less, would ultimately benefit users and society. This philosophy shaped many of the company’s decisions, but time and again, it led to crises that tested the limits of user trust. Three key controversies illustrate a recurring pattern: Facebook defaulting to openness without fully considering the consequences.

One of the earliest examples of this was the introduction of the Beacon program in 2007, where Facebook partnered with commercial websites to track user activity. Facebook’s early approach to privacy was rooted in an “opt-out” model, meaning users were automatically included unless they actively chose to withdraw. If a user purchased dog food or booked a flight online, this information could automatically appear in their Facebook News Feed, notifying friends – often without the user’s explicit awareness.

Although Facebook provided a pop-up warning with opt-out instructions, many users either missed or ignored it. Worse, if they didn’t take action, Facebook interpreted this as consent. While Zuckerberg likely saw Beacon as an extension of Facebook’s transparency ethos — encouraging sharing by default – he underestimated the potential backlash. The program exposed sensitive purchases, including medical supplies, adult products, or surprise gifts like engagement rings, which sparked public outrage.

The key issue wasn’t just the tracking itself but the failure to properly inform users. This pattern – defaulting to public settings without clear notice — would become a recurring criticism in Facebook’s handling of privacy.

Years later, a different kind of crisis emerged — not about privacy, but about the unintended consequences of an open platform. As Facebook’s user base exploded, so did the spread of misinformation. While fake news has always existed, Facebook’s News Feed algorithm amplified its reach, prioritizing high-engagement content —often sensationalist or misleading stories. This created a fertile ground for political disinformation and ad revenue-driven hoaxes, as users rarely fact-checked sources.

A common tactic was to create fake news outlets with names resembling real ones, such as “Denver Guardian”, which falsely appeared affiliated with The Denver Post. Political disinformation campaigns leveraged Facebook’s reach to manipulate voters’ emotions.

Zuckerberg’s initial stance was probably too idealistic — he believed in free speech and resisted in making Facebook the “arbiter of truth”. He assumed that users could discern fact from fiction, but reality proved otherwise. The consequences of this miscalculation were severe. In the U.S., misinformation campaigns played a role in shaping voter perceptions during the 2016 presidential election, while in Myanmar, unchecked hate speech on Facebook was linked to inciting violence against the Rohingya Muslim minority.

Following criticism, Facebook massively expanded its safety, security and content moderation teams to address misinformation proactively rather than reactively. Zuckerberg later admitted he underestimated the impact fake news could have on elections.

This miscalculation wasn’t about Zuckerberg protecting bad actors or personal gain, but about overestimating the benefits of openness. He saw Facebook as a neutral tool rather than an active gatekeeper of truth. However, this idealistic stance ignored the reality that misinformation spreads faster than facts, and bad actors could manipulate engagement-driven algorithms. The controversy forced Facebook to rethink its role in political discourse, revealing a flawed assumption: openness alone doesn’t lead to better outcomes. His mistake wasn’t dishonesty, but rather a failure to anticipate how the system could be abused.

If Beacon was an early warning and fake news a credibility crisis, Cambridge Analytica was a full-blown scandal. Cambridge Analytica wasn’t an isolated incident but rather the most infamous example of Facebook’s lax data-sharing policies.

In 2010, Facebook introduced Open Graph (Graph API v1), which allowed developers to access user data — not just from people who used the app, but also from their friends. This meant millions of users had their personal information unknowingly harvested without explicit consent.

Facebook claimed that third-party apps could only collect data necessary for their function, but in reality, developers could extract nearly all personal details from a user’s profile. Worse, there were no robust safeguards to ensure developers didn’t misuse or resell the data.

One developer, Aleksandr Kogan, created an app called This is Your Digital Life. His app collected data from users and their friends, which he later sold to Cambridge Analytica under the guise of academic research. The firm repurposed this data for political microtargeting during the 2016 U.S. presidential elections and Brexit referendum.

Cambridge Analytica wasn’t the only culprit. Facebook later discovered that over 400 developers had violated its data policies. In response, Facebook suspended 69,000 apps, including 10,000 suspected of misusing user data.

The Cambridge Analytica scandal exposed the risks of Zuckerberg’s overly idealistic approach to openness. Zuckerberg initially saw open data access as a way to empower developers and build a more interconnected platform, but without proper oversight, it became a liability. It also exposed how little control Facebook had over its own ecosystem.

Zuckerberg’s mistakes weren’t driven by a desire to exploit users but by an idealistic faith in openness and innovation. He believed that giving developers access would lead to better products and experiences, failing to recognize how easily this trust could be abused. His flaw wasn’t malice, but naïveté — assuming that others would act in good faith and that minimal oversight wouldn’t lead to major consequences. While he bears full responsibility for not implementing stronger safeguards, the narrative that he deliberately sought to profit at users’ expense oversimplifies the reality. His biggest failing was not deception, but a reluctance to acknowledge that openness without guardrails could be dangerous.

From Beacon to Fake News to Cambridge Analytica, the pattern seems clear: Zuckerberg’s mistakes weren’t rooted in deception or self-interest, but from an idealistic belief in openness, transparency, and innovation. He assumed that people wanted to share more, that free speech would self-regulate, and that developers would act responsibly. Each time, reality proved more complex than his vision allowed.

His integrity isn’t in question, but his judgment has been. He was slow to recognize the darker side of Facebook’s scale and influence, repeatedly assuming that Facebook’s openness and transparency was good for society. The real lesson isn’t about dishonesty — it’s about the unintended consequences of moving fast without fully understanding what you’re breaking.

Zuckerberg Nation and his Paternalistic Vision

Much of Zuckerberg’s idealism is rooted in a form of paternalism — the belief that he knows what’s best for users, even if they don’t realize it themselves. This mindset is similar to that of a king who believes he knows what’s best for his subjects, rather than leaving them entirely up to public consensus. He has often pushed forward with changes that he believed would improve Meta in the long run, even in the face of intense backlash.

One such example is News Feed. When Facebook introduced it in 2006, users were outraged, believing that it was intrusive and a violation of privacy. The backlash was so intense that users staged protests, and the Palo Alto Police Department even called Facebook, asking them to shut down News Feed to calm the chaos. Despite the uproar, Zuckerberg held firm, believing that News Feed would drive engagement and improve the platform. He was right — engagement on the platform surged, and as users adapted, News Feed became one of Facebook’s defining features.

While Zuckerberg sees openness and transparency as inherently positive forces, he has frequently underestimated how uncomfortable users are with losing control over their personal information. The challenge he faces is best captured by James Grimmelman, a professor of law and technology at Cornell University, who notes:

“There’s a deep, probably irreconcilable tension between the desire for reliable control over one’s information and the desire for unplanned social interaction.”

With billions of users, Meta operates at a scale where decisions are bound to be polarizing — what some see as innovation, others perceive as intrusion. This amplifies both successes and failures, making Zuckerberg’s mistakes more scrutinized and, at times, sensationalized.

What complicates thing further is that the perceptions of Meta’s actions aren’t universal; cultural differences shape how people react. In the West, where individual privacy and digital rights are paramount, changes to data policies or content moderation often spark backlash. In contrast, many Asian markets tend to be more pragmatic, prioritizing convenience and functionality over privacy concerns. This divergence creates challenges for Meta’s global strategy, as a single policy can be welcomed in one region while condemned in another.

Meta’s DNA has always leaned toward openness and spontaneity — values that Zuckerberg sees as essential. But this vision has repeatedly clashed with users’ expectations around privacy and control. His challenge in running a social network has been navigating the tension between a world where information flows freely and one where people feel secure in their digital lives.

The Other Side of Zuckerberg: Loyalty, Commitment, and Character

Few leaders have shaped a company with as much conviction as Zuckerberg. His unwavering focus, paternalistic leadership, and long-term mindset has shaped Meta’s trajectory and drawn intense debate. To some, he is a leader who always gets what he wants. But reducing Zuckerberg to a ruthless, power-hungry CEO ignores an important dimension of his character — his sense of loyalty and moral compass.

One of the most telling examples of this is his deep respect for Donald Graham, the former CEO of The Washington Post and Zuckerberg’s early mentor. When the time came to accept capital from Accel Partners — effectively moving on from Graham’s backing — Zuckerberg struggled immensely.

As detailed in The Facebook Effect by David Kirkpatrick, when presented with a much higher offer, Zuckerberg was overcome with guilt, feeling that taking the deal would be a betrayal of the commitment he had already made to Graham. The weight of this decision hit him so hard that he excused himself, only to be found sitting on the bathroom floor, crying. Through his tears, he was saying:

“This is wrong. I can’t do this. I gave my word!”

It was not the reaction of a cold, calculating businessman but of someone tormented by the idea of breaking his promise.

Struggling with the decision, he called Graham, and said:

"Don, I haven't talked to you since we agreed on terms, and since then, I’ve received a much higher offer from a venture capital firm. And I feel I have a moral dilemma."

Zuckerberg wanted the better deal but also felt bounded by his word. Graham, though disappointed, was not offended. Having already spoken to Accel’s Jim Breyer, he knew he couldn’t match the offer. What struck him most was Zuckerberg, at just 20 years old, wasn’t calling to break the news — he was calling to seek guidance. It was a level of thoughtfulness and maturity that left a lasting impression on Graham.

This moment offers a glimpse into Zuckerberg’s integrity, revealing that despite his controversial decisions, he is not purely driven by ambition or self-interest. Beneath his often-misunderstood persona, he cares deeply about honoring his word, even when it comes at great personal cost.

However, Zuckerberg is not infallible. While he has shown remarkable conviction in his decisions, he has also demonstrated the humility to acknowledge mistakes, apologize, and course-correct when necessary. Unlike many leaders who deflect blame, he has consistently owned up to the company’s failures — whether it was the missteps with Beacon, the fake news problem, or the Cambridge Analytica scandal.

Rather than distancing himself, he has publicly apologized, testified before Congress, and implemented structural changes, such as launching the Oversight Board to improve content moderation. He has also emphasized that Meta isn’t perfect, acknowledging that companies like his should be held accountable for their mistakes. This willingness to face scrutiny and evolve shows that, despite his unwavering ambition, he learns from failures, adapts, and continues shaping Meta’s future with a long-term mindset.

Zuckerberg’s decisions have consistently shown that financial gain was never his primary motivation. He was never the type of founder looking for a quick exit or a massive payday. At just 22, he turned down a $1 billion acquisition offer from Yahoo! — an almost unthinkable move given Facebook’s position at the time. The company was generating roughly $30 million in revenue but was still unprofitable, and Zuckerberg himself would have walked away with $250 million. But he believed Facebook’s long-term potential was far greater. Many saw this as reckless, but to him, it was an obvious choice.

Zuckerberg has often stated in interviews over the years that if you were to ask his friends or those who know him well, they would say he’s never been particularly interested in money. Moreover, during a conversation with venture capitalist David Wolf, Zuckerberg was asked why he didn’t just sell Facebook and become very wealthy. Wolf had just visited Zuckerberg’s modest studio apartment, which was sparsely furnished — just a mattress on the floor, scattered books, a bamboo mat, and a single lamp. But Zuckerberg simply replied:

“You just saw my apartment. I don’t really need any money. And anyway, I don’t think I’m ever going to have an idea this good again.”

This moment underscored his mindset — he wasn’t driven by wealth but by the belief that Facebook was a once-in-a-lifetime opportunity to reshape how people connect.

This isn’t to say he doesn’t care about power or influence, because he clearly does. But his ambition is rooted in control over the future of technology, not in personal materialism. For him, the company has always been about shaping the digital world, not just maximizing his bank account.

Zuckerberg’s Playbook: Acquire, Copy, Evolve

Zuckerberg has consistently demonstrated a keen ability to neutralize competitive threats, either by acquiring emerging rivals or by integrating their most successful features into Meta’s ecosystem. His approach is not merely reactive; it is a carefully crafted strategy that revolves around identifying successful trends, replicating and refining them, and ultimately leveraging Meta’s vast distribution power to scale them beyond the reach of competitors. This long-term focus, combined with a patient approach to monetization, sets him apart from many others who often prioritize short-term gains.

This approach has also sparked criticism, with some arguing that Zuckerberg’s strategy lacks true innovation, as it heavily relies on copying ideas rather than creating entirely new ones. Though this perception persists, his ability to refine and execute at scale has repeatedly proven to be a winning formula. While anyone can copy, execution is what truly sets companies apart.

The real differentiator for Meta is the ability to refine, optimize, and seamlessly integrate these ideas into a broader ecosystem, ensuring their long-term success. This process, which unfolds over several years, highlights Zuckerberg’s patience and strategic discipline, allowing Meta to stay ahead of the competitors. The following examples show Meta’s track record executing this strategy:

• In 2009, Facebook responded to the rise of Twitter by incorporating status updates directly into its News Feed, diminishing Twitter’s differentiation as a real-time sharing platform;

• In 2012, just before its IPO, Facebook made a bold pivot to mobile-first development, scrapping its HTML5 app and rebuilding native apps to improve the user experience. The same year, Zuckerberg recognized the growing importance of mobile photos and acquired Instagram for $1 billion — an amount seen as excessive, especially for a company with just 13 employees and no revenue;

• In 2014, Facebook acquired WhatsApp for $19 billion, expanding its footprint beyond traditional social networking;

• In 2016, Facebook responded to Snapchat’s rising popularity by introducing Stories, which quickly surpassed Snapchat’s own version;

• In 2020, in response to TikTok’s dominance, Meta launched Reels, leveraging Instagram’s massive user base to compete in the short-video market; and

• In 2024, Meta began experimenting with a fact-checking system resembling X’s Community Notes, underscoring its continued practice of learning from competitors.

But not all threats could be neutralized through acquisition or feature replication. One of the biggest disruptions Meta has faced in recent years came not from a social media competitor, but from Apple’s 2021 App Tracking Transparency (“ATT”) update. ATT fundamentally altered the digital advertising landscape by requiring apps to ask users for permission to track their activity across other apps and websites. This seemingly simple policy change had profound consequences for Meta’s business, as it significantly reduced the company’s ability to gather detailed user data for ad targeting.

The immediate impact of ATT was severe; Meta had long relied on third-party tracking and behavioral data to optimize its ad delivery. With ATT, much of this granular data vanished overnight. As a result, ad targeting became less precise, attribution models collapsed, and advertisers struggled to measure the effectiveness of their campaigns. Meta estimated a $10 billion loss in ad revenue in 2022 alone, largely due to the loss of tracking signals, which disrupted its ad targeting capabilities and reduced advertiser confidence.

Meta’s challenges were compounded by the fundamental difference between its ad model and Google’s. While Google captures high-intent users actively searching for products, Meta operates as a top-of-funnel discovery platform, relying on behavioral signals to match users with relevant ads. With ATT limiting those signals, Meta had to quickly rethink its approach.

Faced with this existential challenge, Meta adapted by pivoting towards AI-driven advertising solutions. Instead of relying on explicit tracking, Meta invested heavily in machine learning models that inferred user intent based on broader behavioral patterns. Initiatives like Advantage+ Shopping Campaigns leveraged AI to dynamically optimize ad delivery, improving performance even with fewer data inputs. At the same time, Meta developed probabilistic attribution models, such as its Conversions API, which allowed advertisers to send first-party data directly to Meta, reducing reliance on third-party tracking. The company also embraced on-device processing and privacy-enhancing technologies, ensuring personalized ad experiences while complying with evolving privacy regulations.

Despite the initial disruption, Meta successfully rebuilt its ad targeting engine, and by 2023, the company’s revenue growth reaccelerated. AI-driven targeting had become a competitive advantage — enabled by Meta’s heavy investment in infrastructure, including data centers designed to power its probabilistic modeling. Unlike smaller competitors that lack the budget or scale to make similar investments, Meta’s ability to deploy vast computational resources has allowed it to refine its ad targeting capabilities, positioning it as a dominant force in digital advertising.

Zuckerberg’s ability to navigate crises and adapt to changing landscapes underscores his strategic approach to leadership. His long-term thinking goes beyond social media and digital advertising, extending into AI as well. By open-sourcing Llama, Meta is positioning itself as an industry leader in AI infrastructure, ensuring widespread adoption of its models while simultaneously challenging the dominance of closed AI ecosystems. Unlike competitors that restrict access to proprietary models, Meta’s approach allows businesses, researchers, and startups to build on its AI advancements, accelerating innovation while embedding its technology across industries.

This decision is not just about AI ethics or accessibility — it’s a strategic move; Meta’s open-source approach strengthens its position without undercutting revenue. Selling access to AI models isn’t Meta’s business model, meaning that openly releasing Llama does not threaten its financial sustainability or its ability to invest in research — unlike closed providers that must carefully balance openness with revenue protection. This unique advantage enables Meta to scale adoption rapidly without the trade-offs its rivals face.

Moreover, Meta’s open-source approach increases AI adoption for companies. Instead of paying high fees for proprietary AI models or being locked into closed ecosystems, businesses can fine-tune and deploy Llama models on their own infrastructure or through cost-effective cloud solutions. This reduces reliance on expensive API-based AI services and gives enterprises greater control over customization, security, and long-term operational costs. By lowering the financial barriers to cutting-edge AI, Meta ensures that its models become deeply integrated into enterprise applications, research institutions, and emerging AI-powered tools.

Additionally, open-sourcing Llama doesn’t necessarily mean Meta is giving away a dominant advantage. AI is evolving at a breakneck pace, and the field is inherently competitive, with rapid iteration, breakthroughs, and increasing compute power shaping its trajectory. Even with open access, staying ahead in AI requires continuous innovation, top-tier research talent, and massive infrastructure — all areas where Meta already has significant strengths. Instead of trying to maintain an artificial lead through secrecy, Meta’s approach ensures that it remains a central player in the AI ecosystem while benefiting from widespread adoption and external contributions to its models.

This creates a self-reinforcing cycle where Llama becomes the standard, much like Linux did in cloud computing. Just as Meta has leveraged its massive distribution network to dominate social media, it is now leveraging open-source AI to expand its influence far beyond its core platforms, reinforcing Zuckerberg’s ability to think in multi-year horizons and setting Meta up for long-term technological relevance.

This creates a self-reinforcing cycle where Llama becomes the standard, much like Linux did in cloud computing. Just as Meta has leveraged its massive distribution network to dominate social media, it is now using open-source AI to expand its influence far beyond its core platforms. The rapid adoption of Meta AI, its chatbot integrated across Instagram and Facebook, exemplifies this — already reaching 700 million monthly active users and projected to hit 1 billion by 2025, largely due to Meta’s unparalleled reach. Beyond ecosystem expansion, staying at the cutting edge of AI also strengthens Meta’s ad model, improving its ranking and recommendation algorithms — key drivers of engagement and monetization. This reinforces Zuckerberg’s ability to think in multi-year horizons and positions Meta for long-term technological relevance.

As venture capitalist Alex Rampell, a general partner at Andreessen Horowitz, once said:

“The battle between every startup and incumbent comes down to whether the startup gets distribution before the incumbent gets innovation.”

