By mid-May 2026, Adobe was closer to $100 billion.

So roughly $225-$230 billion of market value has disappeared. That is about a 70% decline from the peak.

Back then, Adobe was treated like one of the cleanest software compounders in the world: high recurring revenue, high gross margin, strong free cash flow, and deep creative workflows. Today, the question is whether generative AI lowers the value of basic creation, shifts workflows toward other AI platforms, raises costs, and makes it harder for Adobe to turn usage into paid recurring revenue.

Adobe is still a very profitable software business with a strong five-year record, but AI is attacking the exact area where Adobe has historically made money.

What Adobe Really Is

The company makes money mainly through subscriptions. In fiscal 2025, Adobe generated $23.8 billion of revenue. Of that, $22.9 billion was subscription revenue. It is collecting recurring revenue from tools and platforms that people and companies use repeatedly.

Digital Media is the main business. In FY2025, it produced $17.65 billion of revenue, grew 11%, and generated $16.81 billion of gross profit. That is where Creative Cloud, Document Cloud, Acrobat, Photoshop, Illustrator, Premiere, Express, Firefly and the related tools sit.

Digital Experience is smaller, but still meaningful. It produced $5.86 billion of revenue, grew 9%, and generated $4.24 billion of gross profit. This is where Experience Cloud, Adobe Experience Platform, GenStudio, analytics, customer data, marketing workflows, commerce, Workfront and enterprise experience software sit.

Publishing and Advertising is no longer central to the thesis. It produced only $0.26 billion of revenue in FY2025, declined 7%, and generated $0.17 billion of gross profit.

The money is still mainly in Digital Media. It was about three quarters of revenue and produced about $16.8 billion of gross profit in FY2025. Digital Experience is smaller, but still meaningful, and it is where Adobe is trying to connect content creation with enterprise marketing execution.

The core software economics are still very strong. Digital Media produced gross profit equal to 95% of revenue. That does not mean 95% drops to the bottom line, because Adobe still spends heavily on R&D, sales, marketing and administration. But it does show why the business has been such a strong cash generator.

The AI debate is about protecting this high-quality base while building new revenue streams. If AI helps Adobe sell more Creative Cloud, Acrobat, Firefly, Express, GenStudio and Experience Platform products, the business can keep compounding. If AI forces Adobe to give away more value for free or accept lower pricing, the historical economics become less useful.

In fiscal 2026, Adobe changed the reporting structure and now has one operating and reportable segment. From an investor perspective, that gives less visibility, although Adobe still gives customer group subscription revenue.

For the full fiscal year 2025, Creative & Marketing Professionals produced $16.30 billion of subscription revenue and grew 11%. Business Professionals & Consumers produced $6.50 billion and grew 15%. Together, Digital Media and Digital Experience subscription revenue was $22.80 billion, up 12%.

The same pattern continued in Q1 FY2026. Creative & Marketing Professionals produced $4.39 billion of subscription revenue and grew 12%. Business Professionals & Consumers produced $1.78 billion and grew 16%. Total Customer Group subscription revenue was $6.17 billion, up 13%.

Creative & Marketing Professionals is still the larger revenue base. Business Professionals & Consumers is smaller, but it was the faster-growing customer group in FY2025 and again in Q1 FY2026.

That helps explain the strategy. Adobe is not just a creative professional company anymore. It wants to serve professional creators, marketers, office workers, consumers, students, small businesses and large enterprises.

If AI makes creation easier, more people can create. A student can make a presentation. A small business owner can make an advert. A marketer can generate campaign variations. A large company can automate thousands of content assets. A normal office worker can turn a PDF into a summary, deck, infographic or audio file.

The Products

1. Creative Cloud

Creative Cloud is still the heart of the company. It includes products like Photoshop, Illustrator, Premiere Pro, After Effects, Lightroom and InDesign. These are the tools many professional creators, designers, video editors, photographers and creative teams already know.

Adobe said FY2025 Digital Media subscription growth was driven by strength in Creative Cloud Pro, other flagship apps and Acrobat. In Q1 FY2026, management again said Creative Cloud growth was driven by the CC Pro offering.

This is the core cash engine. It is not only because the apps are good. It is because the products are learned, shared, used inside teams, connected to files, tied to creative habits, and used in professional workflows. That is harder to replace than a single image-generation tool.

The risk is that AI makes some parts of creation easier and cheaper. If that only helps Adobe users do more inside Creative Cloud, it is positive. If it makes customers question why they need the full paid workflow, it becomes a problem.

2. Acrobat, Acrobat Studio And Express

Acrobat is the document side of Adobe. It lets users read, edit, sign, create and work with PDFs. That may sound less exciting than AI image generation, but documents are a huge daily workflow. Businesses do not stop using PDFs because a new AI tool appears.

Adobe is now trying to turn Acrobat from a document tool into a broader productivity and creation platform. Acrobat Studio brings together Acrobat, Express and AI agents. Acrobat AI Assistant can summarise documents, answer questions, cite sources and help create formatted content.

That group produced $6.50 billion of subscription revenue in FY2025, up 15%, and $1.78 billion in Q1 FY2026, up 16%.

The latest product signals are good. Acrobat + Express MAU grew about 20% year over year in Q1. Acrobat AI Assistant ARR grew about 3x. Management also said Acrobat Studio saw strong upgrades as part of enterprise licence renewals.

