Jeremy Chia, Author at The Good Investors : Page 5 of 20

Can You Make Money By Investing in a No-Growth Company?

Should you pay up for a growth stock or look for bargains among stocks that are not growing. Here’s the low down on which investing style works.

We know that investing in high-growth companies can be very rewarding. But there are more ways to make money than investing in growing companies.

A classic example

A great example of a company that has not grown but has still given shareholders sizeable returns is Vicom .

Vicom is a vehicle inspection company based in Singapore. It is mandated by Singapore laws that all cars in the country have to undergo an inspection either annually or once every few years depending on the age of the car. A majority of the vehicle inspection centres in Singapore are run by Vicom, giving the company close to a 75% market share in the sector.

However, because of its relatively high market share, Vicom has limited opportunities to grow. Moreover, in recent years, the Singapore government has targeted zero vehicle growth on the roads to reduce congestion. This has limited the expansion in the addressable market for vehicle inspection in Singapore.

I also suspect that Vicom’s inspection business is regulated by the government, which limits the company’s ability to increase its prices too aggressively.

Because of these reasons, Vicom’s business has been stable but growth has been non-existent. The table below shows Vicom’s revenue and profit since 2012.

The company’s revenue and profit have barely budged for a decade. Yet shareholders who bought Vicom’s shares in 2012 have made a healthy profit.

A decade ago, the company’s share price was S$1.13. Today, they are norht of S$2. As such, Vicom’s shareholders have enjoyed capital appreciation of 82%. In addition, shareholders have collected a total of S$0.751 per share in dividends, which translates to a 66% yield based on the S$1.13 share price.

What’s the catch?

Shareholders who held on to Vicom’s shares for the past 10 years had earned a total return of 148%. And that’s even excluding any potential returns from reinvested dividends.

So why were shareholders so well-compensated despite Vicom not growing in the past decade?

Firstly, Vicom’s shares were trading at a low price a decade ago. At that price, investors could scoop up shares relatively cheaply and earn a decent return simply by collecting dividends.

Secondly, Vicom’s management decided to reward shareholders by paying a much higher dividend per share over time. Vicom had accumulated large amounts of cash on its balance sheet over the years and had little use for it. You can see this play out over the years as Vicom’s dividend payout ratio rose and exceeded 100% in four of the last five years. Management’s decision to pay shareholders a larger dividend caused Vicom’s share price to appreciate as investors were willing to pay a higher price given the higher dividends.

From this, we can see that when investing in no-growth companies, shareholders need to buy at a low valuation and hope for a rerating in the share price to make a capital gain. Oftentimes, a catalyst needs to occur for the share price to appreciate. In Vicom’s case, an important catalyst was management’s change in stance toward its dividend payout ratio.

If you buy Vicom’s shares today, it is unlikely that its share price will appreciate at the rate it did in the past, given the already high valuation of the shares today and the limited opportunity for further dividend growth given the already-high payout ratio.

What to look out for when investing in no-growth companies

Investing in companies that are not growing can still be rewarding. But it is important to know that not all no-growth companies will perform as Vicom did.

When looking at slow-or-no-growth companies, one of the main things to look out for is a low share price. If a company is trading at an unreasonably low multiple, even if its earnings don’t grow, the share price can still appreciate over time.

Next, when investing in slow-or-no-growth companies, it is important to look at the company’s cash position and dividend payout ratio. A company that has more than sufficient cash on its balance sheet is likely to eventually decide to pay that excess cash out as dividends. This provides shareholders with more dividends and can be a catalyst for a re-rating of the share price.

Third, look for a business that is resilient. Vicom’s business has not grown in a decade, but its revenue has not declined either.

If you invest in a company whose profits are declining, the valuation multiple might compress further and what may seem like a value stock will end up as a value trap. On top of that, if profits are declining, management will probably not increase its dividend payout ratio in a bid to use its cash to reaccelerate growth, oftentimes ineffectively.

Lastly, because dividends are a major source of returns when investing in a slow-or-no-growth company, it is important to find companies that are domiciled in places where there is no withholding tax on dividends. For example, if you’re a Singaporean investor, you should not have to pay tax on your dividends. But if you invest in US stocks, there is a 30% tax. As such, it is best to stay away from such companies in the US.

The bottom line

There are many ways to invest in stocks. Although I prefer to pay a higher multiple to invest in growing companies, other investors may prefer to buy no-or-slow-growth companies at a low multiple and wait for valuation re-ratings and/or to collect dividends.