Zuckerberg has mastered both sides of this equation. By leveraging Meta’s vast distribution network, he has consistently out-innovated competitors — whether through acquisition, internal development, or strategic adaptation. In doing so, he has ensured that Meta remains a dominant force in the ever-evolving digital landscape.

Investing for the Future

Phil Fisher’s Scuttlebutt Method, outlined in Common Stocks and Uncommon Profits, evaluates whether management is proactively developing new products and innovations beyond their current growth cycle. Specifically, point 2 of his 15-point checklist asks:

“Does the management have a determination to continue to develop products or processes that will still further increase total sales potentials when the growth potentials of currently attractive product lines have largely been exploited?”

By this measure, Zuckerberg clearly fulfils it. Rather than resting on the success of Facebook’s core social media platforms, he has continuously reinvested into the future, betting on Augmented Reality (“AR”), Virtual Reality (“VR”) and the Metaverse as the next frontier of computing. His commitment to long-term innovation is evident in Meta’s multi-billion-dollar investments into Reality Labs, developing technologies that aim to reshape how people work, interact, and experience digital environments.

However, this aggressive push into AR/VR drew significant backlash from investors, who questioned the financial drain and the uncertain timeline for returns. But in true Zuckerberg fashion — the paternalism at play — he stood firm, insisting that these investments were necessary for Meta’s long-term success, positioning the company for the next evolution of computing beyond social media.

This strategic pivot is also deeply influenced by Meta’s experience with Apple, which controls the dominant hardware ecosystem (iOS and the App Store). After facing restrictions due to Apple’s privacy policies — most notably the ATT changes, which severely impacted Meta’s ad business — Zuckerberg recognized the risks of being dependent on platforms owned by competitors. By pushing aggressively into AR/VR and building its own hardware and software ecosystem, Meta aims to reduce its reliance on Apple and position itself as a leader in the next computing platform.

Zuckerberg isn’t just focused on optimizing current business lines; he is playing the long game, reinvesting profits to shape the future rather than simply maximizing short-term earnings. In my view, only founders with significant control over their companies can truly commit to long-term bets like this. Unlike professional CEOs who are often constrained by quarterly earnings pressures and shareholder expectations, founder-CEOs with significant voting control — like Zuckerberg — have the latitude to sacrifice short-term profits in pursuit of transformative innovation. Without this level of control, it’s tough for a company to willingly pour billions into a project like the Metaverse, where the payoff could take a decade or more.

Conclusion

At just 40 years old, Zuckerberg’s tenure at Meta is far from over, and his role in shaping the future remains pivotal. His leadership has been controversial, but his ability to navigate crises, outmaneuver competitors, and take bold bets on the future is undeniable.

At the core of Zuckerberg’s vision is his belief in the fundamental human need for connection. As he once stated:

“People have this deep thirst to understand what’s going on with people around them.”

This insight underscores the enduring strength of social networking — not just as a business model, but as a fundamental human need. While critics have accused him of being too idealistic or too aggressive, the reality is that he has consistently scaled products and platforms that cater to this intrinsic desire for connection, discovery, and shared experiences. Whether through AI, the Metaverse, or future technologies yet to emerge, one thing is clear — Zuckerberg is playing the long game.

Despite Meta’s massive network effects, Zuckerberg himself remains the company’s ultimate moat. His vision, execution, and control have shaped Meta’s trajectory, and as long as he remains at the helm, his influence will continue to define its future.

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Disclaimer: Please note that none of the information provided constitutes financial, investment, or other professional advice. It is only intended for educational purposes. We have a vested interest in Meta Platforms. Holdings are subject to change at any time.

In this quick dive, we’ll attempt to break down the business of Nu Holdings (NYSE:NU) and understand what makes this company special. We’re trying a new series of business quick dives, so do feel free to share your feedback. If you have any suggestions on what company we should do next, feel free to let us know too. Have a great week ahead!

Financial Snapshot

About Nu Holdings

Nu Holdings (“Nu”) is a digital financial services platform and technology company for Latin American consumers and small businesses. Nu, in Portuguese, means bare, naked, and transparent. Nothing to hide. It also sounds phonetically like “new”, which symbolizes the new digital banking model, rather than traditional banking. Nu is a digital bank, which is a bank that offers banking services without traditional physical branches.

The company’s products can be broadly divided into five categories, which Nu calls the “Five Financial Seasons”. They are:

• Spending (Credit and prepaid cards, QR, Pix, WhatsApp Pay, traditional wire transfers);

• Saving (Personal and business accounts);

• Investing (Direct-to-consumer digital investment platform);

• Borrowing (Transparent credit cards, secured and unsecured loans; and

• Protecting (Insurance solutions).

Nu earns revenue from two main sources: fees and interest income. Fees include fees and commissions applied to credit and prepaid card transactions, payments, loyalty programs, prepaid mobile phone top-ups, as well as the marketplace for and distribution of certain financial products and services, such as investments, insurance and remittance products.

Interest income is related to interest charged on revolving and refinanced credit card balances, purchases of credit card receivables and loans to customers, as well as interest earned on deposits, government bonds and other interest-earning instruments.

Majority of Nu’s revenue is from interest income (~80%), with the remaining from fees (~20%) for the full year 2023.

Pain Points in Latin America’s Traditional Banking Model

To understand the core of Nu is to understand the significant pain points in Latin America’s banking industry. Prior to the founding of Nu, David Velez, co-founder and current Chief Executive Officer of Nu, faced difficulties and complexities in opening just a simple bank account in Brazil.

First, the bank wasn’t easily accessible. Upon entering the bank, Velez had to leave his backpack in a locker, as he couldn’t bring his own bags into the bank. Many banks in Brazil are designed to withstand robberies and attacks. Some branches have reinforced walls, bulletproof glass, metal detectors and bag scanners. Once, Velez had accidentally triggered the alarm by forgetting to empty his mobile phone from his pocket.

Second, the bank staff had a poor level of customer service. If you weren’t considered a VIP or wealthy, the staff’s attitude could be cold and dismissive, acting as if they were doing you a favor. Velez said he was given a bunch of forms and was asked to fill them up and come back the next day. Third, these banks would charge excessively high fees and rates for credit cards and loans, and even just for having the “privilege” of maintaining an account at the bank.

Incumbent banks dominate the banking industry while providing terrible customer service. In 2020, incumbent banks in Brazil, Mexico and Colombia held an average between 70%-85% of all loans and deposits and consequently charged very high fees and generated outsized profits, based on data from their respective central banks. Velez saw this gap and sought to disrupt the traditional banking model characterized by its high fees, terrible customer service, and the unnecessary bureaucracy that more often than not, left a bad taste in customer’s mouth.

The Customer Obsession

Nu was built on a few core principles; the first of which is customer obsession. Latin America’s high smartphone penetration and its large underbanked population created an ideal environment for Nu to be mobile and digital-first. This is because there was a strong desire for financial inclusion from the underbanked population and low competition from traditional banks as they saw this segment as unprofitable. The proliferation of affordable smartphones and low-cost data plans also meant that many would have access to an internet enabled mobile phone as a primary device.

By adopting a digital-first approach, Nu avoids the high real estate costs associated with maintaining physical bank branches, which are often located in prime areas. Nu’s customers are able to easily access and manage their finances through the mobile application on their smartphone. Nu also prioritizes simplicity and transparency in their products, offering digital financial services products that are easy to understand and have transparent pricing – something often lacking in incumbent banks.

Nu then passes on the efficiency gains from their digital-first model to the customer in terms of lower fees and rates. For example, many of Nu’s products including their savings account and credit card have no annual or maintenance fees.

Furthermore, Nu has their own approach to customer service. They have a customer support team called the Xpeers – a team of highly trained and passionate customer service agents with a human-focused mentality. Xpeers are supposedly subject-matter experts that are empowered to solve customer questions at first contact, which can be made via chat, email or phone.

Nu uses a combination of two platforms to improve customer service efficiently: Shuffle and Proximo!. Shuffle is a platform that provides Xpeers a single go-to application for the latest information on the customer, interaction history and insights into the likely problem that the customer is facing; this would give Xpeers a holistic profile of the customer they’re addressing. What Proximo! then does on the back-end is that it intelligently tags each customer inquiry with a designated reason, and routes these inquiries back to the most appropriate agent. This combination helps in maximizing first contact resolution, minimize transfers and friction for the customer, ultimately improving the customer experience.

In addition, Nu has developed a WoW Approach that builds stronger human connection to delight their customers. Nu has a designated team of over 30 customer excellence professionals to train and manage this approach throughout the customer service team. With the WoW Approach, Xpeers are encouraged and empowered to send personalized gifts in building a real human connection with the customer. For example, during a customer interaction with an Xpeer, the customer shared that they had two cats. The Xpeer then surprised the customer by giving toys, a box for the cats, and a handwritten letter.

To further understand how Nu thinks about the customer, here’s Cristina Junqeira, co-founder and current Chief Growth Officer of Nu:

“We must never assume that the customer is here to stay. Every day, we need to continue earning their loyalty, because they can leave at any moment. They have to choose to stay with us. We did not want to lock them in with tricks or contracts.”

This type of empowerment to solve problems and to go above and beyond to help the customer reminds me of how the Chinese hotpot restaurant chain, Haidilao handles customers. They believe that the perfect customer experience is different for everyone, and that each customer experience should be tailored to the specific customer’s wants and needs. By allowing the Xpeers the freedom and creativity to express themselves, the customer experience could be hard to compete with. The WoW Approach has caused many customers to share their positive experiences on social media, further increasing customer referrals and customer acquisitions.

Given the focus on customer satisfaction, it’s no surprise that Nu’s Net Promoter Score, a metric used to measure customer loyalty, satisfaction and enthusiasm for a company or product, is up to three times better than competitors, not only for incumbent banks, but also including fintech companies in the countries they operate in. The average NPS score for incumbent banks in the 30s range, while Nu’s is over 90. Moreover, in the last three months of 2023, more than 80% of the calls received were answered in less than 45 seconds and the customer dissatisfaction rate for the calls was below 8%. Nu measures customer satisfaction rate as the percentage of customers who rate their customer service as a 1 or 2 on a scale of 1 to 5.

Nu’s dedication to its customer is clear, but the company also emphasizes the importance of its employees. Jorge Livingstone, in his book NuBank Purple Revolution, said that the corporate culture is the nervous system of a company. Nu believes in cultivating a culture of ownership among employees. At the end of 2023, approximately 94.6% of Nu employees owned Nu shares or held share-based incentive awards. Livingstone also explained that Nu has a Slack channel called “Bureaucracy Hunters”, which is meant to encourage staff to question any rules that seem unproductive and bureaucratic.

Consequently, Nu’s excellent customer service and high-quality products attracts organic growth as customers would refer Nu to their family and friends. Over time, Nu has been able to grow through word-of-mouth or direct unpaid referrals without the need for significant marketing expenses. Since inception, approximately 80-90% of customers growth per year is through these referrals. As Nu acquires more customers, Nu continues to focus more resources on their customer experience and products, further fueling their marketing strategy and improving the cycle.

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Innovation and Technology

Another main pillar of Nu’s foundation is innovation and technology. Here’s how Nu defines their business:

“…more than a bank, we are a technology company that just happens to be in the financial sector”

Rather than using an on-premise or hybrid model like most incumbent banks, Nu operates in a fully cloud-based environment. This would enable them to manage growth efficiently and cost-effectively by optimizing capacity as needed. Nu runs all of their products, services and operations through NuCore, their proprietary, cloud-based core banking platform that they designed from the ground up. NuCore enables centralized management of key functions such as transaction authorization and processing, core banking, regulatory reporting, business operations, customer services, credit underwriting and fraud prevention. Nu claims that this will allow them to innovate on product features that won’t be immediately accessible to competitors that leverage platforms that are standard in the market today.

Furthermore, Nu operates their business with a microservices approach, which is a decentralized technology to manage and deploy over 500 modular microservices. This is becoming increasingly common, especially among technology companies, as this allows them scalability, flexibility, resilience and overall technology diversity.

Another part of Nu’s technology stack is their immutable database. Nu created an immutable ledger, utilizing the Datomic database technology that they own, providing a highly reliable audit trail and transaction history that provides better accuracy, control, reliability and transparency when compared to traditional database architectures. An immutable database is a type of database where data, once written, cannot be modified. Instead of updating the data in place, new versions of the data are created, preserving the entire history of changes.

With the immutable database, Nu is able to develop new code more aggressively. While an immutable database has data integrity, storage requirements can grow significantly over time, since data is never overwritten. Further, it can be challenging to delete data, as it often means marking data as deleted rather than physically removing it.

Moreover, Nu’s large customer pool means that Nu has significant data advantages. Their proprietary NuX Credit Engine (“NuX”) collects approximately over 30,000 data points on each monthly active customer, which can then be used to better understand customers’ behavior, risks and financial needs to better serve them across their Nu lifecycle. NuX leverages data analytics and machine learning to assess credit risk and underwrite customers more effectively than incumbent banks’ homogenous credit underwriting models. The NuX underwriting is able use live data points from the customer and tailor the credit strategy as they learn more about the customer. For example, NuX could initially provide a small credit line to a customer. Over time, if the customer’s credit behavior is good, the credit could be expanded, and vice versa. This would allow people with limited credit histories access to credit.

As a result of the digital-first and technology focused model, Nu has a significantly lower number of employees compared to incumbent banks. For example, at the end of 2023, Nu has approximately 7,686 employees while the two largest banks in Brazil by total assets, Banco do Brasil SA and Itaú Unibanco Holding SA, both have over 80,000 employees.

Being digital-first, Nu has significantly advantaged unit economics from having no physical branches and proprietary technology that helps scale their growth efficiently. Thanks to their relatively efficient cost structure, in 2023, Nu estimated their customer acquisition efficiency, defined by comparing the lifetime value of acquired customers (“LTV”) to the customer acquisition cost (“CAC”), to be an LTV/CAC ratio greater than 30 times.

In their 2023 annual report, Nu estimated that their CAC is about USD7 per customer, of which paid marketing accounts for about 29%. This would include expenses such as printing and shipping a card, credit data costs (primarily consisting of credit bureau costs) and paid marketing. Based on Nu’s internal data, they believe that their CAC is one of the lowest across consumer FinTech companies and incumbent banks, mainly because of their referral network.

Additionally, for the last three months of 2023, Nu’s consolidated Monthly Average Cost to Serve per Active Customer (“ARPAC”) was about USD10.5 – USD10.6 in Brazil. For customers that were considered active across their core products like credit card, NuAccount, and personal loans, monthly ARPAC was about USD45 for the year 2023. Nu estimates that the ARPAC for incumbent banks in Brazil was approximately 4.5 times higher than Nu’s for the full year 2023. Over time, Nu believes that they can capture a bigger share-of-wallet across customers using existing products, as well as cross-selling additional products to existing customers.

Ecosystem, Partnerships and the Flywheel

Nu serves a massive and growing customer base of 98.8 million as at the end of Q3 2024. This scale brings about a powerful added benefit: it makes Nu an attractive partner for businesses. For example, e-commerce platforms like Amazon, Casas Bahia, and Magalu or travel booking platforms like Hopper, recognize the value of tapping into Nu’s vast customer base. By partnering with Nu, these businesses gain access to millions of potential customers, leveraging the reach and engagement that Nu has built.

That’s not all though. Nu also benefits from this dynamic as it strengthens Nu’s engagement with users, creating a mutually beneficial cycle that enhances customer retention and business appeal. A comparative example is seen in Tencent’s WeChat in China, with its vast user base of about 1 billion people being a magnet for local and foreign businesses looking to reach its massive audience. Just as businesses flock to WeChat to tap into its extensive network, Nu’s growing customer base makes it increasingly attractive for companies seeking partnerships with its users.

1. More customers

2. More engagement and scale

3. More data

4. Lower costs

5. Attractive fees and rates

6. Better products and experiences

7. Growing Nu Ecosystem (More marketplace partners to partner with)

Tying it all together, Nu’s focus on delivering extraordinary customer experience would lead to more customers and a more engaged user base. Having more customers means having more data, that lowers costs for Nu through enhanced credit underwriting, operational efficiency, and economies of scale. In turn, Nu passes the efficiency gains back to the customer through lower fees and rates. Nu also leverages insights from the data to design better products and experiences, to further increase customer engagement and satisfaction. The final element of the flywheel is, as noted earlier, the growing Nu ecosystem. As more businesses partner with Nu, the cycle of customer engagement strengthens, further accelerating the customer acquisition and fueling the growth of the platform.

Conclusion

Nu has a promising business model in the flywheel they have created. It borrows from Costco and Amazon’s model of passing efficiency gains back to the customer, which is undoubtedly strong. In our view, Nu’s long-term success would largely depend on management’s ability to continue its innovative culture; maintain the discipline of passing gains to the customer; and continue to execute with its long-term vision. Since it’s IPO in 2021, Nu has already shown early signs of a long-term compounder in the making.

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Disclaimer: Please note that none of the information provided constitutes financial, investment, or other professional advice. It is only intended for educational purposes. We have a vested interest in Nu Holdings. Holdings are subject to change at any time.

Table of Contents

1. About The Trade Desk

2. Business Analysis

3. Financial Analysis

4. Earnings Call Highlights

5. Takeaway

1. About The Trade Desk

The Trade Desk is a self-service, omnichannel cloud-based software platform that enables advertisement buyers to create, manage, and optimize more expressive data-driven digital advertising campaigns across ad formats, including display, video, audio, native and social, on a multitude of devices, such as computers, mobile devices, and connected TV (“CTV”).

The company serves advertising agencies and other service providers for advertisers. The company mainly generates revenue by charging clients a platform fee based on a percentage of the client’s total spend on advertising.

2. Business Analysis

Client Retention

In Q3 2024, client retention rate was more than 95%, which was the case for the past 10 years consecutively.

Geographical Revenue Mix

The revenue mix was 88% in US and 12% in International, stable compared to last quarter.

Updates on UID2:

• Spotify partnership extension; piloting integrations with OpenPath and UID2 through Spotify Ad Exchange

• Roku’s adoption of UID2; advertisers can have more precise targeting with Roku Media

• Reach, a UK news publisher of 130 media brands, is adopting EUID

• Global media company Motorsport Network’s adoption of EUID

• Global Research Marketplace, Cint’s integration of UID2

3. Financial Analysis

Revenue

The Trade Desk delivered revenue of $628 million, representing a 27% year-over-year increase. This growth was mainly driven by higher gross spend in the current year on the platform, which in turn was driven by new clients, more campaigns executed by existing clients and higher spend per campaign.

Profitability

The Trade Desk reached an operating income of $108 million in Q3 2024, up 188% y/y.

Operating expenses increased by $29 million to $519.5 million, up 31% y/y, mainly due to platform operations expense and sales and marketing.