3. Firefly

Firefly is Adobe’s generative AI product family. It is not one small feature. It includes Adobe’s own Firefly models, the Firefly app, Firefly credit packs, Firefly Enterprise, Firefly Services and Firefly Foundry.

Firefly helps users generate and edit creative content with AI. It is used across images, design, video and other creative workflows. Adobe’s own filings describe Firefly models as commercially safe and trained on licensed content and public domain assets. That is important for enterprise customers because companies care about rights, brand safety and legal risk.

Firefly is Adobe’s clearest AI revenue signal. Adobe is not only adding AI features to defend the old business. It is trying to charge for AI through the Firefly app, credit packs and enterprise products.

Firefly ending ARR exceeded $250 million in Q1 FY2026. Total Adobe ARR was $26.06 billion. Firefly is real, but still small. It proves Adobe can charge for AI, but it does not yet prove that AI can move the whole company.

4. Adobe Stock

Stock is the warning sign.

Adobe Stock gives customers access to licensed creative assets. Historically, that was a useful model. If you needed an image, video or other asset, you could license it rather than create it from scratch.

Generative AI changes that behaviour. If a user can generate a good enough asset, the old standalone Stock model weakens.

Management said the traditional standalone Stock business declined more than expected in Q1 FY2026 and that the shift is happening faster than planned. Adobe’s strategy is to give customers a choice between stock and generative AI for creative and marketing workflows.

I like that they are being direct about the issue. But I would not ignore it. Stock may be small compared with the whole company, but it is one of the cleanest examples of AI replacing an older content model.

5. GenStudio And Adobe Experience Platform

GenStudio and Adobe Experience Platform sit more on the enterprise marketing side.

Adobe describes GenStudio as a content supply chain solution. In plain English, it helps large companies plan, create, produce, activate, deliver, manage and measure marketing content. It connects tools like Adobe Experience Manager Assets, Workfront, Firefly Services and GenStudio for Performance Marketing.

Adobe Experience Platform is the customer data and orchestration layer. It helps companies collect and activate customer data across channels, then use that data for personalization, journey management, analytics and marketing execution.

This is not as easy to understand as Photoshop or Acrobat, but it may be very important. Large companies need more content, more personalization, more measurement and more control. If AI increases content volume, enterprises need systems to manage that content without losing brand control.

Management said GenStudio and AEP & Apps ending ARR each grew over 30% year over year in Q1 FY2026. It also said the number of customers with ARR over $10 million grew more than 20%.

Enterprise demand is still there. The issue is whether it becomes a larger profit engine over time. Digital Experience had $5.86 billion of revenue in FY2025 and $4.24 billion of gross profit. That is a good business, but the gross profit rate is lower than Digital Media. It needs scale and execution.

6. Workfront, Frame.io, Substance 3D And Other Workflow Products

Adobe also owns products that are less visible to casual investors but matter inside workflows.

Workfront is work management for teams. Frame.io supports video collaboration and review. Substance 3D is used for 3D content creation. Adobe Commerce, Marketo Engage, Journey Optimizer, Analytics, Customer Journey Analytics and Real-Time CDP all sit inside the enterprise experience stack.

Adobe does not disclose each product’s revenue or profit. These products matter because they make the platform harder to replace. The more Adobe connects creation, collaboration, data and activation, the stronger the workflow argument becomes.

The main enterprise question is whether GenStudio, AEP and Experience Cloud can become a larger part of the cash flow story.

The Five-Year Record

Adobe’s recent numbers still show a business that has grown. Revenue went from $15.8 billion in fiscal 2021 to $23.8 billion in fiscal 2025.

Revenue was $15.8 billion in FY2021, $17.6 billion in FY2022, $19.4 billion in FY2023, $21.5 billion in FY2024, and $23.8 billion in FY2025.

Operating cash flow also moved higher over time. It was about $7.2 billion in FY2021, $7.8 billion in FY2022, $7.3 billion in FY2023, $8.1 billion in FY2024, and $10.0 billion in FY2025.

That is roughly 11% annual revenue growth over four years. The cash flow record is also strong, although not perfectly smooth. Fiscal 2023 and fiscal 2024 were not as clean as fiscal 2025. But by fiscal 2025, Adobe produced more than $10 billion of operating cash flow.

Capex is very low for a company of this size. In fiscal 2025, Adobe spent only $179 million on property and equipment. That leaves roughly $9.85 billion of free cash flow if I use operating cash flow minus capex.

For an owner, the point is that Adobe does not need a lot of physical capital to keep the business running. The company spends heavily on people, R&D, sales, marketing, cloud infrastructure and products, but the cash economics are still very good.

In FY2025, GAAP operating income was $8.7 billion. Non-GAAP operating income was about $11.0 billion. In Q1 FY2026, GAAP operating income was $2.4 billion and non-GAAP operating income was $3.0 billion. Q1 non-GAAP operating income was 47.4% of revenue.

The Business Engine

First, the tools are deeply used. Creative professionals learn Photoshop, Illustrator, Premiere, After Effects, InDesign and Lightroom. Companies build teams, templates, libraries, brand processes and production workflows around these products. In documents, Acrobat and PDF have decades of habit behind them. In marketing, Adobe is used inside large companies that need analytics, content management, customer data, campaign management and workflow control.