Whichever method you prefer, the main thing is to find a style that you are comfortable with and suits your investing appetite.

Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life. I do not have a vested interest in any stocks mentioned. Holdings are subject to change at any time

Why Shareholders Shouldn’t Fret Over Short-term Fluctuations in Business Growth

Businesses can have good years and bad years. But the good ones will eventually keep growing.

As a long-term investor, business fundamentals matter more to me than the near-term fluctuations in stock price. That’s because if a company can grow its free cash flow per share every year, the share price will likely follow suit over the long term.

But this does not mean that a company which has a bad year will be a bad investment.

The truth is that businesses don’t grow in straight lines. Even the fastest growing companies have periods of time when growth decelerated or even turned negative. Business growth depends on a host of factors, some of which are not within the control of companies.

Let’s take Apple for example. Today, Apple is the largest listed company in the world but its business experienced ups and downs along the way.

The table below shows Apple’s revenue and revenue growth from 2007 to 2021

From 2008 to 2021, Apple managed to grow its revenue almost tenfold. But from the right-most column, we can see that the growth rates were very inconsistent. Apple even saw its revenue contract year-on-year in 2016 and 2019. Those declines in revenue did not make Apple a bad company overnight. The iPhone maker managed to bounce back to post much stronger results each time.

As shown, even one of the most innovative companies in the world can experience inconsistent business growth.

Ultimately, a company that has a capable and innovative management team, great products, and a great value proposition to customers will be able to accelerate growth in the future.

This year, in the current challenging economic environment, many companies that previously had stellar records of growth are either growing more slowly or are experiencing contractions in revenue.

Although this is unpleasant to witness, I think shareholders should focus on what’s causing the deceleration in growth and whether the company can post a rebound. A bad year does not make a trend.

It is in times like this that we need to remember what being a long-term shareholder truly is. Your portfolio companies will not always grow at the same rate each year. There will be some good years and some challenging years.

So be patient. Focus on the metrics that matter and the quality of the business. Don’t be too quick to write off a company and don’t get too caught up with Wall Street’s obsession with near-term results.

Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life. I have a vested interest in Apple. Holdings are subject to change at any time

My Observations On Malaysia’s Payment Ecosystem

I spent a few days in Malaysia. Here are some observations on Malaysia’s payment ecosystem and how paying as a traveler has evolved.

Last week, I spent a few days in Malaysia for a friend’s wedding and for a short drive around the country’s western coast. This was my first time in Malaysia since the start of the COVID pandemic.

Although the purpose of my trip was primarily for leisure, I couldn’t help but notice the interesting dynamic of Malaysia’s evolving payment ecosystem.

Card penetration is still low and will likely remain so

The first thing I noticed was that many small merchants still do not accept card payments. Although card payments are convenient for both merchants and consumers, there is a frictional cost involved with card payments for merchants.

The cost of accepting card payments includes a fixed transaction fee per transaction and a variable fee based on the size of the payment which can add up to 3% of the total amount collected. In addition, merchants need to pay for the hardware to be able to accept card payments, which is another extra cost that some merchants may be unwilling to bear.

Card companies trumpet the fact that a large percentage of payments made globally are still done in cash, implying that there’s a vast addressable market to be won. This is true but there are large amounts of cash transactions made today that will likely never transition to card payments.

In Malaysia, there are still a large number of mom-and-pop businesses that depend on low-margin, small-sized transactions. The frictional cost of card payments makes accepting such payments too costly for these merchants. Moreover, as cash is still dominant in Malaysia and with the nature of these businesses dealing with relatively small transactions, cash is still a relatively convenient solution.

I am bullish on the prospects of card payments growing globally. But I believe card penetration for certain types of businesses will remain low for the foreseeable future.

Other digital payment methods gaining steam

Although card payment is not widely accepted at small merchants, I noticed that local or regional digital payment methods such as Grabpay, Shopee Pay, and Touch and Go are much more common.

I believe that merchants are more inclined to adopt these payment solutions as they are cheaper to set up and have lower transaction fees. Grabpay and Shopee Pay, for example, require neither the installation of a card reader nor a dedicated point of sale system. Merchants only need to download the app to start accepting payments.

Besides the low set-up cost, these solutions currently levy merchants a lower fee than cards. Some solutions like Touch and Go are not even charging any transaction fees to smaller merchants. This naturally makes merchants more willing to accept these payment solutions.