Platform operations expense increased by $29 million, or 23% y/y mainly driven by a $22 million increase in hosting costs and a $6 million increase in personnel costs. The increase in hosting costs was due to support costs related to:

• the increased use of the platform by clients;

• increased use of features by the company’s technical teams in platform support; and

• investment in new data centres to support the continued platform growth.

Sales and Marketing expense increased by $28 million, or 25% y/y due primarily due to an increase in personnel costs related to headcount growth to support sales efforts and to continue to develop and maintain relationships with clients, an increase in incentive compensation driven by gross spend growth, and an increase in travel costs. In the future, management expects sales and marketing expenses to increase in absolute dollars, as the focus on increasing the platform adoption with existing and new clients, as well as expanding the international segment.

As a result of revenue increasing by $135 million, almost double compared to operating expenses of about $64 million, operating margin improved significantly to 17.3%, up from 7.6% a year ago.

Free Cash Flow

In Q3, the Trade Desk delivered a free cash flow of $224.6 million, representing a 20% increase y/y. Over the past 12 months, free cash flow was $527.9 million, with a free cash flow margin of 22.9%.

Balance Sheet

The Trade Desk’s cash and cash equivalents including short-term investments was $1.7 billion, with no debt. Absolutely rock solid.  

4. Earnings Call Highlights

CTV inventory is no longer scarce, advertisers have more choice and require more insight; UID2 and OpenPath help to provide this signal

You may recall, three or four years ago, I would talk on these calls about inventory scarcity, especially in CTV in the fourth quarter, which was enjoying a significant surge because of people spending more time streaming at home during the global pandemic.

As advertisers chased those viewer eyeballs to new streaming platforms, advertising inventory was scarce and with demand rising, CPMs went up. But CTV inventory isn't scarce in the same way anymore. Because over the last couple of years, every major media company has launched a streaming service, and all of them have embraced advertising as a key way to fund their content and grow. As inventory scales and scarcity decreases, advertisers have a lot more choice.

They also have a harder job, which is assigning value to a lot more inventory. Now, it's about the quality of the inventory as well as the quality of the signal. You may remember at our last Investor Day, that we showed a graph of what our clients were willing to pay for CTV ad impressions on the open market. In many cases, we've been significantly higher than the price that the media companies were negotiating in direct deals.

The content arms race is more intense and more expensive than ever, and media companies need to monetize their content as effectively as possible. Two weeks ago, Variety reported that the top six media companies will increase content spending this year by 9% to a record $126 billion, all of which needs to be funded. Without the benefit of scarcity, media companies now need to provide advertisers with more insight. What am I buying? Who am I reaching? Tools like UID2 and OpenPath, are helping provide that signal.

The best is yet to come for partnerships with Netflix, Disney, Roku, Fox and Spotify

One other thing that also gives me a tremendous amount of optimism for the future is that some of our most significant partnerships, whether that's Netflix or Disney or Roku or Fox or Spotify are all in what I would call the crawl phase of our partnership. We've done some amazing themes with some of those. Others, we've always talked about doing amazing things and we've done just sort of testing the pipes.

But I think the very best is yet to come in all of those partnerships. And so, in the short term, they're making small contributions, but I think the very best is yet to come and all of that, and I'm sure we'll talk about OpenPath and some other things later. But that gives you a sense of what we're facing in the short term.

Amazon may be at a bigger disadvantage in CTV if they neglect premium content that others own

Amazon operates at a much bigger disadvantage in CTV than in any other channel. So, we've argued against Google's lack of objectivity in every other part of the open Internet, and they've been less of a competitor in CTV. Amazon has been more of a competitor in CTV, but I think Google was a more formidable competitor in the other parts of the open Internet than Amazon is in CTV and that is simply because of that conflict of interest. They are going to be pushing ads on premium content that they own, meanwhile, neglecting premium content that others own, while we have no dog in the hunt, and we're just trying to help people objectively decide, do I buy the ad on Netflix or do I buy the ad on Hulu or Tubi or somewhere else.

Political spend should be in the low single digits of overall spend for 2024

We went into the last political cycle, the last big one back in 2020 saying that political spend was in the mid-single digits, and we believe for this year of 2024, it will be in the low single digits as a percent of our overall spend. When we think about how we consider political in Q4 and then go into thinking about how we're modeling going into 2025, it's a really nuanced but important question this year. Typically, what we see is that Q1 is, on average, a 22%, 23% sequential decline from Q4.

And in political years, it's critical to exclude that political contribution in Q4 which we believe, again, will be a low to mid-single-digit percent for that quarter as we go into modeling Q1 of 2025.

Sports and programmatic ads could go hand in hand

Of course, sports is some of the most premium and most expensive content and media. Because it is often scarce and often highly sought out by brands, and it changes very quickly, it really is built for programmatic advertising. The best moments in sports are surprises and unpredictable. That's what makes them so exciting.

However, it's also what makes them hard to plan around and to price properly. I expect over the coming years to see programmatic spot markets and sports become best friends. We are enjoying our strongest year to date with live sports as the football season has kicked off here in the United States, we are looking at, on average, 1.5 billion ad impressions per weekend. We have dozens of major brands buying football through our platform for the first time and many others increasing spend in the triple-digit range.

5. Takeaway

Strong quarter from The Trade Desk. They remain well positioned for long-term growth, driven by its robust financial performance, strategic focus on macro tailwinds like CTV, retail media, audio, live sports, and international expansion. The company’s sustained and increasing profitability, strong cash flow, and impressive client retention rate clearly shows the effectiveness and strength of the business. The company’s commitment to innovation and its objective approach to providing advertisers with valuable insights should continue to drive its growth.  

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Disclaimer: Please note that none of the information provided constitutes financial, investment, or other professional advice. It is only intended for educational purposes. We have a vested interest in The Trade Desk Inc. Holdings are subject to change at any time.

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Table of Contents

1. About Netflix

2. Business Analysis

3. Financial Analysis

4. Earnings Call Highlights

5. Takeaway

1. About Netflix

Netflix provides entertainment services including TV series, films, documentaries, stand-up comedy specials, reality TV, anime, live events, games and sports related content to over 260 million memberships in over 190 countries. Netflix provides members the ability to receive streaming content through a host of internet-connected devices including TVs, digital video players, television set-top boxes and mobile devices.

Netflix derives revenues using a subscription-based model from monthly membership fees.

2. Business Analysis

Paid memberships

Subscriber growth continues its acceleration. In Q3, global paid memberships reached 282.72 million, representing a 14.4% y/y increase from 247.15 million. There were 5.07 million paid net additions compared to last quarter.

UCAN paid memberships reached 84.8 million, representing a 10% y/y increase from 77.32 million. There were 0.69 million paid net additions compared to last quarter. UCAN ARM was $17.06, up 5% y/y.

EMEA paid memberships reached 96.13 million, representing a 15% y/y increase from 83.76 million. There were 2.17 million paid net additions compared to last quarter. EMEA ARM was $10.99, stable from last year.

LATAM paid memberships reached 49.18 million, representing a 13% y/y increase from 43.65 million. Paid net additions decreased by 0.07 million compared to last quarter. Management noted that the slight decrease was due to recent price changes in some of their bigger LATAM markets which dampens short-term member growth. The good news though, is that management has already started to observe a rebound at the beginning of Q4. They said that if the quarter lasted one more day, paid net additions would be up instead. LATAM ARM was $8.40, down 5% y/y.

APAC paid memberships reached 52.6 million, representing a 24% y/y increase from 42.43 million. There were 2.28 million paid net additions compared to last quarter. APAC ARM was $7.31, down 4% y/y.

3. Financial Analysis

Revenue

For Q3, streaming revenues reached $9.82 billion, representing a 15% y/y increase. This was primarily due to growth in average paying memberships and price increases, partially offset by unfavorable changes in foreign exchange rates.

It’s clear that the company’s initiatives to re-accelerate growth since the slowdown in 2022 have been bearing fruit. The management’s response to the revenue slowdown and subscriber decline is indicative of their quality. Their initiatives since then, namely the launch of the ad-supported tier, password sharing crackdown, investing in localized content, and pricing adjustments are clearly impacting revenue growth.

Profitability

In Q3, Netflix’s operating income reached $2.9 billion, up 52% y/y. Operating margin expanded significantly to 29.6%, up from 22.4% in the same quarter in 2023.

As Netflix’s revenue re-accelerates, they’ve managed to keep operating expenses under control, indicating clear signs of operating leverage. Looking at the operating expenses below:

• Marketing expenses increased by 15% y/y, reaching $643 million. As a percentage of revenue, marketing expenses remained stable at 7% compared to the same quarter in 2023.  

• Technology and development expenses rose by 12% y/y, reaching $735 million. As a percentage of revenue, technology and development expenses decreased to 7%, down from 8% a year ago.

• General and administrative expenses fell by 15% y/y, reaching $417 million. As a percentage of revenue, general and administrative expenses decreased to 4%, down from 6% a year ago.

Free Cash Flow

Netflix delivered a free cash flow of $2.19 billion, marking a 16% increase y/y. In recent quarters, Netflix has been generating strong free cash flow.

For the full year of 2024, Netflix expects a free cash flow of $6.0 billion – $6.5 billion, up from $6 billion due to higher operating income forecast.

Balance Sheet

Netflix raised $1.8 billion in their first investment grade bond deal during the quarter. This resulted in total debt increasing to $16 billion from $14 billion in the previous quarter, but net debt decreased to $6.8 billion from $7.4 billion in the previous quarter. This isn’t a strong balance sheet – but with the strength of the business, high quality management team, and strong free cash flow generation, and lowered debt levels (For context, Netflix’s debt-to-equity ratio was at a peak of 2.2 in 2019, and it’s 0.8 in 2023), we’re not too worried.

4. Earnings Call Highlights

Engagement is healthy; users watch Netflix for an average of two hours a day

…engagement, which we view as our best proxy for member happiness because when people watch more, they stick around longer. So, that's retention. They talk more about Netflix, which drives acquisition….

…This year, we've maintained very healthy engagement, about two hours of viewing per member per day, and engagement on a per-owner household is up through the first three quarters of 2024….

Reworking the TV homepage

…Also improving the product experience. We tested a new more intuitive version of our TV homepage. We're excited about the progress that we've seen there, so we're polishing it up, and we're excited to bring that to our subscribers around the world….

Majority of growth for 2025 should be driven by memberships

…So, we expect to deliver roughly $43 billion to $44 billion of revenue next year based on FX rates at the end of Q3. That represents about $4 billion to $5 billion of incremental revenue over our kind of 2024 expected landing where -- think of it as about 11% to 13% growth. And that's from a combination of membership and ARM growth. The majority of growth next year, we expect to be membership-driven growth.

It's from the full year impact of this year's strong net adds plus solid paid net adds expected next year. We still have hundreds of millions of households that aren't members, and we'll grow into that opportunity, thanks to a great '25 slate and our improvements in converting consumer demand, and we will have ARM growth. ARM's a combination of continued plan evolution and pricing, building off the actions we've been taking this year, and growing our ads revenue, as Greg just talked about, not yet a primary growth driver but to be a more meaningful contributor in '25. So, overall, healthy double-digit revenue growth, more balanced across multiple drivers, and strong outlook….

Room for operating margin expansion in the future

…So, as we said in the letter, we see plenty of room to increase our margins over the long term. And we feel great about what we're delivering in '24. We expect to be up 6 percentage points, as Ted mentioned, and our approach to margin is unchanged.

We believe we build a stronger and more lasting business by gradually increasing margins as we grow. We set margin targets, and we do that by investing to improve our service while making trade-offs and prioritizing like growing our costs slower than revenue and operating like owners. The amount of margin growth each year, it will bounce around a bit based on the strategic opportunities in a given year, FX moves, and things like that, but we'll aim to increase each year. And what you see in our '25 guide is consistent with that approach….

Ads plan accounted for over 50% of sign-ups in their ads countries

…I would say the most important part is we've been carrying two top-level priorities when we think about our ads business.

Priority No. 1 was we have to grow our ad tier membership so that we can get to sufficient scale to be relevant in each market for advertisers. And the big priority No. 2 is we have to improve our capabilities and attractiveness to advertisers and therefore the monetization of all that inventory.

So, on that first one, we've made some really solid progress. Q3, we mentioned in the letter, ads plan accounted for over 50% of sign-ups in our ads countries. That's a leading indicator about how you think about sort of ads membership there. Our ads plan membership base was up 35% quarter over quarter….

Ads plan membership continues to grow strongly

…Our ads plan membership base was up 35% quarter over quarter. That's over probably four quarters of really significant growth as well. So, that's growing nicely. As we said last quarter, we expect to be at critical scale as our advertising partners tell us they need us to be in each of our 12 ads countries in 2025….

Engagement in ads plan members are similar to non-ads plan members

…Our ads plan members are watching similar amount of view hours and similar titles, too, which is probably interesting to note, relative to comparable non-ads plan members. So, this was our top area of improvement….

Netflix is scaling their audience and ad inventory faster than they can monetize it

…our second priority, and that's effectively monetizing all that growing inventory.

I think it's worth noting we've got a lot of work still ahead of us to achieve that goal, to make our offering better for advertisers. It's going to be a priority for us for several years coming, but we're moving. Our first-party ad server, which is a key component of unlocking value in the space, that's on track to launch in Canada this quarter and then the rest of our ad markets in 2025. We've got our partnerships with Trade Desk and Google Live, and those are going well.

We've got a road map for more formats, for more features, for more measurement. That's all coming. So, while we've got lots of work to do, we are very confident in our ability to execute and grow our ad business much like we did with the paid sharing initiative….

… We see ads revenue growth on a good trajectory. We've got healthy CPMs at the high end of that premium CTV ad market.

That's where we want to be positioned. And while ads won't be a primary driver of revenue in 2025, because we're still scaling that audience and that inventory faster than our ability to monetize it, we definitely see already the momentum growth in the monetization and our opportunity to close that gap. So, for 2025, we expect that ads revenue will roughly double year over year, albeit off a small base. But just as a confidence point in that, this year's U.S. upfront, we're seeing 150% -- over 150% increase in our ads sales commitments. So, I think it's also worth noting that like ads against premium video, it's a proven model. So, if we take the potential size of that opportunity, the growth trajectories that we are seeing, that's what makes us so excited about ads being able to be one of those growing levers to support our sustaining healthy revenue and profit growth in the years to come….

On Netflix partnering with the Trade Desk vs. building their own walled garden…

…As to Rich's walled garden question, I would say we've learned not to be too rigid in our position. So, we're going to always evaluate and will evolve based on how our business is evolving and, frankly, how the ecosystem is evolving around us. But we believe these partnerships are very positive for us….

Going forward, Netflix should have a normalized output schedule

…So, a drumbeat so steady that when you're watching the last episode of whatever you're watching, you start expecting the next thing to be great, too. However, in the first half of this year, our lineup was much lumpier than we liked.

And that was primarily because of the work stoppage. It did hit UCAN the hardest, but there were some effects of that felt in production around the world. We're moving closer and closer to a more normalized output schedule now. Series a little more on track than film, but neither fully, fully recovered….

Giving the most value to the customer by providing the content immediately as they are released, as opposed to a theatrical release or weekly release schedule

…Look, I'm just going to reiterate, we are in the subscription and entertainment business. And you can see in our results it's a pretty good business, and it appeals to a very large segment of consumers and fans. Our top 10 films that premier on Netflix all have over 100 million views, among the most-watched films in the world.

It's our desire to kind of keep adding value to our consumers for their subscription dollar. We believe that not making them wait for months to watch the movie that everyone's talking about adds that value….

YouTube is a competitor, but also complementary to Netflix’s business

…When I look at YouTube specifically, I'd say look, we compete directly with YouTube for people's time, for the time they spend on that TV screen. But we have very different strengths.

And we continue to invest in ambitious premium content to grow our share of engagement. We think that Netflix is the best place for premium stories because we're the home to the best storytellers. We have an enormous reach, 600 million watchers. We assume the financial risk when you're making your content.

Our subscription model generates higher returns for creators. Those higher returns let them make more ambitious investments in their next projects. So, Netflix and YouTube, while we do compete for that time, we're interestingly complementary as well. So, we put up our trailers on YouTube, and they get a lot of viewing, which is great because it drives a lot of viewing on Netflix….

… I think that Netflix fulfills an important and different role for both consumers who want these great movies and TV shows but also for creators who want partners that can share in the risk that's inherent to bringing those stories to life. And if you think about some of the titles we'll launch this quarter, you mentioned a couple: Squid Game, Outer Banks, Black Doves. You mentioned A Hundred Years of Solitude, Senna, both coming from Latin America, which are huge, ambitious projects.

It's hard to imagine how those kind of big creative bets would be possible with YouTube's model. So, while it's certainly a competitive environment, that's absolutely true, but we feel our focus and our model, which is the best storytellers, ambitious premium storytelling, those work well for consumers and for creators while also generating significant operating margin for the business, too….

By paying talent upfront, Netflix assumes the financial risk and stands to benefit from potential success

…Look, we like our model and talent likes our model. It's so much more impactful for our business if we can make our films, our shows just a little bit better, so much more impactful than making them a little bit cheaper. Bela said this very clearly a couple of weeks ago to all the talent agencies.

We're not changing our compensation structure. Paying upfront, something that Netflix actually pioneered, benefits creators and it benefits Netflix. So, for creators, Netflix takes all the financial risks so that they can focus on making the best possible version of what they're working on. And for Netflix, that model enables us to attract the best talent in the world.

Now with all that said, we have been and we continue to be and we are open to more bespoke deals where talent is interested. Now they rarely happen because typically the talent chooses the upfront model. So, we think that we have the right model, and we are not looking to change it….

5. Takeaway

Netflix is in a strong position. Netflix has brought their revenue growth back to double digits through various initiatives such as password sharing crackdown and their ad-supported tier. To strengthen their offerings and to act as future growth levers, they are investing in developing games based on popular IPs (Squid Game, Virgin River), expanding into live programming (Mike Tyson vs Jake Paul, NFL and WWE). Their advertising business is growing and should be a more meaningful contributor to revenue in 2026 onwards.

Netflix is also profitable and is generating positive free cash flow, unlike most of their streaming competitors. A key indicator of Netflix arguably “winning” the streaming wars was when competitors decided to license its content to Netflix, at a time where studios were desperate to boost their bottom line. Importantly, Netflix’s share of viewership, even in the biggest countries, is still less than 10% of TV time. Overall, Netflix remains in a position of strength with room to grow and expand profitability.

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Disclaimer: Please note that none of the information provided constitutes financial, investment, or other professional advice. It is only intended for educational purposes. We have a vested interest in Netflix. Holdings are subject to change at any time.