Second, the business is recurring. Customers do not buy a new Photoshop box every few years. They subscribe. Enterprises renew. Users upgrade. Teams add seats. Customers move between plans and products.

Third, Adobe is trying to attach AI to workflows customers already use. A prompt-based AI image tool may be useful, but it is not the same thing as a full production workflow. A brand team does not only need an image. It needs rights, consistency, editing, approvals, brand safety, collaboration, formatting, storage, delivery and measurement.

Q1 FY2026

Q1 FY2026 had strong operating numbers and early AI signals. Total revenue was $6.40 billion, up 12%. Subscription revenue was $6.20 billion, up 13%. Total Adobe ARR was $26.06 billion, up 10.9%. Operating cash flow was $2.96 billion, and Adobe repurchased about 8.1 million shares in the quarter.

The usage numbers were also strong. Adobe surpassed 850 million monthly active users across Acrobat, Creative Cloud, Express and Firefly, up 17%. Creative freemium MAU crossed 80 million, up more than 50%. Acrobat + Express MAU grew about 20%.

The AI monetization signs are still early, but they are not zero. AI-first application ARR more than tripled year over year. Firefly ending ARR, across Firefly App, Firefly credit packs and Firefly Enterprise, exceeded $250 million. AEP & Apps and GenStudio ending ARR each grew more than 30%, and total customers with ARR over $10 million grew more than 20%.

The latest quarter shows why the AI debate is difficult. User growth is moving first. MAU, freemium usage, credit consumption, Express, Firefly and Acrobat AI Assistant are all moving in the right direction.

The revenue proof is earlier. Firefly ending ARR is above $250 million, while total Adobe ARR is about $26 billion. Adobe needs more than usage. It needs paid conversion and durable economics.

The Stock Business Is A Warning

Management said the traditional standalone Stock business declined more than expected in Q1, and that the shift is happening faster than planned.

I would not make too much of this by itself. Stock is not the whole Adobe business. But it is still useful evidence because it shows where AI can substitute for an older content model.

If a customer can generate an image instead of buying a stock asset, part of the old model weakens. Adobe knows this and is trying to give customers a choice between stock and generative AI. That may be the right strategy. But it still shows the risk.

The bigger question is whether Stock is the small part that gets disrupted, or the early example of a wider change in creative workflows.

If the disruption stays around standalone Stock and Adobe replaces it with Firefly, credit packs, Firefly Enterprise and GenStudio, the bear case weakens.

If the same pressure spreads into Creative Cloud pricing, upgrade behaviour or enterprise renewals, the bear case gets much stronger.

The Bull Case

The bull case is not that AI does not matter. The bull case is that AI makes Adobe more useful.

A person who never learned professional software may start with Express, Firefly or Acrobat AI Assistant. Some of those users may never pay. But some may. A student may become a creator. A small business may become a paid team. An enterprise may use Firefly Services to automate content production. A brand may use GenStudio to generate, review, govern and activate assets across channels.

Adobe’s advantage is that it can connect creation with editing, documents, brand control, customer data, marketing workflows and enterprise governance.

A generic AI model can create something impressive. But large companies need more than impressive. They need content that fits brand rules, legal requirements, approval processes and campaign systems. They need to know where the asset came from. They need controls. They need reliability. They need people across teams to work with the same files and the same standards.

Adobe’s old strengths may become useful again when enterprises need governed content, approvals and measurement, not only a generated asset.

The company has products across the whole chain:

• Photoshop, Illustrator, Premiere, After Effects, Lightroom and InDesign for professional creative work.

• Acrobat, PDF, Acrobat Studio and AI Assistant for document work.

• Express and Firefly for lighter creation and new users.

• Firefly Services and Firefly Foundry for enterprise AI content production and custom models.

• Frame.io and Workfront for collaboration and production workflow.

• Adobe Experience Manager, Adobe Experience Platform, Analytics, Journey Optimizer, Commerce, GenStudio and related products for customer experience and marketing workflows.

I would not describe Adobe as only a tool company. The stronger version is that Adobe owns important parts of the content and marketing workflow.

The Bear Case

The bear case is also real. It is not that Adobe disappears. It is that the business becomes a slower-growing, more expensive-to-run software company with less pricing power. The risk shows up in seven places.

First, AI may reduce the value of basic creation. If a user can create a good enough image, video, presentation or design in a chatbot or a cheap AI app, Adobe has to prove why the paid workflow is still worth it. Professionals may stay. Enterprises may stay. But entry-level and casual users may be harder to monetize.

Second, Adobe may get usage without economics. Management is clear that freemium is part of the strategy. Creative freemium MAU grew more than 50%, which sounds excellent. But management also said this approach has a near-term impact on ARR. That is the right trade-off if free users convert later. It is the wrong trade-off if Adobe trains users to expect more creation for free.

Third, AI may shift distribution away from Adobe-owned surfaces. Adobe is integrating with ChatGPT and other AI platforms. That can bring reach. But it can also make Adobe more dependent on third-party platforms. If users start creation inside OpenAI, Google, Microsoft, Anthropic or another assistant, Adobe needs to make sure it still owns enough of the workflow and economics.