At the other end of the transaction, consumers are inclined to use these digital payment methods as they are more convenient than cash and there is occasionally a reward system tied to these payment solutions.

My observations about paying as a traveller

Making payments overseas is becoming increasingly frictionless and cheaper. For my trip to Malaysia, I paid in cash when necessary (which was mostly the case) but when card payment methods were accepted, I used a debit card linked to my Wise account.

Wise is an app that makes sending money overseas or paying money in a foreign currency convenient and cheap.

To set up, all I had to do was top up my Wise account and apply for a debit card. When paying with the Wise debit card in Malaysia, the Wise app would automatically deduct the amount from my Wise balance. Even though I kept the cash in my Wise balance in Singapore dollars, I could still make payments in Malaysian ringgit as the app would automatically deduct the appropriate amount of Singapore dollars at a competitive rate.

Wise markets itself as a company that provides very competitive rates and low commission fees for transfers and payments made using its solutions.

Travellers today can use apps like Wise or Revolut for more competitive foreign exchange rates than standard credit cards.

Final thoughts

The payment ecosystem in each country is unique. Countries such as Malaysia are still highly reliant on cash but are fast transitioning to other forms of digital payment methods.

And with companies such as Wise, travellers are getting cheaper ways to pay for goods overseas. All of these developments are great for merchants and consumers as it decreases the fractional cost of transactions, enabling more commerce to occur seamlessly.

Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life. I have a vested interest in Wise. Holdings are subject to change at any time

What Is a Stock, Really?

When you buy a stock, you are purchasing a small stake in a company. But what does that really mean?

What is a stock? A stock is a small stake in a company. But what does that really mean?

First Principles Thinking

Elon Musk recently popularised the term first principle thinking which in layman’s terms refers to questioning assumptions until you get down to the bare bones of the matter.

This can apply to defining a stock too. A stock represents part-ownership of a company. But what does being a part-owner of a company mean? Let’s dig deeper.

As a part-owner of a company, you are entitled to receive dividends from the company. The company can choose to pay dividends to shareholders when there is excess cash on the balance sheet. As such, we can say that if you own a stock, you are entitled to a stream of future cash based on the profitability of the company.

This is one of the main reasons investors buy stock in a company. But that’s not all. In a well-oiled stock market, investors can buy and sell stocks to each other.

As such, not only are stockholders entitled to future dividends, but they can also sell the stock – or in other words, this “entitlement to future cash” – to other investors in the stock market.

So why do stock prices fluctuate so wildly?

Once we understand what a stock really is, we realise that the value of a stock should be tied to cash that the stock owner can get.

In theory, the value of a stock is all of the stock owner’s future cash flows discounted to the present day. But if stocks have a very easily defined value, which in theory, should not fluctuate on a day-to-day basis, why do stock prices still gyrate wildly?

There are many reasons for this. First, the cash flows of a company may be hard to predict and may depend on many factors. When situations change, the company’s cash flow outlook can change too, which means the present value of the company’s stock can fluctuate.

Also, investors may make different assumptions about a company which also causes market participants to value a company differently. All of which can lead to fluctuations in the stock price as investors are willing to pay different amounts for a stock.

The discount rate that is applied to value a company is also highly dependent on numerous factors such as the inherent risk in the business and the risk-free rate which is set by central banks. Investors may apply different discount rates to future cash flows based on how they perceive the risks to that cash flow materialising.

The discount rate is also affected by the risk-free rate. Usually, central bankers will meet a few times a year to decide on what the risk-free rate will be. When the rate changes, the value of a stock should change too.

There are also investors in the stock market who simply don’t care about value. All they care about is being able to sell a stock at a higher price to someone else.

These traders simply buy and sell a stock in the hopes that the stock price goes in the “correct” direction for them to make a profit.

Even if a stock seems very overvalued compared to the potential future cash flows of the business, these traders are still willing to buy the stock in anticipation that someone else will buy it from them at an even higher price.

The gravitational pull of value

While stock prices can fluctuate wildly, over time they tend to gravitate toward the intrinsic value of a company.

Benjamin Graham, mentor to Warren Buffett and the author of classic investing texts such as The Intelligent Investor, once said that in the short run, the stock market is like a voting machine but in the long run it is like a weighing machine.