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Table of Contents

1. About Costco

2. Business Analysis

3. Financial Analysis

4. Earnings Call Highlights

5. Takeaway

1. About Costco

Costco operates membership warehouses and e-commerce websites based on the concept that offering members low prices on a limited selection (~4,000 SKUs) of nationally-branded and private-label products in a wide range of categories will produce high sales volumes and rapid inventory turnover. When combined with the operating efficiencies achieved by volume purchasing, efficient distribution, and reduced handling of merchandise in no-frills, self-service warehouse facilities, these volumes and turnovers enable us to operate profitably at significantly lower gross margins than most other retailers.

Costco buys most of their merchandise directly from suppliers and routes it to depots or directly to their warehouses, creating freight volume and handling efficiencies, lowering costs associated with multi-step distribution channels.

The warehouses are designed in for economy and efficiency in the use of selling space, handling of merchandise and control of inventory. For example, merchandise is generally stored on racks above the sales floor, or displayed on pallets containing large quantities. Many consumable products are offered for sale in case, carton or multiple-pack quantities only. Moreover, by strictly controlling the entrances and exits with a membership format, Costco’s inventory losses, or shrinkage, are well below the industry average.

Costco’s merchandise and services are in the following categories:

Core Merchandise Categories (or core business):

• Foods and Sundries (including sundries, dry grocery, candy, cooler, freezer, deli, liquor, and tobacco)

• Non-Foods (including major appliances, electronics, health and beauty aids, hardware, garden and patio, sporting goods, tires, toys and seasonal, office supplies, automotive care, postage, tickets, apparel, small appliances, furniture, domestics, housewares, special order kiosk, and jewelry)

• Fresh Foods (including meat, produce, service deli, and bakery)

Warehouse Ancillary:

• Gasoline, pharmacy, optical, food court, hearing aids, and tire installation

Other Businesses:

• E-commerce, business centers, travel, and other

Costco is widely known for maintaining an average markup of 14-15% on its products, which keeps prices competitive and results in operating near breakeven or with minimal profit margins. Instead, most of Costco’s profits come from its annual membership fees.

2. Business Analysis

Traffic and Ticket

Traffic, or shopping frequency, increased 6.4% worldwide in Q4. This was driven by traffic increase of 5.6% in the US, 7.7% in Canada and 8.1% Other International.

Ticket, or average transaction size, decreased 0.9% worldwide. Ticket decreased by 0.3% in the US, 2.1% in Canada and 2.2% Other International. These include headwinds from gas deflation and foreign exchange. Adjusted for those items, ticket would be 0.5% worldwide and 0.6% in the US.

Membership

Paid Membership

Costco ended Q4 with 76.2 million paid household members, up 7.3% y/y and 136.8 million cardholders, up 7% y/y. Costco estimated about half of new member sign-ups in the year were under 40 years of age. This cohort has been growing since COVID and has lowered the average age of their members over the last few years. Costco members’ average is about 35-44 years.

Executive Membership

Executive Memberships are generally for members that are bigger spenders and are more frequent Costco shoppers. It’s priced at $130 annually, twice the amount of the normal membership fee of $65. However, Executive Members can earn a 2% reward based on their spending, capped at $1,000 annually, as well as other benefits.

Costco reached 35.4 million paid executive memberships, up 9.6% y/y. Executive members represent 46.5% of paid members, but 73.5% of worldwide sales.

Membership Renewal Rate

Membership renewal rates in US and Canada fell slightly to 92.9%, from 93.0% in the previous quarter. This was due to an online membership promotion that was run in 2023 which resulted in 200,000 new sign-ups. Digital promotions typically have lower renewal rates, and as those members entered the renewal rate calculation for Q4 2024, it had a negative impact on the overall renewal rate.

Membership renewal rates worldwide were 90.5%, unchanged from the previous quarter, with improvements in International offsetting the slightly negative in US and Canada.

Warehouses

Costco opened 14 new warehouses in Q4: 10 in the US, 2 in Japan, and one each in Korea and China. For the fiscal year 2024, Costco hit their target of 30 new warehouse openings, including one relocation, resulting in 29 net new warehouses.

For fiscal year 2025, Costco targets 12 of their planned 29 openings to be outside of the US. With three warehouses being relocations, Costco expects 26 net new buildings for the upcoming fiscal year.

3. Financial Analysis

Revenue

Costco delivered revenue of $79.7 billion in Q4, up 1% y/y.

Net sales for the quarter reached $78.2 billion, up 1% y/y. Adjusting for the extra week last year though, net sales would be up 7.3% y/y.

US comparable sales were up 5.3% or 6.3% excluding gas deflation. Canada comparable sales were up 5.7% or 9.3% excluding gas deflation and foreign exchange. Other International were up 5.7% or 9.3% adjusted. On a total company comparable sales basis, Costco grew 5.4% or 6.9% adjusted.

E-commerce sales were up 18.9% y/y or 19.5% y/y adjusted for foreign exchange

Membership fee income was $1.512 billion, representing a 0.2% increase y/y or an increase of $3 million. Adjusting for the extra week last year and foreign exchange, membership fee income was up 7.4%.

Profitability

Costco gross margin was higher y/y by 40bps, at 11.0% compared to 10.6% last year, and up 33bps excluding gas deflation.

Core was lower by 5bps and lower by 11bps excluding gas deflation.

Ancillary and other businesses was higher 44bps and 42bps excluding gas deflation. The increase was driven by gas and e-commerce. E-commerce benefited from strong sales growth, item mix and fulfilment productivity. Gas margins benefited from moderate tailwinds and lapping a slightly weaker quarter last year.

2% rewards was higher by 4bps or 3bps excluding gas deflation, indicating higher sales penetration from executive members.

LIFO was up by 5bps, with an $8 million LIFO credit in this quarter, compared to a $30 million charge last year.

SG&A was higher y/y by 8bps, coming in at 9.04% compared to last year’s 8.96%, and 2bps adjusted for gas deflation.

Operations component of SG&A was higher by 4bps, but flat excluding gas deflation. Higher wages went into effect for the last 6 weeks of the quarter in US and Canada, which was a headwind of approximately 4bps.

Central was higher by 3bps and 2bps without gas deflation. Stock compensation was flat y/y and preopening was higher 1bps but flat excluding gas deflation.

Operating income reached $3.0 billion, up 9% y/y. Net income was up 9% y/y, and excluding this year’s nonrecurring tax benefit and normalized for the extra week, net income was up 12.7%.

Cash Flow

Costco delivered a free cash flow of $1.38 billion, down 36% y/y. On a full 2024 fiscal year basis, was down by 1.7% from $6.75 billion in 2023 to $6.63 billion in 2024.

Balance Sheet

Costco’s cash position including short-term investments was $11.14 billion and total debt was $8.27 billion, resulting in a net cash position of $2.87 billion at the end of the quarter. An excellent balance sheet.

4. Earnings Call Highlights

Costco app is picking up traction

…Members are very excited about being able to check warehouse inventory via the Costco app….

…Our app was downloaded 3.5 million times in the quarter, bringing total downloads to approximately 39 million, and we recently upgraded the native search function on our U.S. mobile app, leading to a doubling of the click-through rate on search results.

Membership card scanners are increasing member sign-ups and member renewals

…And the membership card scanners installed at the front doors have delivered on the goal of speeding up the checkout process….

…We have seen some lift in member sign-ups from that. We've also seen a lift in renewals because before people get to the front end, now they're aware that my renewal is going to be due when I get to the registers, so members are very appreciative about that. They know that and they get up to the front, and they're not shocked by that process as well.

So improved productivity, improved interaction. And as we know, as our volumes grow, we're looking for everything we can find to use technology to help get our members through the front ends in a good, smooth manner….

…The purpose of the card readers at the front door, this is a system we've been using for over 2 years now in Europe and especially in the U.K. and we've piloted here in the U.S. for about 6 months. Several different benefits for it. It gives our operators real-time traffic counts throughout the day. So we're able to adjust front-end lines that we need to open and close lines based on the fluctuations of business. We can monitor our fresh foods a little better because we know what the traffic counts look like and so forth.

And it has also taken the friction of membership verification away from the front-end registers and move that to the front door, where we're able to look at people's membership status. We let them know if their renewals is due before they get to the front end. So we've realized some very nice, healthy front-end improvements in productivity, and it's allowed our operators to manage the business much better throughout the day….

Non-foods drove sales this quarter

…nonfoods led the way with the highest comparable sales in Q4. Our buyers have done a fantastic job finding new and exciting items at great values. Gold and jewelry, gift cards, toys and seasonal, home furnishings, tires and housewares, all were up double digits in the quarter. Health and beauty aids also performed well as we have expanded and elevated that category with new high-end SKUs, both online and in warehouse, including assorted luxury fragrances at a 30% to 70% value to retail.

Continued focus giving value to the customer

…Across the fresh departments, we saw high single-digit growth as our continued focus on value is resonating with our members. An example of this in the meat department is our Kirkland Signature Boneless Chicken Tenderloins, where we lowered the price 13% and saw a 21% lift in pounds sold….

… Our goal is always to be the first to lower prices where we see the opportunities to do so. And just a few examples this quarter include KS Standard Foil reduced from $31.99 to $29.99. KS Macadamia Nuts reduced from $18.99 to $13.99. KS Spanish Olive Oil 3-liter reduced from $38.99 to $34.99 and KS Baguette, 2-pack reduced from $5.99 to $4.99….

Costco is in the process of transitioning to locally produce SKUs in other Asian markets

We've also found success working with suppliers to localize production of bulky items such as water, paper and laundry detergents. By manufacturing these goods closer to the countries in which they're sold, both costs and emissions associated with the shipment of these goods are greatly reduced. This quarter, we introduced our new Japan-produced Kirkland Signature Paper Towels. In addition to the emissions benefits from no longer shipping millions of units of paper towels from the U.S. to Asia, the reduced freight allowed us to lower the price by approximately 30% or $8 per unit in that market.

As production ramps up, we are in the process of transitioning our other Asian markets to locally produce SKUs. Shifting the production country of this one product will result in annual member savings of $30 million.

The launch of Buy online and pick up for TVs in the US

The rollout of buy online and pickup in warehouse for TVs in the U.S. market was also completed in Q4. This allows same-day pickup of a new TV for members who prefer not to wait for delivery.

Costco Next continues to grow

Costco Next, our curated marketplace, while still small, continued to grow nicely in the quarter. We added 11 new vendors, bringing the total to 86 and adjusting for the extra week, gross sales grew nearly 40% year-over-year.

The positive impact of the membership fee increase will be only be apparent in the second half of fiscal year 2025

A brief comment on the membership fee increase that went into effect on September 1.

Due to deferred accounting, this will have minimal impact early in the year. The vast majority of the benefit will come in the back half of fiscal year 2025 and into fiscal year 2026.

Kirkland Signature should create a tailwind to overall margin as it continues to grow

…We continue to see the penetration grow. And it's in the high 20s now as it continues to grow as our penetration across the board goes….

…Obviously, we stay very disciplined about -- we have a cap on the margin that we expect to make on a Kirkland Signature product. But as that mix continues to grow, it definitely creates some overall tailwind in our margin overall. And I mentioned a couple of examples in the prepared comments. We're also seeing some really great opportunities as we're thinking more globally across our merchandising team is really working together and finding ways to buy more efficiently and in-country production that we mentioned…

Trends on member shopping patterns

…I think the encouraging thing for us is, as you know, as you look at our trends in the year-to-date, we have seen that as inflation has dissipated, our members have started to spend more on nonfood items, which is really encouraging in our mind….

…On the food side of things, we've definitely seen some signals that would suggest that members and consumers in general are maybe shifting a little bit of spend from food away from home to food at home. Under the food and the sundry side of our business, alcohol would still be relatively soft. But as I mentioned in my prepared remarks, we're seeing really strong growth in our ethnic food categories and also in Kirkland Signature products, particularly in the new ones that we've been introducing.

And then on the fresh side of things, really strong growth across meat, produce and bakery. I would say we've certainly seen a continued acceleration in some of those lower-cost protein items like poultry, cheaper cuts of beef like ground beef and pork….

Management’s view on the retail media opportunity

But we would see it as a significant opportunity over the long term, to drive new revenue. We will approach this probably a little bit differently than many others -- we'll be reinvesting the vast majority of those dollars as we always do to drive top line growth. And we think that will be a competitive advantage with our CPG partners because it will show them that every dollar they're spending is really intended to drive overall growth for the company. That being said, I do think it will help also with e-commerce business is typically less profitable, on this case, a way to offset some of those costs in delivery and fulfillment as well.

E-commerce has lower margins than traditional warehouse shopping

I would still say it's marginally, it's lower than the traditional shopping in the warehouse, and that's obviously intuitively makes sense given that we're doing more of the picking and shopping for the member. As I mentioned in the prepared remarks that we have seen some good improvements as we've grown our sales numbers, that's created some leverage in the model.

We're improving the efficiency of our fulfillment costs. So it is continuing on an improving trend over time because of the sales growth and the leverage that's creating, but also some of the improvements the team are making in the business to drive more efficiency as well.

Average wage of Costco’s employee in US and Canada

Currently, the average wage is just north of $30 an hour.

5. Takeaway

Costco’s value proposition remains strong. The company continues to grow its members, traffic and have high member renewal rates. Executive members which represent almost half of Costco’s membership base but account for 73.5% of sales continues to grow. Costco’s private label, Kirkland Signature, also continues to expand and contribute positively to margins. Costco is transitioning to locally source and produce products in their Asian markets, resulting in lower shipping costs and ultimately passing the reduced costs back to the customer in the form of lower prices.

Overall, Costco’s earnings reflect the company’s strength in an uncertain retail environment. Their strategic focus on giving back cost savings to the customer is reflected in continued membership growth and high renewal rates.

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Disclaimer: Please note that none of the information provided constitutes financial, investment, or other professional advice. It is only intended for educational purposes. We have a vested interest in Costco. Holdings are subject to change at any time.

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Table of Contents

1. About Adyen

2. Business Analysis

3. Financial Analysis

4. Earnings Call Highlights

5. Takeaway

1. About Adyen

Adyen is a technology company that operates a single, fully-integrated proprietary platform that provides functions in the payments stack including gateway, risk management, acquiring, processing, issuing and settlement services.

The typical payments landscape has been characterized by a fragmented patchwork of providers and legacy systems, where traditional platforms provide for separate gateway, risk management, processing and acquiring solutions. Adyen combines all these functions into one platform.

Traditionally, both payment service providers and merchants have been challenged with in-store and online/mobile payments running on different technology and systems. Adyen's platform has no such limitation, being built as a channel agnostic platform from day one. Adyen's platform provides the same back-end payment processing and settlement infrastructure for merchants whether their shoppers make purchases online, on their phones or in-store.

Traditional payments systems are a so-called 'black box', whereby transactions are either approved or declined – with little insights as to why that happened, especially as payment service providers are only one part of the value chain. In contrast, Adyen's control of the complete payments stack results in a high degree of transparency, including as to why transactions are rejected.

Furthermore, Adyen's visibility into the payments value chain allows the Company to gather data on shoppers' behaviors, which can then be used to generate actionable insights for merchants on how they can best serve their shoppers and optimize their systems and settings to achieve higher authorization levels.

Adyen mainly generates revenue from processing services (i.e., authorization, reconciliation, risk management, tokenization and payout services) and settlement services (i.e., underwriting settlement risk).

2. Business Analysis

Total Processed Volume

Given that Adyen takes a cut from processing payment volume, a key driver of the business is the amount of Adyen’s processed volume. The chart below shows how Adyen’s total processed volume has trended over time:

There’s been very strong growth over the past few years. Although there was a slight bump in growth in 2023, it was still double-digit growth, which management explained it was due to the price sensitivity in the competitive US market. Adyen stood their ground believing that their product provided more value, and total processed volume growth has bounced back strongly with 45% y/y in H1 2024.

On a related note, while the processed volume metric is not what Adyen runs the business on, there is underlying value in the information transactions contain. Adyen believes that their product offering strengthens as it scales, creating a network effect. This is because data enables technology to continually refine its ability to combat fraud, authenticate users, maximize successful payment completion, and improve customers total cost of ownership.

Further, in this period, Adyen’s global acquiring capabilities continues to grow, as they obtained additional licenses in India, and an acquiring registration in Mexico. As a reminder, Adyen does not outsource capabilities and functions, seeking to retain end-to-end control of the platform and remove third-party dependencies where possible. This takes long-term thinking, discipline and perseverance. This also explains why they have a huge amount of cash on their balance sheet – it’s easier to talk to regulators.

Take rate

Adyen’s take rate, defined as transaction revenue compared to transaction volume was 14.7 bps, down from 17.3 bps in H1 2023 and 16.3 bps in H2 2023. The decrease was driven primarily by merchant mix impacts. This is to be expected, as Adyen operates a tiered pricing model, where merchants get a discount for processing more volume. This is deliberate to gain market share, and it is why processed volumes and net revenue do not move in parallel.

Full-stack volumes

Full-stack volumes were 82% of processed volumes, up from 79% in H1 2023, aligning with the strategy of selling full-stack capabilities.

Adyen further splits total processed volume into three categories: Digital, Unified Commerce and Platforms.

Digital

Digital consists of processed volumes of non-platform merchants that process over 99.5% of their volumes online. Digitals volumes reached €399.9 billion, up 50% y/y, representing about 65% of total processed volume, making this the largest pillar. Adyen’s Digital volume growth was driven by, among other factors:

Solving for payment failures pertaining to subscription-model businesses

In subscription businesses, merchants face common problems relating to payment failures such as when a card expires or contains insufficient funds.

Adyen’s Real Time Account Updater ensures the cards are updated by continuously scanning for updated card details ranging from changes in expiration dates, card numbers, direct debit status, and even stolen notices.

Moreover, when a charge attempt is declined due to insufficient funds, Adyen’s systems would intelligently decide for an optimal retry time. An example cited was to attempt a date that affords time to refill, taking into account factors such as region and day of the month. In the case of the US, as most users are paid bi-weekly, typically on a Friday, Adyen managed to get an uplift in successful payments at the beginning and middle of each month.

Local Payment Methods (LPMs) – Importance of preferred payment methods

An increasingly important point for user conversion is ensuring that consumers are able to pay exactly as they want, and in the currency they want. Adyen’s recent Retail Report found that 55% of consumers abandon an online cart if they are unable to pay using their preferred method. This would differ across regions. For example, in North America, the UK and Australia, majority of the transactions are executed with credit cards. Austria and Netherlands, however, prefer bank payments. And for the developing countries in APAC where there’s a huge underbanked population, it’s likely that they will prefer non-bank forms of payments such as mobile wallets.

US debit capabilities – Optimizing for cheaper rates through alternative debit networks

What’s unique about the debit card industry in the US is that debit cards issued by major card schemes are required to be processed by two independent networks. This would drive up the costs of transactions due to premium interchange and scheme fees. Adyen helps merchants by using the multiple alternative debit networks available to optimize for cheaper conversion and rates.

Unified commerce

Unified Commerce segment is the processed volume of non-platform merchants processing at least 0.5% of their volumes via point-of-sale. Unified Commerce volumes reached €140.5 billion, an increase of 29% y/y, with point-of-sale volumes up 32% y/y. This represents about 23% of total processed volume.