Fourth, AI can raise costs. Adobe’s own 10-Q says developing, testing and deploying AI systems can increase compute costs and that adoption and monetization pathways are uncertain. That is plain enough. AI can make the product better, but if the company must spend more on infrastructure, models, datasets, compliance and indemnity, the cash flow argument becomes more complicated.

Fifth, AI brings legal, IP and regulatory risk. Adobe’s filings discuss AI regulation, third-party model risk, training data, IP claims, privacy claims and reputation risk. Adobe sells trust to enterprises. If customers are buying Adobe partly because it is commercially safer, Adobe has to keep that trust.

Sixth, reporting is now less detailed. Adobe combined its old segments into one operating and reportable segment in Q1 FY2026. Management says this reflects unified selling and integrated product innovation. That may be true. But from an investor view, less segment detail makes it harder to see exactly what is working and what is weakening.

Seventh, there is a CEO transition. Shantanu Narayen has led Adobe for a long time.

What The Numbers Say Today

Q1 FY2026 revenue grew 12%. Customer group subscription revenue grew 13%. Operating cash flow was a Q1 record at $2.96 billion. The company had $6.89 billion of cash and short-term investments exiting the quarter. Non-GAAP operating income was 47.4% of revenue.

For FY2026, management reaffirmed revenue of $25.90 billion to $26.10 billion. It expects Business Professionals & Consumers subscription revenue of $7.35 billion to $7.40 billion, Creative & Marketing Professionals subscription revenue of $17.75 billion to $17.90 billion, Total Adobe ending ARR growth of 10.2%, and non-GAAP operating margin around 45%.

If Adobe can grow revenue around 9-10%, keep non-GAAP profitability around the mid-40s as a percentage of sales, and keep producing close to $10 billion or more of free cash flow, the market does not need a perfect AI story.

By mid-May 2026, Adobe was roughly a $95-$100 billion company. Against FY2025 free cash flow of about $9.85 billion, that is around 10x owner earnings. Against my rough FY2026 cash generation base of about $10.5 billion, it is closer to 9-10x. The stock is no longer priced like a perfect software story.

Valuation

Before I put numbers into a DCF, I want to think about the stock like I am buying the whole business.

That is the Buffett way of thinking I find useful. It is a piece of a business. The market cap is what the market is asking me to pay for the whole company today. The value of the business is the present value of the cash it can generate for owners over its life.

So the question is not only whether Adobe trades at 9x, 10x or 12x free cash flow.

The question is whether the whole business is worth more than the market cap today, after discounting the future cash Adobe can realistically produce.

In FY2025, Adobe produced $10.03 billion of operating cash flow and spent $179 million on property and equipment. That gives me about $9.85 billion of free cash flow.

For FY2026, management is guiding to $25.90-$26.10 billion of revenue, 10.2% Total Adobe ending ARR growth, and non-GAAP operating margin around 45%. Using the midpoint of the revenue guide and a low-40s free cash flow margin, my working free cash flow base is about $10.5 billion.

If AI weakens pricing power and Adobe becomes a no-growth cash flow business, I would use a low terminal multiple, maybe 8-10x free cash flow. If Adobe stays durable but grows more slowly, 12-15x free cash flow is more reasonable. If AI expands the workflow and Adobe keeps strong growth and high margins, then 18x can be argued. I would be careful using anything above that unless the evidence becomes much clearer.

In the stress case, I assume free cash flow declines 2% a year, use an 11% discount rate, and apply an 8x terminal multiple to year-10 FCF. That gives about $81 billion of equity value, or roughly $201 per share.

In the no-growth case, I assume cash generation stays flat and apply the same 8x terminal multiple. That gives about $98 billion of equity value, or roughly $241 per share.

In the bear-but-still-durable case, I assume free cash flow grows 3% a year and the terminal multiple is 10x. That gives about $130 billion of equity value, or roughly $320 per share.

In the base case, I assume owner cash grows 6% a year and Adobe still deserves a 15x terminal multiple. That gives about $196 billion of equity value, or roughly $484 per share.

In the bull case, I assume free cash flow grows 9% a year and the terminal multiple is 18x. That gives about $273 billion of equity value, or roughly $676 per share.

I do not treat this as a target price. I use it to see what the current price already assumes.

At around a $95-$100 billion market cap, the market is close to my no-growth case. That means investors are not paying much for future growth today.

If the bear case is right and AI slowly reduces Adobe’s pricing power, raises costs, weakens Creative Cloud monetization, and turns more usage into lower-quality revenue, then the stress case matters. A low multiple will not protect me if the cash flow base starts going backwards.

But if Adobe can keep producing more than $10 billion of free cash flow, grow that cash flow even in the low single digits, and still deserve a 10-12x terminal free cash flow multiple, the current valuation looks too cheap.

Adobe has to show that AI is not only defending the old business. It has to become a paid workflow layer across Creative Cloud, Acrobat, Express, Firefly, GenStudio and Experience Cloud. That is what would support the base or bull cases.

In FY2025, the company repurchased about 30.8 million shares and spent $11.3 billion on common stock repurchases. In Q1 FY2026, it repurchased another 8.1 million shares for about $2.5 billion. The March 2024 authorization was for up to $25 billion, and $3.89 billion remained at the end of Q1.