This makes sense as eventually, a stock should trade close to the present value of its future cash flows. For instance, if a stock is too cheap, investors can simply buy the stock at a discount and make an outsized profit from the actual cash flows paid to shareholders.

This basic principle should be music to the ears of long-term investors, especially in today’s bear market. Although it may feel unpleasant when your stock price falls, it is important to take a step back and realise the true meaning of being a shareholder.

When you do so, you can properly assess the actual value of your stock.

Themes To Watch This Coming Earnings Season

Earnings season is just round the corner and with so much uncertainty around the economy, this will be an interesting earnings season to say the least.

I find that earnings seasons always provide important insights to investors. This is especially so in today’s climate, when there is so much uncertainty over macroeconomic conditions and stock prices have fallen hard.

With this in mind, here are the key themes I’ll be keeping an eye out for during the upcoming earnings season which will start in a few weeks.

Spending trends

The Federal Reserve’s tightening of monetary policy will likely impact consumer spending and company budgets. I will be keeping an eye on managements’ commentary about the business environment that they are in and the spending trends that they are seeing.

In the first quarter of 2022, it was heartening to see mission-critical software companies continue to post excellent results amid the wider market slowing down. I’ll also be looking for other companies that can come out of this environment stronger than they were before.

If these companies can continue to buck the trend, it will be another sign of their resilience.

Stock-based compensation

Lower stock prices could result in more heavy dilution for companies that depend heavily on stock-based compensation. This is because such companies need to offer employees more shares to make up for the shortfall in stock prices to attract the best talent.

With some companies seeing up to an 80% drop in their stock prices, it will be interesting to watch the dilutive impact of stock-based compensation. While the true impact will likely only be felt much later in the future, I’ll be keeping an eye on managements’ commentary on this subject.

Leadership changes and employee turnover

DocuSign and Pinterest recently reported that their respective CEOs have stepped down from their roles. It is not uncommon to see leadership shuffles in times such as these.

In the coming earnings season, we should also get a better picture of what companies are doing about retaining employees and the employee turnover trends. Investors of companies who have seen the loss of key personnel should also hope to get clarity on the reasons for any C-suite shuffling.

Updates on cost-cutting initiatives

There has also been a host of companies that have tightened their belts for the year. Sea Ltd, Tesla, and Netflix have all announced layoffs. With interest rates rising and capital becoming more expensive, companies will need to be more prudent in their spending.

In the coming earnings reports, I’ll be looking for additional colour on the impact cost-cutting initiatives have on their businesses going forward and how the initiatives have panned out.

Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life. I have a vested interest in Docusign, Tesla, Netflix, and Sea Ltd. Holdings are subject to change at any time

Here’s Why Lower Stock Prices Shouldn’t Bother The Long-Term Investor

Are you happy to hold on to your investments forever?

Warren Buffett once said: “If you’re making a good investment in a security, it shouldn’t bother you if they closed down the stock market for five years.”

With the US stock market in a bear market, these words ring louder than ever. But, I would go even further and suggest that the truly long-term investor shouldn’t bother even if the stock market closed forever. Yes, you heard that right- forever.

Even if we are never able to sell our shares, a truly good investment (bought at the right price) should still pay off over time as companies pay their shareholders dividends.

For example, let’s say you bought shares of the Singapore-listed hospitals owner Parkway Life REIT back in 2007 at its offering price of S$1.28 per share. After you made your investment, the Singapore stock market completely closed down and you were left holding on to your shares with no way to sell them. Since then, you would have collected a total of $1.46 per unit in dividends (technically, a REIT’s dividends are called distributions, but let’s not split hairs here).

Today, even if you are not able to sell your shares, you would still have more than made up for your investment and continue to be entitled to future dividends.

This is the goal of the long-term investor. I do not hope to simply sell off an asset at a higher price to a higher bidder; instead, I’m comfortable holding the asset for its cash flow.

But what if your stock doesn’t pay a dividend now? The same concept should still apply. This is because companies may be in different phases of their life cycle. A growing company may not pay a dividend when it’s growing rapidly. But after some time when excess cash builds up in its coffers over time, it can start paying that cash to patient shareholders.

If the stock market closed down forever, patient shareholders of these “non-dividend-paying” companies will still ultimately start receiving dividends, which ideally should eventually exceed what they paid for the shares.

However, not all investments pay off. Some investors may have paid too much for a stake in a company. And some high-growth companies that may look promising may never generate enough cash to reward shareholders.