Autonomous stores

Adyen reported the interesting use case of autonomous shopping, where consumers can tap their card or mobile wallet at an Adyen payment terminal upon entry to pre-authorize upcoming spending. Think of taking an item of a shelf and walking out of the store – without the need to queue or check out.

Growing Unified Commerce customers

• The number of Unified Commerce customers processing across channels at scale, being merchants processing at least €10 million on both POS and eCommerce, with over €50 million in total processed volume in the last 12 months, increased by 63, to 357 customers this period;

• The number of Unified Commerce customers processing in multiple regions reached 540, up 79 y/y; and

• The number of transacting Unified Commerce terminals reached 292,000, up 60,000 y/y.

Benefits of a consolidated touchpoint

Among the verticals, hospitality was the fastest growing, up 55% y/y. By consolidating all touchpoints in a single view, hotels are able to use real-time payment data to gain insights into where guests are coming from, their preferred method of payment, the spending amount or whether the trip is business or leisure. What this enables is for the hotel to be able to personalize offers or use cross-selling strategies, e.g., upgrading a room or providing transport.

Platforms

Platforms consists of processed volumes of customers processing at least 50% of their volumes via Adyen for Platforms. This pillar is mainly for software platforms (SaaS) and marketplaces. Platform users can sign up, sell, and get paid all in a single destination. Platforms handles the heavy lifting of onboarding users, contractors and businesses onto the platform, and even ensuring they are verified before conducting pay-out.

Platforms volume reached €79.1 billion, up 59% y/y. Excluding eBay volumes, Platforms volume growth would have been 91% y/y. It’s important to note that the super high growth rate is due to Platforms smaller size, representing only 13% of total processed volume.  

It’s notable that the vertical which displayed the most growth was food and beverage.

Some highlights for Platforms:

• The number of Platform business customers serviced reached 104,000 end-customers, up 55,000 y/y;

• The number of transacting Platform terminals reached 165,000, up 79,000 y/y; and

• The number of Platform customers processing over €1 billion reached 22, up 7 y/y.

Platforms is Adyen’s strategy to target the long tail of the market, being the SMEs. They believe that the adage that all companies will eventually become software companies requires slight tweaks; instead, they feel that every company will eventually run on an industry-specific software company. This is why Adyen has positioned Platforms early, essentially to capitalize on SMEs as traditional business models continue to digitalize.

3. Financial Analysis

Revenue

In H1 2024, Adyen’s net revenue was €913 million, representing a 24% y/y increase. The majority of growth was driven by growth with existing customers.

Net revenue contributions by region remained consistent y/y, as shown in the chart below.

North America was the fastest growing region (30%), followed by EMEA (25%), APAC (15%) and LATAM (2%).

Profitability

In H1 2024, operating expenses were €538.3 million, up 19% y/y from H1 2023.

Employee benefits were €347.5 million, up 22% y/y, reflecting the annualization of hires made in 2023 and the continued scaling of the Adyen team.

IT costs reached €22.4 million, up 19% y/y mainly due to costs related to data centers and investment in IT related equipment.

Adyen continues to commit to pledging 1% of net revenue to initiatives that support the UN SDGs.

Adyen’s hiring slowed, as they hired 37 net-new joiners, reaching a total of 4,233 Full Time Equivalents (FTEs). The majority of the new hires this period were located in North America in tech and commercial roles.

As a result, EBITDA reached €423.1 million, up 32% y/y from €320 million. EBITDA margin increased from 43% in H1 2023 to 46% in H1 2024, with operating leverage becoming more visible, mainly due to this period’s cooled hiring pace as well as fewer one-off operational expenses.

Net income reached €409.6 million, up 45% y/y, primarily due to an increase in finance income driven by the relatively higher interest rate environment and an increase in average overnight deposits held banks and central banks.

Cash Flow

Adyen delivered a free cash flow of €360.6 million, up 46% y/y.

Adyen’s capex was €42.3 million and 4.6% of net revenue, down from 7.6% in the previous comparable period, aligned with their capex policy of up to 5% of net revenue.

Balance Sheet

Adyen’s cash and cash equivalents reached €8.7 billion in H1 2024. After deducting the payables to merchants and financial institutions of €6 billion, Adyen’s net cash balance is about €2.7 billion, with no debt. A rock-solid balance sheet.

4. Earnings Call Highlights

New hires expected to contribute to net revenue growth but will take time

It will take some time for that hiring to be visible in our net revenues. So it's too early to say that it's already a big impact in the first half, but the early signs are good.

We see that the new hires are able to build pipeline and able to move that pipeline through the various phases of the sales cycle. So we do see good early signs of progress and expect that it will contribute to our growth over the coming years.

Adyen’s US debit capabilities is unmatched by the competition

Yes, on U.S. debit, the way how we build U.S. debit is to optimize at the one hand, for low-cost routing, and on the other hand, also for the highest authorization rates. And I think that functionality, the way how we've implemented it is unique.

I don't think that our competitors do that in the same way that we can do it, and that's also why we are very well positioned to work with our customers and offer it. We are continuously upgrading those connections because indeed these are multiple networks. And there's certainly some work to be done to get to the last stage where we want to be to have the optimal experience, but we already have a very strong offering for U.S. debit.

Adyen plans to hire more in H2 2024, but it’s not expected to have a significant impact on EBITDA margins

So in terms of the hiring, yes, we do plan to hire more in the second half. But in the scheme of things, it's still a relatively small number, compared to the overall team that we've built over the years. So I don't expect it to have a major shift on impact between H1 and H2, especially because EBITDA margin progression is typically seen on a 12-month rolling basis.

LATAM’s growth should improve longer-term given the investments made in acquiring in Mexico and Brazil

So I think, first of all, the places where we have offices, also, they help to sell into different regions. So the way how we recognize revenues. So revenues in Lat Am is indeed the revenues that we process locally in Lat Am, but for instance, Lat Am also sells into other regions, and that's not being reflected in that number.

So the offices are very successful. The fact that you see less of growth in Lat Am as an example is because we are -- continue to improve our connections there. So we have our own acquiring now in both Mexico and Brazil. That also means that we can further improve our products. So for instance, with anticipations, which is a key feature in the Brazilian market, we have been in a position now to make changes there, and we become more in a better competitive position. So for the long term, we are in a really good position, and I expect going forward that our growth rates also in Lat Am will further increase.

Strategy is on organic growth, rather than M&As

So we've always had an organic growth strategy. And the reason for this is that we strongly believe that building the infrastructure ourselves gives us full control. And the moment you would start to consolidate platforms, you always end up with a question like which platform are we going to terminate, how are we going to migrate customers. I think there are a lot of examples in this industry where that has been very painful or just not working.

Customers select us because of our performance and the fact that we have this full control. At the same time, we're never dogmatic, but for us, focusing on executing on our strategy, the things that we have already built, that is key to being successful. So I don't expect any change in our strategy so far.

Biggest parts of the non-full stack volumes are airlines, American Express and PayPal

As we shared in the past, our non-full stack volume today is mostly in industries where you weren't looking to do the acquiring in the past, like airlines, for example, or with certain payment methods. The biggest ones that come to mind are American Express and PayPal, where there's the option to do that as gateway volume.

Those still remain the biggest parts of the non-full stack volume. So it's not that we are employing some specific strategy around it. We've brought on most of the acquiring volumes on our own licenses over the years in the markets where we operate.

5. Takeaway

Processed volume growth remains strong across Digital, Unified Commerce and Platforms. The competitive advantage that Adyen has continues to show its strength by Adyen winning market share. And still, there’s room to grow. Even in their more mature markets of EMEA and North America, they only have single-digit market share. Adyen continues to invest to reduce the total cost of ownership for merchants through various ways. As the company ends their accelerated hiring phase, the benefits of that should become clear in the coming years, as the company targets EBITDA expansion to 50% or more by 2026. With an excellent balance sheet with no debt, Adyen remains a compounder for the long-term.

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Disclaimer: Please note that none of the information provided constitutes financial, investment, or other professional advice. It is only intended for educational purposes. We have a vested interest in Adyen. Holdings are subject to change at any time.

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1. About Datadog

Datadog is an observability and security software as a service (SaaS) platform for cloud applications that integrates and automates infrastructure monitoring, application performance monitoring, log management, user experience monitoring, cloud security and many other capabilities to provide unified, real-time observability and security for customers’ entire technology stack.

This cloud agnostic and easy to deploy proprietary platform is used by organizations of all sizes and across a wide range of industries. Among some of the use cases include:

• to enable digital transformation and cloud migration;

• drive collaboration among development, operations, security and business teams;

• accelerate time to market for applications;

• reduce time to problem resolution;

• secure applications and infrastructure;

• understand user behavior; and

• track key business metrics.

Companies across all industries are re-platforming their businesses to cloud native or hybrid on-premise and cloud infrastructures to enable the digital transformation with software applications. Historically, engineering teams have been siloed, making the development of next generation applications in dynamic cloud environments challenging.

Datadog was founded to facilitate collaboration among development and operations teams, enabling the adoption of DevOps practices. Since then, the company has continuously pushed to unify separate tools, building a real-time data integration platform to turn chaos of having uncorrelated data from disparate sources into digestible and actionable insights. The two slides below illustrate Datadog’s product expansion and innovation over time:

Datadog generates revenue from the sale of monthly or annual subscriptions to customers. The company employs a land-and-expand business model which enables customers to expand their footprint on a self-service basis. Datadog’s customers can enter into a subscription for a committed contractual amount of usage that is apportioned on a monthly basis, a subscription for a committed contract amount of usage that is delivered as used (i.e., billed based on actual usage until they reached the committed amount), or a monthly subscription based on usage.

Usage is measured primarily by the number of hosts or by the volume of data indexed. A host is generally defined as a server, either in the cloud or on-premise. Infrastructure monitoring, application performance monitoring and network performance monitoring products are priced per host, while logs products are priced primarily per log event indexed and secondarily by events ingested.

2. Financial Highlights

3. Business Highlights

Customer growth

Total Customer Growth

In Q2, Datadog reached 28,700 customers, up 10% from about 26,100 a year ago.

Large Customer Growth

Datadog's large customer base — defined as those with an Annual Run-Rate Revenue (“ARR”) of $100,000 or more — reached 3,390 at the end of the period, representing a 13% y/y increase. These large customers generated about 87% of the company’s ARR.

Note: ARR is defined as the annual run-rate revenue of subscription agreements from all customers at a point in time

Expanding within the existing customer base (Land and expand model)

Platform adoption

Datadog’s platform adoption strategy is trending positively. At the end of Q2:

• 83% of customers were using two or more products, up from 82% a year ago

• 49% of customers were using four or more products, up from 45% a year ago

• 25% of customers were using six or more products, up from 21% a year ago

• 11% of customers were using eight or more products, up from 7% a year ago

Dollar-based Net Retention Rate and Dollar-based Gross Retention Rate

A key metric to measure the propensity of Datadog’s customer relationships to expand over time is the dollar-based net retention rate (“DBNRR”), which compares our ARR from the same set of customers in one period, relative to the year-ago period. In other words, the DBNRR shows how well Datadog is retaining and expanding its business with the same set of customers. For example, a DBNRR above 100% means that Datadog is not only retaining its existing customers but also getting revenue expansion, which can come from increasing customer usage, or upselling additional products.

In Q2, the DBNRR was in the mid-110%s, similar to the past quarters. As recent as 2022, the DBNRR was in the mid-140%s. The decline in DBNRR was mainly due to slower usage growth from existing customers, which could be due to the uncertain macroenvironment. However, management stated that they’ve seen an increasing trend in recent quarters.

On the other hand, the dollar-based gross retention rate (“DBGRR”) measures the company’s retention rate excluding revenue growth from upselling or cross-selling additional products. In other words, it focuses mainly on the retention of the existing revenue base. Datadog’s DBGRR remained stable at the mid- to high 90%s.

Remaining Performance Obligations

Remaining performance obligations (“RPO”) are the aggregate amount of contracts allocated to performance obligations that are not delivered, or partially undelivered at a point in time. They include deferred revenue, multi-year contracts with future installment payments and certain unfulfilled orders against accepted customer contracts at a given period.

While management believes that revenue is a better indicator of business trends rather than billings and RPOs as those can fluctuate on a quarterly basis based on the timing of invoicing and the duration of customer contracts, RPOs can still be a useful indicator for future revenue. Growing RPOs could indicate business stability and be a proxy for customer satisfaction. Further, longer contract duration could be a positive sign of confidence in the company.

In Q2, Datadog’s RPO reached $1.79 billion, up 43% y/y, with contract duration generally increasing as customers choose more multiyear deals. Contract duration increased modestly compared to a year ago.

Billings reached $667 million, up 28% y/y, with billings duration roughly flat compared to the same period a year ago.

4. Financial Analysis

Revenue

Datadog delivered revenue of $645 million, representing a 27% y/y increase. Three thirds of the increase in revenue was driven by growth from existing customers, and the remaining quarter of the increase in revenue was attributable to growth from new customers.

Management stated that usage growth from existing customers was higher than usage growth in the year ago quarter. In the first half of 2024, usage growth was higher than in the first half of 2023. There was strong performance among Datadog’s largest customers as they continue to return to growth and strike a balance between new deployment and focus on optimization. The strongest growth was coming from the enterprise customers which accelerated over the past few quarters, while growth has been more stable for SMB and mid-market customers.

For context, enterprise customers have 5,000 employees or more, mid-market customers have 1,000 to 5,000 employees, and SMB have less than 1,000 employees.

Profitability Analysis

Gross margin increased to 81%, up from 80% a year ago, as revenue growth exceeded the growth of third-party cloud infrastructure provider costs due to cost savings.

Datadog reached an operating income of $12.6 million in Q2, up 157% y/y.

Operating expenses increased by $79.5 million to $509.2 million, up 18% y/y, primarily due to research and development and sales and marketing.

Research and development expense increased by $35.1 million, or 15% y/y due to an increase in personnel costs including allocated overhead costs for engineering, product and design teams as a result of headcount increase.

Sales and marketing expense increased by $39.6 million, or 27% y/y primarily due to an increase in headcount and advertising, marketing and promotional activities.

As a result of revenue increasing by $135.8 million, GAAP operating margin improved significantly to 2%, up from -4.3% a year ago. GAAP profitability has been maintained in recent quarters.

Cash Flow Analysis

Datadog reached a free cash flow of $160 million, up 6% y/y. The chart above shows Datadog’s improving free cash flow over time. Although far from a mature software company, its free cash flow margin is already at 25%. It is important to note though, that stock-based compensation was $135 million in Q2, which we’ll be keeping an eye on. Further, Datadog has net cash position of about $2 billion.

5. Earnings Call Highlights

AI-native customers are ramping up

Today, about 2,500 customers use one or more of our AI integrations to get visibility into their increasing use of AI. We also continue to grow our business with AI-native customers, which increased to over 4% of our ARR in June. We see this as a sign of the continuing expansion of this ecosystem and of the value of using Datadog to monitor the product environment. I will note that over time, we think this metric will become less relevant as AI usage and production broadens beyond this group of customers.

M&A strategy is expected to be more on small and medium-sized deals, and less on bigger deals

Because we have this platform strategy where we're building a consolidator, and we're bringing together many different use cases into one shared platform, we have very broad interest and a very ambitious road map in many different directions. So as a result, we cast a very wide net when it comes to M&A. There's many possible potential fits for us.

So historically, we've been very successful with doing a lot of small and medium-sized deals. At any point in time, we're going to look at a lot of deals that might be small or big. We expect the bigger deal to be fewer and far between, and the bar is very high for those. And today, we're also not looking into anything that would be very material to the business.

The best proxy for future demand in inference spending is the growth of the model providers and AI natives

I would say the best proxy you can get from the future demand there is the growth of the model providers and the AI natives because they tend to be the ones that currently are being used to provide AI functionality into other applications and largely in production environment. And so I always said they are the harbinger of what's to come.

Usage growth is trending upwards, with optimization mostly over, peaking around mid-2023

So when you look at the time series, the peak of the optimization was in Q2, Q3 last year, and we've had a time series of higher usage growth for our clients month-to-month since then. And that's continued through the first half of the year and into July.

Usage growth in enterprises is higher while SMB and mid-market has been more stable

…It's -- the usage growth, as we talked about, is stronger in the enterprise and in the larger users, but it has been fairly stable in the SMB. So we're seeing some more, when you look at the chart in the line, enterprise being -- usage growth being higher than it had been and SMB being stable….

… And for us, I would add that the digital natives are largely SMB and mid-market, they're not enterprise. And even when you look at the digital native, there's two stories, depending on whether you talk about the AI natives or the others. The AI natives are inflecting in a way that the others are not at this point. So today, we see this higher growth from AI natives and from traditional enterprises. And stable growth, but not accelerating, from the rest of the pack….

… Yes. I don't know that there's that much of a trend just yet to look at or there's too much to say at this point. This is just the way the numbers came up in the -- over the past quarter or so.

I would say, look, there's many reasons why the SMBs could be more careful in terms of the macro environment, the fact that there are less -- maybe less -- there's less runway -- immediate runway with consolidation, like things like that, compared to the larger enterprises. And some of them maybe are further along also in their cloud journey, so the growth there is more tied to their overall growth as opposed to their state of transition into next-gen AI and cloud environment. So these are all potential factors….

LLM observability has to be integrated with the rest of the stack because LLM doesn’t work in a vacuum

Yes, I think, so the first thing I'd say is we expect this market to change a lot over time because it is far from being mature. And so a lot of the things that might happen today in a certain way might happen 2 years in a very, very different form.

That being said, the way it works typically is customers build applications using developer tools, and there's a whole industry that has emerged around developer tools for -- and playgrounds and things like that for LLM. And so they use not one, but 100 different things to do that, which is fairly similar to what you might find on the IDE side or code editor side for the more traditional development, which is lots of different, very fragmented environment on that side.

When they start connecting the LLM to the rest of the application, then they start to need like visibility that includes the other components because the LLM doesn't work in a vacuum, it's plugged into a front end. It works with authentication and security. It works with -- connects to other system databases in other services to get the data. And at that point, they need it to be integrated with the rest of the observability.

For the customers that use our LLM Observability product, they use us for the rest -- all the rest of their stack. And it would make absolutely no sense for them to operate their LLM in isolation completely separately and not have the visibility across the whole applications. So it's -- at that point, it's a no-brainer that they need everything to be integrated in production.

Gross margins may fluctuate from quarter to quarter as new products are launched and optimized

…But essentially, what we said consistently is that gross margins have operated in a range, they've operated towards the top of the range. But there will be variability quarter-to-quarter as we launch functionality, often having to do with rolling out functionality and then optimizing it. And so the movement -- slight movements that we've seen quarter-to-quarter have been the result of that….

