Chicken or the Egg
research report
Hello,
The Japanese stock market has recently brought into focus precisely the kind of high-quality asset I find most compelling:
it has a first-mover advantage and the largest scale in what appears to be a winner-takes-most niche, where a much better-financed competitor tried to replicate the business and failed.
the two-sided network nature of the business model means larger scale improves the value proposition for both customers and partners, while raising barriers to entry for already limited direct competition.
it solves a recurring and urgent problem for customers, where the cost of not solving it is far greater than the cost of the service itself, making price a secondary consideration.
it is about as asset-light as a business can be, having grown revenue at a double-digit rate every year except during the worst year of COVID, without having to employ capital. Put differently, net invested capital has been negative in every year since listing, making operating ROIC theoretically infinite.
it also benefits from negative working capital dynamics, which have allowed free cash flow to exceed net income in 10 of the last 14 years.
It is no wonder the company increased FCF by 12x over the 13 years since listing, which resulted in an 18% total return CAGR to early investors.
Fortunately, it is also run by a founder who is not the stereotypical Japanese cash hoarder, but someone who understands the importance of shareholder returns. Over the past 10 years, the company has returned, on average, more than two-thirds of free cash flow to shareholders through dividends and buybacks.
I know this may sound like I am overselling it, but if I had to describe what I consider a high-quality business, I would end up describing many of the characteristics this company has today. Luckily, I do not have to pay a high-quality multiple for it, as the business trades on a single-digit forward EV/FCF multiple. And yes, I did discount part of the cash pile in my EV calculation, just to be conservative.
So there is no special-situation angle this time…just a business I like very much at a price I like as well.