In times like these, I think of another quote from Buffett: “It’s only when the tide goes out that you learn who has been swimming naked.”

In today’s market, investors who only bought a stock hoping to sell it to a “greater fool” at a higher price with no actual cash flow fundamentals behind the stock are unlikely to make back their capital.

Whenever I invest in a stock, I always think about how much cash flow it can potentially generate and whether I can make back what I paid for it simply by collecting the cash flow that I am entitled to over the years. This way, I will never be bothered about dips in share prices as I know I will eventually get more than paid off even if no one offers to buy the shares in the future.

So do you own productive assets you are happy to own forever?

Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life. I do not have a vested interest in any companies mentioned. Holdings are subject to change at any time

Highlights From Wix’s Investor Day

Wix recently held its investor day. Here are some of the highlights from its presentation and what I will be watching going forward.

Wix recently held its investor day where it shared its plans for the future and the competitive landscape surrounding its business.

Here are some of the highlights from its presentation.

Software as a service (SaaS) content management solutions winning market share

In the early days of the Internet, coding was the only way to set up a website. This is time-consuming and requires technical know-how.

The second phase of the Internet saw the emergence of content management solutions (CMS-es), such as wordpress.org and Magneto. If you started a blog before, you might be familiar with such tools. In fact, The Good Investors blog – what you’re reading now – is made using wordpress.org. It is an easy solution and requires minimal coding skills.

However, wordpress.org still has its limitations as users still have to source for their own website hosts and use multiple plugins for different functions. All of which are time-consuming and require some education on our part. It is also a little challenging to build more complex websites, such as e-commerce sites, on legacy CMS platforms.

That is why full-stack SaaS CMS-es such as Wix and Shopify are becoming increasingly popular.

A SaaS CMS provides out-of-the-box solutions for hosting, security, deliverability, and performance. It also allows designers to easily input different functionalities such as online bookings, e-commerce, and payments etc.

In the last 10 years, the number of websites built using SaaS CMS-es such as Wix has grown 20X.

SaaS CMS sites now contribute nearly 10% of all websites globally, compared to only 0.5% a decade ago.

And there’s still plenty of market share that SaaS CMS providers can win over, especially when you consider that companies such as Wix and Shopify are developing technologies that can seamlessly help businesses switch from their legacy CMS to a SaaS CMS.

Self Creators business already profitable

Wix’s business can be broken down into two main customer groups: (1) Self Creators and (2) Partners.

Self Creators are customers with whom Wix has a direct relationship. They go on the Wix.com website and build their websites by themselves. Partners are agencies or professional website builders that help their clients build a website using Wix’s solutions.

Wix started its business targeting mainly self creators who needed a simple website for their small businesses. Today, the Self Creators segment is already a highly profitable business, with a 20% free cash flow margin in 2021.

The Self Creators segment is also already a scaled business that generated US$1 billion in revenue in 2021. Wix expects this segment to grow by 5% to 8% this year after accounting for macroeconomic challenges. But management’s target for the segment over the next few years after this year is annual growth in the high-teens percentage range. Management also expects the segment’s free cash flow margin to improve to the mid-twenties percentage range in three years, and to around 30% in the longer term.

Partners segment growing faster than the Self Creators segment

The Partners segment is a fairly new business, and accounts for just 21% of Wix’s overall revenue.

However, the segment is growing fast. Partners build websites for their clients every year, which generates consistent subscription revenue for Wix. As such, partners generate more Wix revenue each year as long as they keep building and maintaining more clients’ websites. The two charts below illustrate this dynamic.

The chart on the left shows yearly booking retention for annual Self Creators cohorts each year. The lines are roughly flat which indicates that these cohorts spend roughly the same amount on Wix products year after year. The chart on the right shows the same information for Partners. The lines go up each year, which suggests that each cohort of Partners brings in more revenue for Wix over time. This demonstrates that Wix’s relationships with Partners are much more valuable over the long term due to the growth in bookings over time.

As such, Wix expects the Partners segment to grow faster than the Self Creators segment. Not only will existing Partners cohorts contribute more over time, but Wix is also spending heavily on marketing to win new partners each year. The table below shows the business profile of the Partners segment and management’s long-term projections for it.

In 2021, revenue for the Partners segment grew a whopping 75% from 2020. However, the unit economics was still poor as expenses were relatively high. But with scale, Wix expects the Partners segment to reach a free cash flow margin in the range of 30%.