…Yes. There's definitely nothing to read into the small movements in the gross margin from a product mix perspective. A lot of what happened is we build new features, maybe some of you saw these new features, will have more compute impact and more storage impact or something else. Maybe also they won't be fantastically optimized on day one from an, I'll call, efficiency perspective. Or maybe sometimes, we'll focus more on building more things as opposed to optimizing them because they are the same people, same resources on our end that work on both. And so what you should expect to see some ebbs and flows on that number as we keep shipping new feature and then we keep optimizing.

In general, we feel good about the gross margins. We're not constrained in terms of what we can build by the margin profile we have. And also, should we need them, we have many levers to improve these margins as well. So we wouldn't read too much into the small changes. I would expect some of those small changes in the future. And in all, we feel good about that….

Three-thirds of growth is from existing customers as opposed to new customers

It's going to be 75-25. 25% from new, 75%, which would be what we said all along is that, as net retention recovers and usage growth is higher than the previous comparable period. As -- if you go back through our history, you will see that the amount from existing customers relative to new logos has generally increased.

6. Takeaway

Strong quarter from Datadog with continued customer growth and effective product upselling strategy with net retention rate above 110%. Although revenue growth has slowed down relative to 2020-2022, it’s still fairly strong at 27% y/y. Since the optimization for cloud spending seems to have peaked in mid- to late 2023, Datadog’s revenue growth could begin re-accelerating as cloud spending picks up.

Datadog has managed their costs and returned to GAAP profitability in recent quarters, while maintaining strong free cash flow. Overall, strong performance from the company with a large and growing TAM that is still in its early innings.  

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Disclaimer: Please note that none of the information provided constitutes financial, investment, or other professional advice. It is only intended for educational purposes. We have a vested interest in Datadog Inc. Holdings are subject to change at any time.

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1. About TTD

The Trade Desk is a self-service, omnichannel cloud-based software platform that enables advertisement buyers to create, manage, and optimize more expressive data-driven digital advertising campaigns across ad formats, including display, video, audio, native and social, on a multitude of devices, such as computers, mobile devices, and connected TV (“CTV”).

The company serves advertising agencies and other service providers for advertisers. The company mainly generates revenue by charging clients a platform fee based on a percentage of the client’s total spend on advertising.

2. Financial Highlights

3. Business Highlights

Of the above, the only two metrics that are disclosed quarterly are the client retention rate and the geographical revenue mix. The rest of the metrics in the above table are only disclosed on an annual basis.

Client Retention

The client retention rate this quarter was more than 95%, which was the case for the past 10 years consecutively.

Geographical Revenue Mix

The revenue mix remains somewhat stable with 88% in the US and 12% in international. As management claimed that about two thirds of the total addressable market is outside of North America, the revenue mix should trend towards international over time.

Gross Spend by Industry

The Trade Desk’s gross spend continues to be well-diversified across major verticals as shown in the chart below.

Updates on CTV:

• The Trade Desk to be one of Netflix’s main programmatic partners for advertisers, as part of Netflix’s effort to expand their buying capabilities

• FOX announced an expanded partnership with The Trade Desk through integration of UID21 and OpenPath2 across FOX brands and the AdRise technology platform

• E.W. Scripps is streamlining its programmatic ad buying process for advertisers through the adoption of OpenPass3 and UID2, making it the first CTV publisher to adopt OpenPass; and

• At Forward ‘24 in Canada, CBC announced its Olympics inventory will be available programmatically for the first time ever via The Trade Desk.

Updates on UID2:

• Roku announced its adoption of UID2, allowing advertisers to implement more precise targeting and a secure means to facilitate data collaboration with Roku Media;

• SiriusXM Media announced Pandora Media as the first audio publisher to adopt UID2;

• LG Ad Solutions announced it is integrating UID2 to enable advertisers to leverage their first-party data across LG’s extensive audience network in a privacy-conscious manner; and

• TF1, M6, and Media Figaro, three of the leading broadcasters and publishers in France, announced their adoption of EUID to help their advertisers run effective campaigns with improved targeting capabilities.

4. Financial Analysis

Revenue

The Trade Desk delivered revenue of $585 million, representing a 26% year-over-year increase. This growth was mainly driven by higher gross spend in the current year on the platform, which in turn was driven by new clients and more campaigns executed by existing clients.

Profitability Analysis

In Q2 2024, The Trade Desk reached an operating income of $95 million, up 127% y/y.

Operating expenses increased by $67 million to $489.8 million, up 16% y/y, mainly due to platform operations expense and sales and marketing.

Platform operations expense increased by $24 million, or 27% y/y driven by an increase in hosting costs due to support costs related to:

• the increased use of the platform by clients;

• increased use of features by the company’s technical teams in platform support; and

• investment in new data centers to support the continued platform growth.

Sales and Marketing expense increased by $22 million, or 20% y/y due primarily due to an increase in personnel costs as the company increases headcount growth in support of their sales efforts.

As a result of revenue increasing by $120 million, almost double compared to operating expenses of $67 million, operating margin improved significantly to 16.2%, up from 9% a year ago.

Cash Flow Analysis

Overall, free cash flow for The Trade Desk is strong, with the trailing last 12 months (LTM) free cash flow margin at 22.5%. The company has $1.5 billion of cash and cash equivalents on the balance sheet, with no debt.

5. Earnings Call Highlights

Companies are being pressured for higher return on investments with less ad spend

…Nonetheless, CMOs are being asked from CFOs to deliver growth. CFOs are saying, we have to have real growth now, and that puts more pressure on the CMOs than ever. And of course, they're in an environment with inflation and some consumer weakness and some higher interest rates and a bunch of other macro themes that investors know all too well.

But those pressures are actually creating a better macro environment for us. All of those things, including some of the pressures on the sell side, create a buyer's market. And the pressures on CMOs create data-driven, rational buying. And they're looking to us to help them put their data to work and make more informed decisions. They're being asked to do more with less. They're being asked by their CFO to prove that the ROI is better. It's no wonder they're coming to us asking for joint business plans and saying, how can we build long into the future, especially when there seems to be no other company in the world more focused on the open Internet and helping to monetize that for all the great premium content owners on the open Internet, but of course, representing the buyer to help them figure out what is best for them…

…One top CMO talks about the difficulty of what he described as "the illusion of growth" where it appears that companies are doing well, stock prices are up, but the average consumer feels more constrained than ever in terms of purchasing power. That has significant implications on how companies market products from pricing to packaging to advertising. And perhaps more than anything else, it's putting a premium on the efficacy of marketing.

More than ever, CMOs have to prove that what they are doing is working. And increasingly, that means revising traditional dependencies on cheap reach and all the legacy mechanisms and beliefs that support cheap reach. It means embracing the power of programmatic data-driven advertising. We are convinced that the only scaled response to all the changes CMOs and the agencies are facing is to embrace data-driven buying…

There’s a disconnect between Big Tech Walled Gardens (i.e., Facebook, Instagram, YouTube)’s cheap reach and longer-term business results

For many marketers dealing with macro uncertainty over the last few years, this cheap reach solution has been attractive. But more and more CMOs, especially those at the world's leading brands, have become concerned with the flaws in this strategy for a number of reasons. A few of those. First, much of the mass scale is predicated on cheap, owned and operated content, which is often just user-generated videos or social content that is essentially free to produce and ultimately, mostly lower quality and higher risk for large advertisers.

The big tech owners of this content have an inherent incentive to direct demand toward it because the margins on it are so significant. But it's often not where the marketers target customers spend most of their time nor where they're the most leaned in.

Second, after several years of uncertainty, the business flaws of cheap reach are more apparent than ever. If a CMO has been going to the CEO or CFO and saying, look, I was able to drive down costs, and the scorecard says it's working. But then a couple of years later down the road, business results are not consistent with those marketing metrics. And as a result, there's a disconnect. This is arguably one of the main reasons that CMOs have the shortest tenure on the C-suite. Marketing performance data predicated on cheap reach that doesn't match up with the business outcomes over time.

Consumers are shifting to the Open Internet i.e., CTV and digital audio…

…One of the trends that, that report showcases is the massive shift over the last 4 years in terms of where consumers are spending their digital time. It used to be that consumers spend about 60% of their time within walled gardens and 40% on the open Internet. That trend has completely reversed since the pandemic. Why? Well, in large part, it's because of the mass consumer shift to emerging premium open Internet channels such as CTV and digital audio.

In the U.S., over the last decade or so, consumers have doubled the time they spend in these 2 channels alone to around 5 hours per day, significantly more than they spend on social media…

…On average, in the U.S., consumers spend around 3 hours per day listening to music, podcasts and other types of digital audio. And yet digital audio commands a small fraction, by comparison, of advertising demand. But that's beginning to change, especially as companies like Spotify make investments to enable more programmatic and automated buying, as they highlighted in their most recent earnings call…

…and engagement on CTV and digital audio is much higher quality

Companies like Spotify, Netflix, Disney, Warner Bros., Discovery and others have fundamentally changed the way that consumers behave. I would also add that the time that consumers spend in these channels is much more leaned in and engaged than the time spent on channels such as social media. You're much more leaned in when watching the latest hit show or the Olympics or listening to your favorite podcast than you are watching endless short videos of teenagers pulling wheelies on the West Side Highway.

CTV was the leader in growth, followed by mobile, display and audio

From a scale channel perspective, CTV, by a wide margin, led our growth again during the quarter. In Q2, video, which includes CTV, represented a high 40s percentage share of our business and continues to grow as a percentage of our mix. Mobile represented a mid-30s percentage share of spend during the quarter. Display continued to represent a low double-digit percent share of our business, and audio represented around 5%.

Broad-based growth in ad spend across verticals

We saw strong performance in the majority of our verticals, particularly in home and garden, food and drink, and shopping. Family relationships and healthy living verticals were both below average. Overall, we continue to see healthy trends across our verticals, and we continue to believe there is opportunity for us to gain share in the verticals we serve.

The walled garden playbook doesn’t work in CTV because the CTV market is fragmented

…I would argue that the decisions that they made are to join the open Internet and to recognize that the walled garden playbook doesn't really work in CTV.

And the reason why the walled garden playbook doesn't work in CTV is because nobody has enough share to be draconian or even to target well, even to be effective, because of the fact that TV is fragmented. There is no one single player that has anything close to what Facebook does in social or what Google has in search.

So as a result, if you house a bunch of inventory there and then don't enable people to bring data to work from other places, it will not perform as well. And so it is true that more inventory has been coming online in CTV, but what is -- what sometimes I think is lost, especially in discussions about CPMs, is that there is a greater desire for marketers to find their exact audiences than they've ever been or there has ever been.

Amazon’s conflict of interest with ad buyers

And they're look -- they have to look across all these different pools of inventory in order to find the small pieces in each of them that give them the efficacy that they need to be effective and to put their dollars to work as effectively as possible. That's only possible when you're looking across the entire open Internet. And when you consider the fact that perhaps our greatest strategic asset is that we are objective, that we don't own media, and so as a result, we can help the biggest brands in the world objectively figure out whether they should buy Hulu or Netflix or Spotify or Yahoo.

And that objectivity is in greater compromise, I would argue, at Amazon than anywhere. And that's in large part because not only does Amazon have its own owned and operated inventory as it relates to CTV inventory. It also operates as the second-largest search engine in the English-speaking world, and then it also competes in building products with almost every major advertiser in the world.

Note: Amazon has both an ad inventory and a Sell-Side Platform (“SSP”). The SSP sells both Amazon’s and other advertisers’ inventory, which means Amazon and other advertisers compete for inventory. Given that Amazon has a data advantage through its Bing search engine, and the fact that it competes with other advertisers in building products (Amazon’s private label products), it can easily use the information in their favor when it comes to ad inventory decisions.

Along with CTV, retail media is a threat to walled gardens due to the accuracy of measurement in ads

And I've mentioned before that I believe the 2 greatest threats to walled gardens and the bringing down of their walls are: number one, CTV for all the reasons we've talked about on this call; and number 2, retail media.

And the retail media is important because it changes the measurement game. So a few times in the prepared remarks and in the comments, I've mentioned some of the flaws of measurement inside of walled gardens. But if you're actually connecting the ads that you show to a specific user and then the purchase that they make later, it becomes much more irrefutable to show the connection between the ad shown and the purchase. And retail just has tremendous promise for that.

And not only is that good for advertisers, but that is also good for retailers who are all trying to find their way to compete in the digital world and to compete with the Amazons of the world. So our partnerships with companies like Walgreens and Walmart and Target and so many others are just great examples of the opportunities that exist in retail media, and we have merely scratched the surface

Publishers absolutely need to have an identity and authentication strategy

And for publishers, they need to have an identity strategy and an authentication strategy. And what I mean by that is when it comes to authentication, if you're not in CTV or audio where 100% of your users log in, and that's not true of all CTV players but that's true of most of them, then you need to find a way to get them to log in and to address consent. In other words, ask them if you can provide them with personal content and create a quid pro quo that makes it worth it.

Everybody needs to be developing that strategy, especially if you're in browser right now. So they've been given a bit more time, but they need to use that time to act. And even if Google does nothing more, you have to use that time to act simply because things like UID are so effective for CTV and audio and other channels and for those that have log-ins even in the browsing world, that it will make it so that we prioritize that media over those that are just dependent on cookies or something else. So naturally, over time, it becomes very important.

And this is more important for those in journalism than anywhere. Just because they tend to move very slow and not be technological innovators, so it becomes really important that they respond to that. And advertisers, if you're not putting your data to work with an identity strategy, in other words, how can I use my data in a consumer-friendly way and pricing-centric way, how can I put my data to work so that I can do better marketing?

If you're not thinking about that and honoring the sort of sacred relationship that you have with your customers, then you're doing it wrong and you're likely to lose to those that are doing that. So there's a fair amount of pressure on both buy side and sell side to sort of get with the times. And all of this change is happening so fast, but all of that has created an opportunity for us at an unprecedented pace. And that's part of the reason why we're so bullish.

6. Takeaway

The Trade Desk’s results this quarter were strong overall, with robust revenue growth, strong free cash flow and a solid net cash balance sheet. The growth in advertising spend is broad-based across well-diversified business verticals. The company’s client retention rate has been maintained at above 95% for the past 10 years, which speaks volumes to the quality of the service they provide.

Additionally, there’s a long runway for growth ahead for the company. CTV is the largest and fastest growing channel; both Netflix’s ad-supported plan rollout and Amazon Prime setting the ads-supported plan as default are making it increasingly clear that being ad-funded is the way forward. Digital audio remains an emerging channel for ad spend. Despite US consumers spending around 3 hours a day listening to digital audio, it currently captures only a small share of advertising dollars.

The retail media opportunity is another growth driver, which enables deterministic insights and verifiable information about consumers. By plugging in or activating shopper data with closed-loop attribution, marketers can now measure, optimize (in midflight) and attribute ad campaigns to business outcomes. Moreover, there is significant room for international growth. While the majority of The Trade Desk's revenue comes from the U.S., two-thirds of global advertising dollars are spent outside North America

Overall, this is a company with strong fundamentals that seems well-positioned for long-term growth.

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Disclaimer: Please note that none of the information provided constitutes financial, investment, or other professional advice. It is only intended for educational purposes. We have a vested interest in The Trade Desk Inc. Holdings are subject to change at any time.

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BETI continues to increase efficiency for clients

…One example is an existing client who has been with us for 6 years. This is a 2,500-employee company that recently adopted Beti. Since allowing their employees to do their own payroll, they reduced their payroll team by half, going from a process that took roughly 4 days before Beti to merely hours with Beti. Beti continues to evolve and raise the bar as we add more functionality and connections to solve complex decisioning. And we are seeing increased inbound inquiries from prospective clients….

BETI’s international expansion to Canada, Mexico, Ireland and the UK

…On the international front, we continue to make meaningful progress in the geographies that we rolled out in the last 12 months. Beti is now available for employees in Canada, Mexico, Ireland and the U.K. We continue to win new clients with domestic and foreign employees, thanks to our investments in our global HCM product and our native international payroll….

…[On adding more countries] As we develop them and as certain countries have certain factors that go into their own employment law, so -- but as we develop these countries, absolutely, we would expect that to be happening….

Clients in Canada are the only locally domiciled country that doesn’t have a US base connection

…Now you're asking if we've sold a client that has 0 U.S. employees and they're just in the country with 0 domestic employees? Is that your question? You may have fallen off. I'm going to answer that question. I assume it was. For sure, Canada, I believe we've had the clients that just have that. That was our first one released. I would be surprised at this point if we have a client just in Mexico or the U.K. or Ireland that doesn't have a U.S. base connection. But I would expect in Canada, we would have some of the talent….

BETI adoption continues to increase

…Yes, it continues to go up every month. I mean we're -- again, we're adding more and more clients. And each client that starts, they're starting with greater Beti usage than we have in the past. And so -- and those that are using it and have been using it, it continues to go up. And so with good technology that's easy to use, usage continues to move forward. Of course, we do have a percent of our client base still that may not be receiving the full benefit that it may have to offer at this point just because it's not the right time for them or what have you or it doesn't fit specifically with their initiatives. And so those clients are meeting them where they live.

And sometimes they do come on. Again, I talked on the call about a 2,500-employee company that finally said yes. It reduced their labor cost in regards to working the payroll system by half, and they went from 4 days of working on payroll to merely hours. So that's available to everyone out there. But again, we're servicing clients where they are right now today, and that's what we're focused on. And we'll move forward with clients on their time line, not ours. And then when it comes to new prospects coming in, we want them to receive the full value that we have to offer so that they can achieve that ROI, which is available only through Beti for new clients…

GONE automates the time-off process, saving time for clients

…GONE, the industry's first fully automated time-off solution, was recently recognized as a Globee award winner for transforming the time-off process. It connects highly complex, traditionally disparate solutions and leverages decisioning logic to automatically approve, deny or warehouse employee time-off requests. Time-off decisions are a hassle for everyone within an organization unless you use GONE.

Thanks to GONE, employees get immediate decisions, and managers gain back time and increased scheduling visibility. HR and payroll no longer have to track down managers to verify and decision requests. And GONE significantly reduces after-the-fact liabilities and related costs. The C-suite benefits from increased confidence in operations and resource management, driving improved productivity and reducing liability.

We have a retail client with over 100 stores where each managers control time-off requests differently. The client enabled GONE and built unique rules per store to ensure each manager was in control of their appropriate coverage. Now these managers no longer need to take direct action on request, and when the payroll team is prepping payroll, they've eliminated the need for all follow-ups. Their payroll manager stated, GONE to Beti to the next level. Since implementing GONE, this client has automated over 1,000 time-off decisions bringing up hours of nonproductive time. I'm very excited about GONE and its ability to streamline time-off requests for the businesses across the globe….

Ramping up the sales team

On the sales side, we are seeing strong momentum. Our new outside sales reps are winning more deals earlier than ever before, and we've sold significantly more units in 2024 than we did the same time last year. Just this month, we had our top sales week in company history. Sales is energized. And last week, we added our largest sales class of new reps, placing 67 sales reps in the field across the country. I'm excited about the enthusiasm across our sales division heading into the back half of the year….