My Current View

The current business is strong. The five-year record is good. Adobe still produces a lot of cash. The products are deeply used. The balance sheet is fine. The buyback can help per-share value.

But the bear case is not imaginary. AI attacks the centre of the company. It changes who can create, where they create, how much they pay, what tools they need, and what platforms own the customer relationship.

Adobe has a real chance to use AI to expand the number of creators and business users. More people can create because the tools are easier. More companies need content because digital channels keep multiplying. More marketing teams need automation because manual content production cannot keep up. If Adobe keeps the workflow, trust and cash economics, AI can make the company more valuable.

The valuation is what makes the idea interesting. At around a $95-$100 billion market cap, Adobe is close to my no-growth case. My stress case was around $81 billion of equity value. Based on my valuation work, I think downside risk is more limited.

I want ARR to stay around double-digit growth while free cash flow remains strong. I want Firefly, Acrobat AI Assistant, GenStudio, AEP AI products and Firefly Enterprise to become material revenue sources, not only usage stories. I want Creative Cloud and Acrobat upgrades to show that customers will pay more because AI makes the products more valuable. I also want margins and cash conversion to hold while Adobe invests in AI.

Stock is the product-level warning sign. If standalone Stock declines but Adobe replaces it with Firefly and enterprise content automation, that is acceptable. If Stock is the first sign of broader Creative Cloud pricing pressure, the view has to change.

Enterprise retention, Creative Cloud pricing and seat behaviour are the faster signals. If customers start using AI to reduce Adobe seats rather than expand usage, the thesis changes quickly. Cost matters too. AI compute, model costs, compliance, indemnity, data and infrastructure spending cannot keep rising if cash generation starts to weaken.

Adobe is going through a major product transition at the same time as a leadership transition. That does not have to be a problem, but it is not nothing.

The question is whether AI increases Adobe’s useful role in the workflow, or slowly gives away the value of creation to cheaper tools and third-party platforms.

Not investment advice. Just my own thinking.

E-commerce, social media, digital payments, delivery, games, and online services were not just nice things to have. In many places, they helped solve problems where infrastructure was still catching up.

That created a big tailwind for companies like Alibaba ($BABA), Tencent ($TCEHY) , Baidu ($BIDU), JD.com ($JD), Meituan (3690.HK), and NetEase ($NTES).

For a long time, these companies were growing revenue, entering new markets, and becoming more important in everyday life, so the market was willing to pay for that growth.

After 2020, the story changed. Regulation became more important, the internet crackdown hurt investor confidence, consumer behaviour changed, and the macro economy in China became harder. The property market also became a major pressure point. Property activity fell sharply: real estate development investment fell from RMB14.1 trillion in 2020 to RMB8.3 trillion in 2025, while commercial housing sales value fell from RMB17.4 trillion to RMB8.4 trillion.

That changed the background for Chinese consumer and internet companies.

This is not only a company-specific story. It is part of a wider reset in how investors think about Chinese internet companies.

Tencent’s market cap at HKD4.298 trillion, which is about US$550 billion. Alibaba is more famous in the West because of Jack Ma and because e-commerce is easier to explain. Tencent is less familiar, but I think it is the more interesting business to study because it touches so many parts of digital life in China.

Business Quality

Tencent is not only a gaming company. It owns several different businesses: domestic games, international games, social networks, marketing services, FinTech, business services, cloud, and Weixin/WeChat.

In 2025, Tencent reported RMB751.8 billion of revenue, up 14%.

• VAS: RMB369.3 billion, up 16%, about 49% of revenue

• Marketing Services: RMB145.0 billion, up 19%, about 19% of revenue

• FinTech and Business Services: RMB229.4 billion, up 8%, about 31% of revenue

• Others: RMB8.1 billion, about 1% of revenue

VAS includes domestic games, international games, and social networks. In 2025, domestic games revenue was RMB164.2 billion, international games revenue was RMB77.4 billion, and social networks revenue was RMB127.7 billion.

The part I care about most is not only the segment split. It is the platform position. Weixin (WeChat) had 1.418 billion combined monthly active users at the end of 2025.

For many users, WeChat is not just an app. It is where they message, pay, use services, interact with merchants, use mini programs, watch content, and move through large parts of daily digital life.

That makes Tencent different from a company that only competes by cutting price or spending more on customer acquisition. Tencent still has competition, and I do not want to pretend it does not. But many businesses also need to work with the ecosystem. Merchants, advertisers, developers, payment users, game studios, cloud customers, and service providers all touch parts of Tencent.

This is why I see Tencent closer to a digital infrastructure business with several profit pools attached to it.

Growth Drivers

Tencent has several very profitable segments, and many of them still have growth tailwinds. Games are still the main profit engine. Advertising is getting better. Payments and fintech continue to grow. Cloud looks more disciplined than before. Mini Programs make the WeChat ecosystem stronger.

Marketing Services can grow if user engagement stays strong in Video Accounts, Weixin Search, Mini Programs, Mini Shops, and better ad targeting. FinTech and Business Services can grow through commercial payments, wealth management services, consumer loan services, cloud services, AI-related cloud demand, and e-commerce technology service fees.

Games can grow through both domestic and international games, but gaming always has content-cycle and regulatory risk.