Long term projections

Wix also provided its long-term targets for the overall company when combining both the Self Creators and Partners segments.

As a whole, management expects revenue to grow by around 10% this year and around 20% in the next few years with a long term free cash flow margin target of 30%.

What I’m watching

From what I’ve seen, Wix’s management is confident in the company delivering high free cash flow in the future. When you put the numbers together, management is targeting to around US$500 million in free cash flow by 2025.

If Wix can achieve that, its market capitalisation, which sits around US$3.5 billion at the moment, will likely be much higher by then.

However, there’s one thing I’m monitoring: The number of shares that the company is awarding to employees. This could significantly dilute investors.

Wix’s weighted average diluted share count rose from 35 million in the first quarter of 2015 to 57 million in the first quarter of 2022. This a 63% increase. Some of the increase was due to the issuance of convertible bonds, but most of it was because of stocks awarded to employees.

With Wix’s stock price falling to a multi-year low in recent times, the number of shares the company issues for employee compensation could increase. To attract talent, Wix may also need to offer pay packages that include more shares to make up for the fall in its stock price. This could potentially lead to an acceleration in dilution.

Bottom line

With a large untapped addressable market, best-in-class software, and a growing partnership business, Wix is well placed for long-term revenue growth and operating leverage. And with its market cap at just US$3.5 billion and the potential for US$500 million in free cash flow in three years, we could easily see double-digit compounded annualised growth in its market cap.

However, the amount of dilution could potentially dilute returns for shareholders. Although I think Wix’s long-term return looks very promising for shareholders, I’ll be keeping an eye on that weighted average diluted share count number.

Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life. I have a vested interest in Wix and Shopify. Holdings are subject to change at any time

How Do Lower Stock Prices Impact Businesses

The market has fallen hard in recent times. How does this affect companies and what should investors be looking out for?

With stock prices falling sharply in recent months, here’s how businesses may be impacted.

Higher dilution

It is common practice for tech companies to offer employees stock-based compensation (SBC). This can come in the form of stock options or restricted stock units that vest over time.

SBC is useful for companies in a few ways. First, it incentivises employees to stay for the long-term to reap the rewards of stocks that vest over time. Second, it allows employees to participate in the growth of the company’s stock price. Third, it aligns employees’ interests with shareholders as the employees become shareholders themselves. Fourth, it helps companies to save cash as it is a non-cash expense.

The down-side though is that SBC results in a higher number of outstanding shares in a company, which dilutes existing shareholders. The amount of dilution is usually dependent on the stock price at the time. Take for example a company that offers an employee a pay package that includes $100,000 in shares. If the share price is at $100 a share, the employee gets 1,000 shares. But if the stock price is at $50 a share, the employee will get 2,000 shares. When stock prices are lower, the higher number of shares issued results in higher dilution for the company’s other existing shareholders.

With this in mind, it is important for investors in a company that uses SBC to keep an eye on the growth in the outstanding share count in the future.

More expensive capital

Numerous companies took advantage of soaring stock prices in the last two years to raise cash. For instance, SEA Ltd, raised US$3.5 billion through a secondary offering last year by issuing 11 million new shares at a stock price of US$318 in late-2021.

Today, SEA Ltd’s stock price has fallen to around US$70 per share. In order to raise the same US$3.5 billion today, SEA will need to issue around 50 million shares. This is nearly five times as many shares that were issued in late-2021 and would mean significantly more dilution for SEA’s existing shareholders.

With capital getting more expensive, in both the bond and the equity markets, companies will need to be more prudent with their cash. Cash burning companies will need to find ways to reduces losses or turn cash flow positive in order not to have to raise cash at expensive rates.

Buybacks may be attractive

Conversely, companies that have lots of cash or have a very cash-generative business can take this opportunity to reduce its outstanding share count. Buying back stock when the price is down can be effective in increasing shareholder value. Warren Buffett’s Berkshire Hathaway is a classic example of a company that has taken advantage of a relatively low stock price to accelerate its share buybacks.

But even software companies are joining the party. For example, Zoom is looking to take advantage of its cratering stock price by buying back shares. In its latest earnings announcement released on 28 February 2022, Zoom said that its board of directors had authorised a stock repurchase program of up to US$1 billion. With a price-to-free-cash-flow ratio of less than 20, this seems like a great opportunity for Zoom to reduce its share count for shareholders.