…So we're better staffed in sales than what we've been in probably 5 or 6 years. And what I mean by that is having all teams with the sales manager in it, fully staffed, and then just the number of staff that we have on each. And so Amy Vickroy took over sales and had been with us for 14 years prior to that. She took over sales in April, and since that time, has really got them in a position -- us in a position on the sell side where we're strong from a staffing perspective, and again, our sales tactics and techniques to be able to go out there and even sell more as we're differentiated in the industry….

Strategy is to maximize value for the client before upselling more products

And so it really depends on if I'm working with the client that has not yet gone through the client value achievement strategy fully or if I'm working with the client that has.

And so that's not to say that they can't provide opportunity and additional -- that they don't have additional revenue opportunities with each client. It's just there are certain methods that we go through today to ensure that clients are achieving that before we just sell them.

Paycom focuses on solving and automating problems for clients first, subsequently discovering the revenue opportunity

And so I guess we focus on problems to solve and what we want to automate. That's where we start regardless of whether or not that's in our current system of innovation or whether or not that's something new that we had. And so we start with what problem are we solving. And so when you're looking at automation, it's across the entire suite.

But it will include additional module opportunities. But those develop as you're doing the right thing, and then you're at the end of your process, you're able to discover the ROI for each and see if there is a revenue opportunity for that. We don't start with the revenue opportunity. We start with automating problems for our clients and solving problems. And sometimes, we get to share in those problems we solve through additional revenue opportunities.

Opportunistically buying back shares at lower prices

…During the second quarter and into July, the valuation of our stock dropped below that of slower growth and lower margin peers. We opportunistically took advantage of the low stock price to repurchase approximately 790,000 shares between April 1 and July 31 for $120 million. Since July 1 of last year, we have repurchased approximately 2.3 million shares, representing approximately 4% of total shares outstanding. Nearly 2 million of that has been repurchased since November of last year. Earlier this week, we increased our buyback authorization to $1.5 billion and extended it for another 2-year period. We will continue to be opportunistic buyers of our stock if and when we see dislocations in valuation relative to our peers…

Capex to be 11-12% of revenue for 2024; to be single digits for 2025

…Yes. I mentioned that we just finished the last building. We've got a couple more projects throughout the end of the year. So kind of as we talked earlier, what we thought the percent would be for the year, somewhere in that 11% to 12%, probably still thinking that. As we look at next year, we really don't have any large projects on the plan. So we mentioned even on the last call that we would expect CapEx to be potentially single digits next year as a percent of revenue….

Takeaway

While revenue growth continues to take a headwind from BETI’s cannibalization, Paycom’s financials are solid with strong free cash flow generation and a healthy balance sheet with no debt. BETI adoption continues to pick up and international expansion is underway. The extent that BETI increases efficiency for clients, more so than the competition, is the extent that they should be successful. In our view, management is taking the long-term view with BETI. Lowering costs for customers through BETI will mean less revenues for Paycom, in the short-term. Taking a longer perspective though, adding more value to the customer and gaining their trust could lead to much bigger gains. The focus on the customer is spot on, and this quote by Jeff Bezos, founder of Amazon feels appropriate:

"If you're long-term oriented, customer interests and shareholder interests are aligned."

At the current valuation, the market is pricing in the lower growth rates, leaving opportunity for Paycom to surprise on the upside. The company has also been buying back shares rather aggressively. As Paycom continues to execute well on adding new clients, expanding to new countries and cross-selling more products, the drawdown in stock price could be an opportunity for long-term investors in hindsight.  

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Disclaimer: Please note that none of the information provided constitutes financial, investment, or other professional advice. It is only intended for educational purposes. We have a vested interest in Paycom Software Inc. Holdings are subject to change at any time.

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Stores

Improved operating margin for North America stores business

If we look at profitability of the core North America stores business, we actually improved our margin again quarter-over-quarter in Q2. The overall North America segment operating margin decreased slightly due to increased Q2 spend in some of our investment areas, including Kuiper, where we're starting to manufacture satellites we'll launch into space in Q4…

North American unit growth meaningfully outpaced sales growth

While consumers are being careful on price, our North American unit growth is meaningfully outpacing our sales growth, as our continued work on selection, low prices and delivery is resonating. So far this year, our speed of delivery for Prime customers has been faster than ever before, with more than 5 billion units arriving the same day or next day.

The Amazon flywheel: Focus on lowering cost to serve improves selection, further providing the opportunity to lower cost to serve

…I continue and the team continues to believe that we have the opportunity to expand the margin in our Stores business. And as I've said on a number of the calls that we've done, it's not going to happen in 1 quarter. It's not going to happen in one fell swoop. It's going to take work over a long period of time.

But I think that 1 of the silver linings, if you will, about 1.5 years ago in the ricochet of the pandemic and all the growth that we had and the cost to serve challenges that we had was it really forced us to reevaluate everything in the network and really, even our most closely felt beliefs over a long period of time. And what it did was it unveiled a number of opportunities that we believe we have to keep driving cost to serve down.

And the first one that you've seen play out over the last year or so has been the regionalization of the U.S. network. And I think one thing to remember about that is that while it's had even bigger impact than maybe we theorized when we first architected it, we're still not done fully honing it. There's a lot of ways that we continue to optimize that U.S. regionalization that we think will continue to bear lower cost to serve.

But at the same time, we found a number of other areas where we believe we can take our cost down while also improving the customer experience. One of the great things about regionalization was it not only took our cost to serve down, but it meaningfully changed the speed with which we're able to get items to customers. And so we have a number of those other opportunities.

Another example of that is regionalizing our inbound network, which is also going to lower our cost to serve and get items more close to end users and diminish the amount of time it takes to get them to customers. We have a number of things that we're working on that allow us to combine more units per box, which lowers our costs as well and a lot of customers like that better because it's better for the environment, having more units per box.

So I think we have a lot of opportunities to continue to take down our cost to serve. And strategically and philosophically, just 2 other things as you were alluding to that question. I think that from our perspective, as we're able to take cost to serve down, it means that we're able to afford to have more selection that we're able to offer to customers. And there are a lot of lower ASP items there, average selling price items, that we don't stock because they're not economic to stock with our current cost to serve.

But as we work hard to make progress like we are on lowering our cost to serve, that allows us to add more selection. And we see this time in and time out that we add -- when we add more selection, customers actually consider us for more of their purchases and spend more with us down the line.

By lowering cost to serve, Amazon can add more low average selling price (ASP) selection

As we lower our cost to serve, we can add more low ASP selection that we can support economically, which, coupled with our fast delivery, puts Amazon in the consideration set for increasingly more shopping needs for customers.

International segment’s path to profitability

…This [operating margin] increase is primarily driven by our established countries as we improve our cost structure with better inventory placement and more consolidated shipments. Additionally, our emerging countries continue to expand their customer offerings, leverage their cost structure and invest in expanding Prime benefits. We are pleased with the overall progress of these countries as they make strides on their respective paths to profitability…

…You mentioned we're at about $300 million profit for the quarter. That is up about 390 basis points year-on-year from a margin perspective. And as we talked about in the past, there's a number of countries at different stages of existence and maturity there. And so I think you're seeing continued progress certainly on a year-over-year basis with both our established countries.

So the U.K., Germany and Japan, in particular being sizable contributors to that business, continued improvement and build out there, similar to the factors we talked about with the U.S., focused on operational efficiency while expanding the customer experience. And then in the emerging countries, as we've said over the past several quarters, we launched about 10 countries over the last 7 years, really focused on, again, expanding that customer experience, building out the Prime member benefits while building scalable solutions for customers. And so I think in both that established and emerging areas, seeing good progress year-over-year and working for further improvement there…

Advertising

Aim to have meaningfully fewer ads by improving relevance and performance. Advertising is already a >$50b annual run rate business, but it’s only beginning

For perspective, we've added over $2 billion in advertising revenue year-over-year and generated more than $50 billion in revenue in the trailing 12 months. Sponsored ads drive the majority of our advertising revenue today, and we see further opportunity there. Even with this growth, it's important to realize we're at the very beginning of what's possible in our video advertising.

In May, we made our first appearance at the upfronts, and we're encouraged by the agency and advertiser feedback on the differentiated value we offer across our content, reach, signals and ad tech. With ads and Prime Video, the exciting opportunity for brands is the ability to directly connect advertising that's traditionally been focused on driving awareness, as is the case for TV, to a business outcome like product sales or subscription sign-ups.

We're able to do that through our measurement and ad tech, so brands can continually improve the relevance and performance of their ads. While ads have become the norm to streaming video, we aim to have meaningfully fewer ads than linear TV and other streaming TV providers. And of course, for customers preferring an ad-free experience, we offer that option for an additional $2.99 a month.

Advertising is a key contributor to profitability

Advertising remains an important contributor to profitability in the North America and international segments. And we saw strong growth on an increasing larger revenue base this quarter. We continue to see opportunities that further expand our offering in areas that are driving growth today like sponsored products as well as newer areas like Prime Video ads.

AWS

AWS growth is reaccelerating as companies’ cost optimization efforts are mostly over, the shift from on-prem to cloud continues, and companies are looking to leverage AI

We're continuing to see 3 macro trends drive AWS growth. First, companies have completed the significant majority of their cost optimization efforts and are focused again on new efforts.

Second, companies are spending their energy again on modernizing their infrastructure and moving from on-premises infrastructure to the cloud. This modernization enables builders to save money, innovate at a more rapid clip and drive productivity in most companies' scarcest resources, developers. This is the flip I've talked about in the past, where the vast majority of global IT spend today is on-premises, and we expect that to keep inverting over time. With the broadest functionality, the strong security and operational performance and the deepest partner ecosystem, AWS continues to be customers' partner of choice and the biggest beneficiary of this flip from on-premises to the cloud.

And third, builders and companies of all sizes are excited about leveraging AI. Our AI business continues to grow dramatically with a multibillion-dollar revenue run rate despite it being such early days, but we can see in our results and conversations with customers that our unique approach and offerings are resonating with customers.

… But I do think that we have seen the lion's share of the cost optimization happen.

And I also do believe that pre-pandemic we were on this march where most companies are trying to figure out how to modernize their infrastructure, which really means moving from on-premises to the cloud because they can save money and invent more quickly and get better developer productivity. And then the pandemic happened, and people were in survival mode. And then a difficult economy came, and people were trying to save money. And we just see people going back to asking themselves why aren't we taking this low hanging fruit here. I mean it makes -- I don't want to run my own data centers. I can actually be more cost effective and invent more quickly for my customers if I'm using the cloud. And AWS with just a lot more functionality, stronger operational performance and security, which really matters to customers as well and a deeper partner ecosystem continues to be the partner of choice as people are moving to the cloud.

And I think the generative AI component is in its very early days. It's -- as I said, we kind of sometimes look at it and say that it's interesting that we have a multibillion-dollar revenue run rate already in AI, and it's so early. But if we look at the amount of demand that we have from customers right now, it's very significant. So I think all 3 of those things have a chance and will likely continue over time. And we'll see where that growth rate nets out over the next number of years.

I think that the -- one other thing I would say about that, too, Mark, is that the business today, as I mentioned, it's a $105 billion revenue run rate business. About 90% of the global IT spend is still on-premises. And if you believe that equation is going to flip, which I do, there's a lot of growth ahead of us in AWS as the leader in all those dimensions I mentioned. But I also think that generative AI itself and AI as a whole, it's going to be really large.

I mean it is not something that we originally factored when we were thinking about how large AWS could be and unlike the non-AI space, where you're basically taking all of this infrastructure that's been built on premises over a long period of time and working with customers to help them migrate it to the cloud, which is a lot of work by the way, in the generative AI space, it's going to get big fast, and it's largely all going to be built from the get-go in the cloud, which allows the opportunity for those businesses to continue to grow…

On right-sizing capacity for AI investments: Amazon’s receiving significant early signals that customers need more capacity

I think on the question about investment in AWS and on the AI side, I think where I'd start is, I think, one of the least understood parts about AWS over the last 18 years has been what a massive logistics challenge it is to run that business.

If you think about the fact that we have about 35 regions and think of a region as multiple -- a cluster of multiple data centers and about 110 availability zones, which is roughly equivalent to a data center, sometimes it includes multiple and then if you think about having to land thousands and thousands of SKUs across the 200 AWS services in each of those availability zones at the right quantities, it's quite difficult. And if you end up actually with too little capacity, then you have service disruptions, which really nobody does because it means companies can't scale their applications.

So most companies deliver more capacity than they need. However, if you actually deliver too much capacity, the economics are pretty woeful, and you don't like the returns of the operating income. And I think you can tell from having -- we disclosed both our revenue and our operating income in AWS that we've learned over time to manage this reasonably well. And we have built models over a long period of time that are algorithmic and sophisticated that land the right amount of capacity. And we've done the same thing on the AI side.

Now AI is newer. And it's true that people take down clumps of capacity in AI that are different sometimes. I mean -- but it's also true that it's not like a company shows up to do a training cluster asking for a few hundred thousand chips the same day. Like you have a very significant advanced signal when you have customers that want to take down a lot of capacity.

So while the models are more fluid, it's also true that we've built, I think, a lot of muscle and skill over time in building these capacity signals and models, and we also are getting a lot of signal from customers on what they need. I think that it's -- the reality right now is that while we're investing a significant amount in the AI space and in infrastructure, we would like to have more capacity than we already have today. I mean we have a lot of demand right now, and I think it's going to be a very, very large business for us…

…For the first half of the year, CapEx was $30.5 billion. Looking ahead to the rest of 2024, we expect capital investments to be higher in the second half of the year. The majority of the spend will be to support the growing need for AWS infrastructure as we continue to see strong demand in both generative AI and our non-generative AI workloads…

Custom silicon improves price performance for customers

On the custom silicon point, it's really interesting what's happened here. And it's also our strategy and approach here has been informed by running AWS for 18 years. When we started AWS, we had and still have a very deep partnership with Intel on the generalized CPU space. But what we found from customers is that they -- when you find a -- an offering that is really high value for you and high return, you don't actually spend less, even though you're spending less per unit. You spend less per unit, but it enables you, it frees you up to do so much more inventing and building for your customers. And then when you're spending more, you actually want better price performance than what you're getting.

And a lot of times, it's hard to get that price performance from existing players unless you decide to optimize yourself for what you're learning from your customers and you push that envelope yourself. And so we built custom silicon in the generalized CPU space with Graviton, which we're on our fourth model right now. And that has been very successful for customers and for our AWS business, is it saves customers about -- up to about 30% to 40% price performance versus the other leading x86 processors that they could use.

And we saw the same trend happening about 5 years ago in the accelerator space in the GPU space, where the products are good, but there was really primarily 1 provider and supply was more scarce than what people wanted. And people -- our customers really want improved price performance all the time. And so that's why we went about building Trainium, which is our training chip, and Inferentia, which is our inference chip, which we're on second versions of both of those. They will have very compelling relative price performance.

And in a world where it's hard to get GPUs today, the supply is scarce and all the schedules continue to move over time, customers are quite excited and demanding at a high clip, our custom silicon, and we're producing it as fast as we can. I think that's going to have very good return profile just like Graviton has, and I think it will be another differentiating feature around AWS relative to others.

Prime Video and Live Sports

Emmy nominations and the NBA deal

Our storytelling is resonating with our hundreds of millions of monthly viewers worldwide, and the 62 Emmy nominations Amazon MGM Studios recently received is another supporting data point…

…And we continue to see momentum in live sports. We recently announced 11-year landmark deals with the NBA and the WNBA.

Pharmacy

Expanded RxPass to MediCare members

On the pharmacy side, I think you're right that you're seeing that business continue to grow and to get more resonance with customers. And I think it was always a relatively natural extension for us to build a pharmacy offering from our retail business. But I think a lot of what you see in the business has grown really quickly, a lot of what you've seen is that the work that the team has done on the customer experience over the last 18 months has really paid off.

Customers love the customer experience of Amazon Pharmacy. And we -- especially, by the way, when you think about the experience and the speed and ease with which you can order versus walking into a pharmacy, in a physical store, if you walk into pharmacies and -- in cities today, it's a pretty tough experience with how much is locked behind cabinets, where you have to press a button to get somebody to come out and open the cabinets for you and a lot of shoplifting going on in the stores.

So the combination of what's happening in the physical world and how much improved we've made our pharmacy experience is driving a lot of customer resonance and buying behavior, I think also you see us continuing to expand there. We expanded our RxPass package and program to Medicare members, and that program allows customers and members to be -- Prime members to be able to get up to 60 common medications for just $5 a month. And we continue to launch same-day delivery of medications to cities. We have them in 8 cities, including Los Angeles and New York today with plans to expand to more than a dozen cities by the end of the year. So we're seeing a lot of growth there, and we're very optimistic about it.

Project Kuiper

Expect to start shipping production satellites end 2024

…for Project Kuiper, our low Earth orbit satellite constellation, we're accelerating satellite manufacturing in our facility in Kirkland, Washington. We've announced a distribution agreement with Vrio who distributes DIRECTV Latin America and SKY Brazil to offer Project Kuiper satellite broadband network to residential customers across 7 countries in South America. And we continue to field significant demand for the service from enterprise and government entities. We expect to start shipping production satellites late this year and continue to believe this could be a very large business for us.

Takeaway

A very solid quarter for Amazon with low double digit revenue growth (keeping in mind that Amazon’s annual revenue is more than half a trillion dollars), expansion in operating margin as the company manages their costs, and strong free cash flow generation. The North America segment expanded operating margin and management believes there’s room for further expansion. The International segment’s path to profitability remains on track. Advertising is already a $50 billion ARR, high margin business that is still in the early stages. AWS growth continues to pick up with cost optimization efforts largely being over and companies being excited about AI. Moreover, the Amazon flywheel continues to be in effect as the company reinvests to lower cost to serve and returning value to the customer, which only further enhances Amazon’s gigantic moat. While already a huge business, Amazon remains a core holding with lots of opportunity for growth.

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Disclaimer: Please note that none of the information provided constitutes financial, investment, or other professional advice. It is only intended for educational purposes. We have a vested interest in Amazon.com Inc. Holdings are subject to change at any time.

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Meta AI

Meta AI use cases range from utilitarian to creative

Some of the use cases are utilitarian like searching for information or role-playing difficult conversations before you have them with another person. And other uses are more creative like the new Imagine Yourself feature that lets you create images of yourself doing whatever you want in whatever style you want. And part of the beauty of AI is that it's general, so we're still uncovering the wide range of use cases that it's valuable for.

Meta AI will improve engagement in existing products and as Meta AI scales, monetization should follow

So realistically, for things like Meta AI or AI Studio, I mean, these are things that, I think, will increase engagement in our products and have other benefits that will improve the business and engagement in the near term.