The other growth driver is Tencent’s ecosystem and investment muscle. Tencent has invested in public and private companies for many years, and in some cases those companies also connect back to Tencent’s ecosystem, but I would separate that value from Tencent’s operating growth.

Kaspi.kz is one example. Kaspi ($KSPI) announced in April 2026 that Tencent invested alongside Kaspi’s co-founder and other long-term investors in the purchase of 6.0 million ADSs from Baring Fintech Venture Funds. Kaspi called Tencent one of its largest shareholders.

PDD is another useful example. Tencent is still a major shareholder in PDD, owning 13.8% of PDD’s Class A ordinary shares through entities affiliated with Tencent. The two companies have also had a strategic cooperation relationship since 2018, including access points on Weixin Pay, payment solutions, cloud services, user engagement, Weixin payment services, and technical support. PDD also said that in 2023 it signed new agreements with Tencent for continued access points on the Weixin platform.

Tencent is not only an operating company. It also has an ecosystem and portfolio layer around other digital businesses.

Margin / Free Cash Flow Drivers

The financials are one reason I keep following Tencent quarter by quarter. China has been a difficult market since 2020, but Tencent’s profits and cash flow have held up much better than Alibaba’s and many other large Chinese names.

Between 2021 and 2025, Tencent’s revenue grew from RMB560.1 billion to RMB751.8 billion. But the more interesting part is what happened below the revenue line. Gross profit increased from RMB245.9 billion to RMB422.6 billion.

IFRS operating profit increased from RMB124.7 billion to RMB241.6 billion. Non-IFRS profit attributable to shareholders increased from RMB123.8 billion to RMB259.6 billion.

So Tencent did not just grow. It became more profitable during a very tough period. That matters because the environment was difficult for everyone, including Tencent. Broader economic activity slowed down, and many Chinese internet companies struggled to protect margins and cash flow.

The difference becomes clearer when you compare Tencent with Alibaba.

As I wrote before, Alibaba’s revenue growth became more expensive. Margins were pressured, and free cash flow declined. Tencent was different. Revenue grew, but profits grew faster. Margins improved, and free cash flow stayed strong.

Gross margin improved from around 44% in 2021 to 56% in 2025. IFRS operating margin improved from around 22% to 32%.

That matters because revenue growth alone can be misleading. What I want to see is whether more of each renminbi of revenue is turning into profit. In Tencent’s case, that has clearly happened.

For FY2025, Tencent reported RMB751.8 billion of revenue and RMB422.6 billion of gross profit. More importantly, the business generated RMB182.6 billion of free cash flow, up 18% for the year. Tencent also ended the year with RMB107.1 billion of net cash.

Capital Allocation

Capital allocation is one of the main reasons Tencent is interesting. I do not want to overdo the Berkshire ($BRK.B) comparison, but there is one simple similarity: Tencent has used operating cash flow to own stakes in many other companies over time.

At the end of 2025, Tencent reported RMB672.7 billion of listed investee company shareholdings at fair value and RMB363.1 billion of unlisted investee company shareholdings at carrying value.

Tencent also repurchased 153.4 million shares for about HKD80.0 billion in FY2025 while ending the year with RMB107.1 billion of net cash.

That combination matters to me because the company can reinvest in games, cloud, AI, payments, and WeChat, while also buying back shares and keeping financial strength.

The shareholder structure is also worth noting. As of 31 December 2025, MIH Internet Holdings B.V., controlled by Naspers through Prosus, owned 22.8% of Tencent. Ma Huateng, Tencent’s co-founder, had an 8.82% interest through Advance Data Services.

Market Concern

The market has real reasons to be cautious. Tencent is Chinese, complicated, and exposed to regulation, gaming approvals, geopolitics, currency, consumer weakness, AI spending, and the wider discount investors apply to Chinese equities.

There is also one honest limitation. I do not live in China. I can read the annual reports and filings, but that is not the same as using the ecosystem every day. Tencent is tied to how people in China communicate, pay, shop, play games, consume media, and use services. It is also tied to local regulation. Because of that, I need a bigger margin of safety than I would need for a business I understand directly as a customer.

Bear Case

The bear case is not that Tencent is a bad business. The bear case is that Tencent can be a very good business and still not be a good investment for a foreign investor if the discount is not large enough.

Regulation can change. Gaming approvals can affect the profit engine. Consumer behaviour can weaken. AI and cloud spending can pressure free cash flow if returns are not good enough. The investment portfolio can be hard to value, especially the unlisted part. Minority shareholders may not receive the full value of the portfolio in the simple way a spreadsheet suggests.

There is also the risk that I overestimate the ecosystem because I am looking from outside China. WeChat may be critical to daily life, but I still need to understand what can weaken that position, what can become more competitive, and what the government may allow Tencent to earn over time.

This is why the short thesis matters more than the long thesis at the start. It is easy to say Tencent is high quality. The harder question is why I might be wrong.

Valuation Question

As of today, Tencent trades at HKD471.40, with a market value of around HKD4.3 trillion and a P/E of about 17x.

Tencent trades at around 20–21x FY2025 free cash flow based on the headline market cap. That is not deep value by itself.

The valuation becomes more interesting when I adjust for the balance sheet and investment portfolio. Tencent had RMB107.1 billion of net cash and RMB672.7 billion of listed investee stakes at fair value. If I give credit to those two items, the operating business looks closer to a mid-teens multiple of FY2025 free cash flow.