The bottom-line

Falling stock prices can have both a negative or positive impact on companies. Companies that have cash on hand for buybacks can benefit from this bear market. On the other hand, companies that are short of cash may end up having to raise money at unfavourable terms.

We often hear the phrase “cash is king.” It is in times like this that these words ring truer than ever.

Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life. I have a vested interest in , Zoom and Sea Ltd. Holdings are subject to change at any time

What To Do During This Stock Market Crash?

With the stock market crashing, what should investors do now?

The stock market has been brutal this year. The S&P 500 is down 18% year-to-date and the tech-heavy NASDAQ is already down 29%.

But that’s just the tip of the iceberg. Many stocks have been hammered much worse than the indexes. Big names such as Meta Platforms, Paypal, and Netflix are down 44%, 61% and 72% year-to-date.

Smaller tech companies such as Zoom, Fiverr, and Shopify have fallen by 53%, 72%, and 76% respectively. And these are just to name a few. There are numerous other stocks that are down 70% or more in the last four and a half months.

Investors who enjoyed stellar returns in the past few years have clearly been given a rude awakening this year. In light of this and with investors starting to feel unsure of what to do next, I’ve compiled some common questions I’ve seen online and tried to answer them according to my own investing approach.

Question: What should long-term investors do?

With such steep and sudden declines in stock prices, some investors might be wondering what is the best thing to do now?

As a long-term investor, I am not concerned about what stock prices do over the near term. I prefer to focus on the price that the stock can reach when I’m ready to sell my investments years or decades from now.

For instance, if I bought Stock XYZ at $1000 a share and believe it will be worth $3000 in a decade’s time, then do I really care how it reaches there? Does it have to go up in a straight line? The answer is obviously “No”.

I’ll make the exact same profit in a decade if it zig-zags its way to $3000 a share as if it went up in a straight line.

So instead of worrying too much about the decline in my current net worth or current stock valuations, I’m focusing on the business fundamentals and how much these businesses can be worth in the future.

Question: What aspects of the business should we focus on?

Although stock prices may be going down, my focus is not on the stock price but on business fundamentals.

Is the business growing? Does the management team exude confidence in the long-term growth potential of the business? Are there signs of operating leverage coming into play?

All of these help me build a picture of what is possible for my investments over a long term period.

Question: Should I invest spare cash now?

Steep market declines also provide an opportunity for investors with money on the sidelines to start buying ownership stakes in companies at cheaper valuations.

For example, Shopify co-founder and CEO Tobi Lutke recently announced that he will be ploughing in another US$10 million into shares of his own company. He clearly is taking advantage of the lower business valuations to further increase his stake in the company he founded.

Investors who have cash can use this opportunity to invest in companies that could potentially be worth much more in the future. I’m not saying that stocks will not go down more from here, but at these prices, I think that the long-term outlook is rosy.

Question: Were stocks too expensive before and just reasonably valued after this washout?

There are many stocks that I think were vastly overvalued in the past that will never return to their all-time highs. These are meme stocks, stocks that had too much optimism baked into them, and stocks that may have gotten too overvalued due to hype around them on social media platforms.

These stocks will never return to their former heights. But on the other corner, there are many quality businesses that I believe are in deep value territory.
These are companies that have best-in-class technology and management, and are disrupting industries or just simply executing brilliantly and winning market share. In today’s environment, some of these companies are trading at low valuations compared to what they can potentially achieve in the next decade or so.

Investing in these companies at current valuations will possibly reap double-digit annualised returns for multiple years.

Final words

Although it is unpleasant to see your portfolio so deep in the red, this is part and parcel of investing in the stock market.

Warren Buffett once said that the true investor welcomes volatility. It offers investors the chance to buy stocks at depressed prices and to sell at unreasonably high prices. With some stocks trading at unreasonably low levels today, I think Buffett’s words are ringing truer than ever.

Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life. I have a vested interest in Meta Platforms Inc, Netflix, Paypal, Zoom, Shopify, and Fiverr. Holdings are subject to change at any time

A Conversation With FIRL On Investing

A couple of weeks back, I was fortunate to be invited to have a conversation with John and MJ on their Youtube podcast called The FIRL Podcast.

During the nearly two hour session, we had a chance to chat about a wide range of topics, such as investing in REITs, Singapore’s stock market, growth versus value stocks, and much more.

I hope you enjoy the conversation as much as I had fun doing it.

Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life. I may have a vested interest in some companies mentioned. Holdings are subject to change at any time