But before we're really talking about monetization of any of those things by themselves, I mean, I don't think that anyone should be surprised that I would expect that, that will be years, right? It's just -- I think that that's like what we've seen with Reels. It's what we saw with all these things.

But I think for those who have followed our business for a long time, you can also get a pretty good sense of when things are going to work years in advance. And I think that the people who bet on those early indicators tend to do pretty well, which is why I wanted to share in my comments the early indicator that we had on Meta AI, which is, I mean, look, it's early. Last quarter, we -- I think it just started rolling it out a week or 2 before our earnings call. This time, we're a few months later.

And what we can say is, I think, we are on track to achieve our goal of being the most used AI assistant by the end of this year. And I think that's a pretty big deal. Is that the only thing we want to do? No. I mean we obviously want to kind of grow that and grow the engagement on that to be a lot deeper, and then we'll focus on monetizing it over time. But the early signals on this are good, and I think that that's kind of all that we could reasonably have insight into at this point.

Creating your own tailored AI agents to help businesses and creators engage with more people

An important part of our vision is that we're not just creating a single AI but enabling lots of people to create their own AIs. And this week, we launched AI Studio, which lets anyone create AIs to interact with across our apps. I think the creators are especially going to find this quite valuable. There are millions of creators across our apps, and these are people who want to engage more with their communities, and their communities want to engage more with them. But there are only so many hours in the day.

So now they're going to be able to use AI Studio to create AI agents that can channel them to chat with their community, answer people's questions, create content and more. So I'm quite excited about this. But this goes beyond creators, too. Anyone is going to be able to build their own AIs based on their interests or different topics that they are going to be able to engage with or share with their friends.

Business AIs are the other big piece here. We're still in alpha testing with more and more businesses. The feedback we're getting is positive so far. Over time, I think that just like every business has a website, a social media presence and an e-mail address, in the future, I think that every business is also going to have an AI agent that their customers can interact with. And our goal is to make it easy for every small business, eventually every business, to pull all of their content and catalog into an AI agent that drives sales and saves them money. When this is working at scale, I think that this is going to dramatically accelerate our business messaging revenue.

AI Infrastructure

Expect significant capex growth in 2025

We anticipate our full year 2024 capital expenditures will be in the range of $37 billion to $40 billion, updated from our prior range of $35 billion to $40 billion. While we continue to refine our plans for next year, we currently expect significant CapEx growth in 2025 as we invest to support our AI research and our product development efforts.

Better to be early building out AI infrastructure than to risk being late

Another major area of focus is figuring out the right level of infra capacity to support training more and more advanced models. Llama 3 is already competitive with the most advanced models, and we're already starting to work on Llama 4, which we're aiming to be the most advanced in the industry next year. We are planning for the compute clusters and data we'll need for the next several years. The amount of compute needed to train Llama 4 will likely be almost 10x more than what we used to train Llama 3. And future models will continue to grow beyond that.

It's hard to predict how this trend -- how this will trend multiple generations out into the future. But at this point, I'd rather risk building capacity before it is needed rather than too late given the long lead times for spinning up new infra projects. And as we scale these investments, we're, of course, going to remain committed to operational efficiency across the company.

Building AI infrastructure with fungibility

The other thing I would say is we're continuing to build our AI infrastructure with fungibility in mind so that we can flex capacity where we think it will be put to best use. The infrastructure that we build for GenAI training can also be used for GenAI reference -- inference. We can also use it for ranking and recommendations by making certain modifications like adding general compute and storage. And we're also employing a strategy of staging our data center sites at various phases of development, which allows us to flex up to meet more demand and less lead time if needed while limiting how much spend we're committing to in the outer years. So while we do expect that we are going to grow CapEx significantly in 2025, we feel like we have a good framework in place in terms of thinking about where the opportunities are and making sure that we have the flexibility to deploy it as makes the most sense.

Why Meta Open Sources AI

Like I talked about, I think -- the reason why open sourcing, this is so valuable for us is that we want to make sure that we have the leading infrastructure to power the consumer and business experiences that we're building. But the infrastructure, it's not just a piece of software that we can build in isolation. It really is an ecosystem with a lot of different capabilities that other developers and people are adding to the mix whether that's new tools to distill the models into the size that you want for a custom model or ways to fine-tune things better or make inference more efficient or all different other kinds of methods that we haven't even thought of yet, the silicon optimizations that the silicon companies are doing, all the stuff. It's an ecosystem.

So we can't do all that ourselves. And if we built Llama and just kind of kept it within our walls, then it wouldn't actually be as valuable for us to build all the products that we're building as it's going to end up being. So that's the business strategy around that. And that's why we don't feel like we need to necessarily build a cloud and sell it directly in order for it to be a really positive business strategy for us. And part of what we're doing is working closely with AWS, I think, especially did great work for this release. Other companies like Databricks, NVIDIA, of course, other big players like Microsoft with Azure and Google Cloud, they're all supporting this.

And we want developers to be able to get it anywhere. I think that that's one of the advantages of an open source model like Llama, is it's not like you're locked into one cloud that offers that model whether it's Microsoft with OpenAI or Google with Gemini or whatever it is. You can take this and use it everywhere, and we want to encourage that. So I'm quite excited about that.

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Facebook

Groups and Marketplace are driving engagement with young adults on Facebook

…I'm particularly pleased with the progress that we're making with young adults on Facebook. The numbers we're seeing, especially in the U.S., really go against the public narrative around who's using the app. A couple of years ago, we started focusing our apps more on 18 to 29 year olds, and it's good to see that those efforts are driving good results…

…So building products with young adults in mind has been a core priority area for the Facebook team in recent years, and we've been very encouraged to see these efforts translate into engagement growth with this cohort. We've seen healthy growth in young adult app usage in the U.S. and Canada for the past several quarters. And we've seen that products like Groups and Marketplace have seen particular traction with young adults. Posting to Groups in the U.S. and Canada has been growing. That's been boosted mainly by young adults. And we also see that they are active users of Marketplace, which has benefited from product improvements and strong demand for secondhand products in the U.S….

Moving towards a single, unified recommendation system across Facebook

…This quarter we rolled out our full-screen video player and unified video recommendation service across Facebook -- bringing Reels, longer videos, and Live into a single experience. This has allowed us to extend our unified AI systems, which had already increased engagement on Facebook Reels more than our initial move from CPUs to GPUs did. Over time, I'd like to see us move towards a single, unified recommendation system that powers all of the content including things like People You May Know across all of our surfaces. We're not there, so there's still upside -- and we're making good progress here.

Threads

Threads is about to hit 200m MAU

…Another bright spot is Threads, which is about to hit 200 million monthly actives. We're making steady progress towards building what looks like it’s going to be another major social app. We're seeing deeper engagement and I'm quite pleased with the trajectory here…

Reminder that Meta’s product cycle is different, usually takes several years to scale before focusing on monetization

Threads, I think it's another example of something that it got off to about as good of a start of any app that I can think of. I think it was the fastest-growing app to 100 million people. And it's a good reminder that even when you have that start, the path from there to 1 billion people using an app is still multiple years. And that's our product cycle.

And I think that that's something that is a little bit different about Meta in the way we build consumer products and the business around them than a lot of other companies that ship something and start selling it and making revenue from it immediately. So I think that's something that our investors and folks thinking about analyzing the business, if needed, to always grapple with, is all these new products. We ship them and then there's a multiyear time horizon between scaling them and then scaling them into not just consumer experiences but very large businesses.

But the thing that, I think, is just super exciting about Threads is that we've been building this company for 20 years, and there are just not that many opportunities that come around to grow 1 billion-person app. I mean there are, I don't know, maybe a dozen of them in the world or something, right? I mean there are certainly more of them outside the company than inside the company, but we do pretty well, and being able to add another one to the portfolio if we execute really well on this is just really exciting to have that potential.

WhatsApp

WhatsApp now has more than 100 million MAUs in the US

So the WhatsApp stat, I think, is really important as a business trend just because the United States punches above its weight in terms of it's such a large percent of our revenue. So before, WhatsApp was sort of the leading messaging app in many countries around the world but not in the U.S. And I think now that we're starting to make inroads into leading in the U.S. as more and more people use the product and realize that, hey, this is a really good experience, the best experience for cross-platform communication and groups and on all these different things, I think that that's going to just mean that all of the work that we're doing to grow the business opportunity there over time is just going to have a big tailwind if the U.S. ends up being a big market. So that's one reason why it's really relevant.

Meta Smart Glasses

Ray-Ban Meta Smart Glasses showing early traction

…and Ray-Ban Meta smart glasses are showing very promising traction with the early signals that we are seeing across demand, usage and retention, increasing our confidence in the long-run potential of AR glasses…

…Ray-Ban Meta glasses continue to be a bigger hit sooner than we expected, thanks in part to AI. Demand is still outpacing our ability to build them, but I'm hopeful that we'll be able to meet that demand soon…

…On the smart glasses, EssilorLuxottica is a great partner. We are now in the second generation of the Ray-Ban Meta glasses. They're doing well, better than I think we had expected, and we expected them to grow meaningfully from the first generation, so that's been a very positive surprise. And I think part of that is that it's just well positioned to dovetail well with the AI revolution that we're seeing and offering all kinds of new functionality there. So that was great.

But EssilorLuxottica is a great company that has a lot of different products that we hope to be able to partner with to just continue building new generations of the glasses and deepen the AI product and make it better and better. I think there's a lot more to go from here. And compared to what we thought at this point, it's doing quite well compared to, I think, what it needs to be, to be like a really leading piece of consumer electronics. I think we're still early, but all the signs are good…

Takeaway

Meta continues to be a key beneficiary of the AI revolution. As the technology is still relatively nascent, there’s likely to be loads of upcoming product innovation. Meta’s core business remains strong with recommendation and efficiency improvements from AI. Business messaging from WhatsApp, Threads, and Meta AI are potentially the next levers for growth. Their Reality Labs segment continues to be loss making, but Meta Smart Glasses shows early promising traction as demand outpaces supply.

Meta’s playing the long game here by investing in the AR/VR space and building out their AI infrastructure. As Zuck noted, it’s better to build out capacity earlier before it’s needed, than to risk being late. For now, Meta is executing well on its core advertising business while investing for the future. It’ll be interesting to see how the race for the development of the next computing platform develops with Meta being the front runner.

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Disclaimer: Please note that none of the information provided constitutes financial, investment, or other professional advice. It is only intended for educational purposes. We have a vested interest in Meta Platforms Inc. Holdings are subject to change at any time.

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Netflix had a fairly strong quarter: revenue continues to grow, operating margins continues to expand, and free cash flow remains strong. However, this wasn’t always the case. Here’s a chart showing how those metrics have trended over time:

Operating Leverage and the Value Translation Mechanism

Although Netflix’s revenue has always been healthy, the same cannot be said about their free cash flow. For context, back in Q4 2014, the company came to the realization that original content (as opposed to licensed content) was their most efficient content; original content cost less money relative to their viewing metrics than most of their licensed content.

Netflix then decided to grow their original content spend which required more upfront cash, dampening free cash flow for years. It took them about five years for their investments in original content to mature, and with the help of the pulled forward demand from the Covid-19 pandemic in 2020, free cash flow was finally positive. In Q4 of 2020, they explained that they no longer needed to raise external financing for their day-to-day operations. And finally in Q3 of 2021, Netflix guided to be sustainably free cash flow positive in 2022 and beyond.

Similarly, Netflix’s operating margin has been on a strong uptrend. In the most recent quarter, Netflix raised their operating margin guide to 26%, up slightly from 25%. What’s more impressive is that it isn’t done expanding. Netflix committed to continually expand operating margins every year. From the Q2 2024 shareholder letter:

Our goal is to increase our operating margin each year, though the rate of expansion will vary year to year.

To broadly visualize the flywheel that Netflix spins, here’s a little diagram:

The above illustrates that content is turned into engagement; management calls this process the value translation mechanism. As the flywheel goes: content is produced, and the value translation mechanism extracts the most business value out of the content, turning it into revenue dollars for Netflix.

One way is through paid sharing. It may seem hypocritical of Netflix to be cracking down on password sharing because this was the same company that tweeted the following back in 2017:

This was another great example of how Netflix can be quick to completely change their stance when the facts change (another being anti-advertising); when the pandemic pulled forward demand, subscriber growth and revenue slowed, Netflix needed to crackdown on password sharing to tap into the estimated over 100 million additional households that were essentially using Netflix for free.

Netflix is now at the point where they’ve operationalized paid sharing, that is, they view paid sharing as part of the standard product experience. One point to note though, is that Ted Sarandos, co-CEO of Netflix, talked about how they anticipated engagement to take a hit from paid sharing. This, however, was not the case as engagement held steady, which probably speaks to the quality of the product.

Another way is through sign-up flows, which is the user experience that a consumer has when they want to sign up for Netflix.  Gregory Peters, co-CEO of Netflix, explained that they found that multiple improvements over the last few quarters meant significant incremental revenue gains.

We can probably expect management to experiment with a variety of ways, amongst others, such as plan optimization, pricing, merchandising and ads revenue.

Advertising Continues to Scale

Netflix’s advertising segment continues to grow and they are on track to achieve their critical-scale goals for all of their ad countries in 2025. Peters described that there were two main fronts on the ad segment: go-to-market capability and the product and technology stack. Peters on the earnings call:

And there's sort of 2 main fronts here. One is our go-to-market capability. So we're adding more sales folks, we're adding more ads operation folks, building our capabilities to meet advertisers. A big component of that is giving advertisers more effective ways to buy Netflix. It's a big point of feedback that we heard from advertisers. So by adding demand sources that are already integrated into their processes and their systems, that just makes it easy for them to buy. And in some cases, that was a threshold item for them to buy in us, so we're going to expand the number of buyers as a result of that.

And then the other big area of growth for us is the sort of product and technology stack. We mentioned we're building our own ads server now. We're excited to launch that in Canada this year and then the rest of our ads markets in '25. That unlocks a whole set of innovations that we expect that are focused on a better user experience for our members on those ad tiers and better advertiser features. So think a lot about this as targeting relevance, more capabilities in that space as well as thinking about how do we do ROI, ROAS, incrementality measurements, all the things that we want.

For now, ads average revenue per member (“ARM”) is lower than the non-ads ARM. The reason for this is because Netflix has been scaling their ads so rapidly that they’re behind on inventory. And as they scale up their ads, Peters claimed that engagement on their ads plans is very similar to their non-ads plans; here’s Peters again:

…our engagement on our ads plans is very similar to what we see on our non-ads plans. That's close to the approximately 2 hours of viewing per member per day across all the plans that you can calculate globally from our engagement reports. So you should think of that as roughly how our ads plan members are engaging as well.

Again, the fact that engagement has not fallen significantly with ads suggests that there is an untapped market; ads offer a lower entry point to be more accessible for more people. Perhaps the question should be: why didn’t Netflix offer advertising earlier?

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Netflix’s Sports Play             

Once upon a time, Netflix did not touch sports; they didn’t like the economics of live sports. This was understandable, given that live sports can be very costly; major leagues command astronomical fees and so rights acquisition would be expensive. Until now, the only sports play they’ve made is storytelling.

This changed through Netflix’s venture into sports through the NFL games and WWE. Keep in mind though, that this isn’t through the conventional route, it’s through an event-based model, which is more profitable. Sarandos elaborates on sports as an event-based model:

Well, hopefully, exactly the way we're doing it: by making these Netflix events, not necessarily taking on a lot of tonnage from any one league but actually making these games, events, like having 2 NFL football games on Christmas Day and 2 great games, the Chiefs and the Steelers and the Ravens and the Texans, they're both going to be great games, and it really creates a lot of real excitement with the service, and it's one day of football.

So when I look at that and think along those lines, you can see how we solved for that in our WWE deal, which was economics that we like and live with and can grow into and contemplate with that expansion of cost and viewing would be, in that case, as long as 20 years if we want it to be. So I think it's really not a matter of there's an automatic disconnect between you can't do sports and have profit. It's very difficult to have big league sports and profit when you offer them in entire seasons. But when you offer them in this event model that we're building on, we're really excited about our opportunity to do that without the risk that you're talking about right now.

Games

Their games segment continues to grow and engagement looks strong. Here’s Peters with an update on games:

Games is a big market. It's almost $150 billion ex China and Russia, and not including ad revenue, which we aren't participating in, in our current model. And we're getting close to 3 years into our gaming initiative, and we're happy with the progress that we've seen. We've had set ourselves pretty aggressive engagement growth targets. And we've met those, exceeded those in many cases. In 2023, we tripled that engagement. We're looking good in our engagement growth in '24, and we've set even more aggressive growth goals for '25 and '26.

But worth noting that, that engagement and that impact on our overall business at the current scale, it's still quite small. And it's also probably worth noting that the investment level in games relative to our overall content spend is also quite small. And we've calibrated the growth in investment with the growth in the business impact. So we're being disciplined about how we scale that. So now obviously, the job is to continue to grow that engagement to the place where it has a material impact on the business.

I think you've seen this trajectory with us before, whether it's been a new content genre like unscripted or film or maybe getting the content mix right for a particular country, you can think about Japan or India, which we're now in an amazing place through the hard work of our teams there. We continually iterate. We refine our programming based on the signals we get from our members. And if you look over several years with that model, we can make a huge amount of progress.

We've launched over 100 games so far. We've seen what works, what doesn't work. We're refining our program to do more of what is working with the 80-plus games that we currently have in development. And one of those things that really is working is connecting our members with games based on specific Netflix IP that they love. And this is an area that we've been able to move in quickly in a particular space, which is interactive narrative games. These are easier to build. And we place those in a narrative hub that we call Netflix Stories. Q2, we launched Virgin River and Perfect Match. Starting this month in July, we're going to launch about 1 new title per month into Netflix Stories, and this is amazing IP like Emily in Paris and Selling Sunset. And we have lots more, including very different types of games yet to come in the quarters and years ahead.

Moreover, Netflix hinted that games could be able to influence the story of upcoming content; Sarandos on the potential influence of games:

But I think our opportunity here to serve super fandom with games is really fun and remarkable. I think the idea of being able to take a show and give the superfan a place to be in between seasons and even beyond that, to be able to use the game platform to introduce new characters and new storylines or new plot twist events, now you could do those kind of things and then they can then materialize in the next season or in the sequel to the film. It's a really great opportunity and a rare one where 1 and 1 equals 3 here. And to kind of replicate some of the success we've seen building fandom and with live events and consumer products, this actually fits really nicely into that. So I'm really excited to see where this goes.

The potentially big thing for games could be the IP expansion of their content. It’s likely that Netflix is trying replicate a Disney-like environment where the content translates into merchandise, dine-in restaurants, theme parks, and games. While possible, we’ll have to wait and see.

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Disclaimer: Please note that none of the information provided constitutes financial, investment, or other professional advice. It is only intended for educational purposes. We have a vested interest in Netflix. Holdings are subject to change at any time.

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