If I also give full credit to the unlisted investments, the multiple looks even lower. But I would be careful with that. Unlisted investments are not cash. I do not want the thesis to depend on treating them as cash.

So the valuation question for me is simple:

After cash, listed investments, the broader portfolio, and China risk, is the price attractive enough for the quality of the business?

What Must Remain True

Tencent is already part of the infrastructure of daily life in China.

Weixin and WeChat are not just apps. People use them to communicate, pay, shop, access services, follow content, play games, interact with merchants, and move through the digital economy. That is what makes Tencent different. It is not just another internet company trying to compete on price.

This is why I am less worried about normal competition. Competition always exists, but Tencent’s position is very hard to replicate. The bigger risks for me are regulation, China risk, and how much profit Tencent is allowed to earn from such an important position over time.

The business already has very profitable segments. Games, advertising, payments, fintech, cloud, and business services all sit inside a very strong ecosystem. The important thing is not whether Tencent suddenly becomes profitable. It already is. The question is whether those economics remain strong and whether free cash flow continues to hold up.

Management is also one of the reasons Tencent is interesting. This is not a weak management team with no history. Tencent has a strong track record, highly capable leadership, meaningful insider ownership, and a long-term way of thinking. Ma Huateng still has a serious economic interest in the business, and that matters to me. It does not guarantee perfect decisions, but it changes how I read capital allocation.

I want management to keep doing what they have mostly done well: allocate capital rationally, protect the strength of the core business, invest where returns make sense, and return capital when the stock price is attractive.

I do not want to own Tencent only because the stock is below its old high. I would only want to own it if the business quality, cash generation, balance sheet, investment portfolio, management quality, and price together compensate for the risks.

What Would Prove Me Wrong

I would be wrong if Weixin started to lose their role as daily digital infrastructure in China.

The real risk would be deeper than normal competition: people using the ecosystem less, merchants becoming less dependent on it, Tencent losing pricing power, or the company losing the ability to monetise its position. As of today, I think that outcome is very unlikely.

I would also be wrong if regulation permanently damaged the economics of the business. The government can change rules, gaming approvals can affect the profit engine, and policy can limit how much profit Tencent is allowed to earn over time.

Competition is still worth watching, but I am less worried about competition alone because Tencent’s position is already very strong. What would worry me more is competition plus regulation plus changing user behaviour weakening the platform over time.

I would also be wrong if margins reversed without a clear future return, if free cash flow weakened structurally, if AI and cloud spending consumed too much cash without good returns, or if the investment portfolio could not be monetised in a way that benefits shareholders.

Tencent can be a great business and still become a poor investment if the price does not leave enough margin of safety.

Not investment advice. Just my own thinking.

Free cash flow was healthy. Management also raised full-year guidance.

For most companies, that would be enough.But software is not being valued normally right now.

The quarter was strong across growth, profitability, cash generation, and customer metrics.

Revenue was $881.0 million, up 23% as reported and 18% in constant currency. Subscription revenue was $862.3 million, up 23%.

Profitability also improved. GAAP operating income was $27.9 million, compared with a loss of $27.5 million last year. Non-GAAP operating income was $156.8 million, up from $100.3 million last year. GAAP operating margin improved to 3.2%, compared with negative 3.8% last year, while non-GAAP operating margin improved to 17.8%, compared with 14.0% last year. Non-GAAP net income was $143.0 million.

Cash generation was healthy. Operating cash flow was $198.8 million, and non-GAAP free cash flow was $153.7 million. HubSpot ended the quarter with $1.8 billion of cash, cash equivalents, and investments.

Customer metrics were also solid. HubSpot had 299,458 customers, up 16%. Average subscription revenue per customer was $11,722, up 6%. Calculated billings were $912.3 million, up 19% as reported and 17% in constant currency.

The company also guided for Q2 revenue of $897 million to $898 million, up 18% as reported and 16% in constant currency.

For the full year 2026, HubSpot guided for revenue of $3.700 billion to $3.708 billion, up 18% as reported and 17% in constant currency.

The company also guided for non-GAAP operating income of $762 million to $766 million, with a non-GAAP operating margin of 21%.

Non-GAAP EPS is expected to be between $13.04 and $13.12.

This is why the stock reaction surprised me.

The stock fell sharply after hours, trading around or below $190. That puts the market cap around $10 billion.

It reported growth, margin expansion, free cash flow, and higher guidance.

So why did the stock fall?

Because investors are no longer giving SaaS companies the benefit of the doubt.

The AI Problem

The concern is not really Q1.

The concern is the future shape of software.

When investors say “AI risk” for software companies, they usually mean tools like ChatGPT, Gemini, Claude, and the new coding tools that make it easier to create software, automate workflows, and interact with data.

For years, software companies benefited from a simple setup:

Companies needed tools. Employees used the tools. The vendor charged per seat, per module, or per platform.

AI makes that model less obvious.

If an AI agent can do the work, maybe the human does not need to log into the software as often. If the AI can update records, write follow-ups, summarize meetings, create tickets, qualify leads, and answer customer questions, then the old software interface becomes less important.

That is the fear.

If AI really changes how work gets done, then a lot of software pricing models will need to change.

The question is whether HubSpot is hurt by that change or whether HubSpot becomes one of the platforms where that change happens.

Agentic Is Easy To Say

This is where I think investors need to be careful.

It is easy to say “agentic but It is much harder to create useful agentic workflows for real businesses. HubSpot has almost 300,000 customers. Those customers do not all use HubSpot in the same way. Some use it mainly for marketing. Some use it for sales. Some use it for service. Some use it as a lightweight CRM. Some use multiple hubs together.

Each business has its own data, workflows, customer history, sales process, support rules, permissions, integrations, and internal habits.

That is the hard part.

AI by itself is not enough.

The AI needs context.

It needs to know the customer, the company, the workflow, the prior conversations, the open deals, the support history, the marketing campaign, the permissions, and the next best action.

That is why I do not think most companies will simply build their own CRM or marketing system from scratch.

Some companies can do it.

I listened to Palantir’s earnings call a few days ago, and they actually talked about legacy SaaS. They also seem to have built their own AI systems in a way that reduces the need for a traditional CRM.

A company like Palantir may be able to build very specific internal AI workflows because it has the technical talent, the operating culture, and the need. In that kind of company, the old CRM idea may disappear. The AI can capture the data, update the system, route the work, and bring the human in only when judgment is needed.

But most companies are not Palantir.

They do not have the time, resources, engineering depth, or internal clarity to build their own CRM, marketing automation, sales automation, and service automation layer.

They still need a platform.

That is HubSpot’s opportunity.

But it is also HubSpot’s risk.

If HubSpot can turn its customer data and workflows into useful agents, it becomes more valuable.

If it cannot, then customers may ask why they are paying for another software layer when AI tools can do more work directly.

The Monetization Question

For me, the biggest question is AI monetization.

HubSpot has been trying to explain this through products like Customer Agent, Prospecting Agent, Data Agent, AEO, Smart Deal Progression, and HubSpot Credits.

I understand the logic.

Instead of charging only for seats, HubSpot can charge for outcomes or usage. For example, Customer Agent is priced around successful resolutions, and Prospecting Agent is priced around recommended leads.

Customers do not want to pay for AI because it sounds interesting. They want to pay because it produces a result.

AI is here, but creating real business use cases is not easy. A company does not commit more budget just because a vendor says “agentic.” It needs to see better conversion, lower support costs, faster ticket resolution, cleaner data, better lead quality, or more efficient sales follow-up.

That takes time.

HubSpot needs customers to use the AI products so the products improve and monetization grows. But customers need to see results before they commit too much spend.

That is why the credit system matters.

If credits become a clean way to charge for real outcomes, then HubSpot has another growth lever.

If credits feel confusing, expensive, or hard to connect to business value, then monetization will be slower.

That is what I am watching.

Capex And Product Investment

The second thing to watch is investment intensity.

HubSpot generated $203.5 million of non-GAAP operating cash flow in Q1 and $153.7 million of non-GAAP free cash flow.

The difference is roughly $50 million.

That came from $15.4 million of purchases of property and equipment and $34.3 million of capitalized software development costs

The company also still has a strong liquidity position. Cash and cash equivalents were $943.9 million, short-term investments were $747.1 million, and long-term investments were $87.5 million at quarter-end. Together, that is about $1.78 billion of cash and investments.

The market is already worried that software companies will need to spend more just to defend their existing business.

That is a very different story from the old SaaS model.

In the old model, investors assumed software companies could scale with very high incremental margins. AI may still improve productivity, but it also requires more product investment, more infrastructure, more data work, and more experimentation.

So the question is simple:

Is HubSpot spending to create a stronger platform, or is it spending just to keep up?

Those are very different things.

Valuation

At around $190 per share, HubSpot’s market cap is roughly $10 billion.

The company has about $1.8 billion in cash, cash equivalents, and investments. That puts the rough enterprise value near $8.2 billion, before smaller adjustments.

Using the midpoint of 2026 guidance, HubSpot expects about $3.704 billion of revenue, about $764 million of non-GAAP operating income, and about $13.08 of non-GAAP EPS.

At $190, the stock trades at roughly 2.7x 2026 revenue, or 2.2x 2026 revenue on an enterprise value basis.

It also trades at about 14.5x 2026 non-GAAP EPS and 10.7x 2026 non-GAAP operating income on an enterprise value basis.

That is not demanding for a business still growing revenue around 18% with a 21% non-GAAP operating margin.

HubSpot is guiding for about $3.704 billion of revenue and $762 million to $766 million of non-GAAP operating income. That is roughly a 21% non-GAAP operating margin.

On that basis, at around $190, the stock trades at roughly 10.7x enterprise value to guided non-GAAP operating income.

Q1 free cash flow is still useful, but as a cash conversion check.

HubSpot reported $153.7 million of non-GAAP free cash flow in Q1.

That number comes from $198.8 million of GAAP operating cash flow, minus $15.4 million of property and equipment purchases, minus $34.3 million of capitalised software development costs, plus $4.7 million of restructuring payments added back.

My View

The market is basically saying: “Good quarter. But prove the AI story.”

Investors are punishing SaaS companies that do not crush earnings and give confidence about the future. Growth deceleration is not a surprise, especially with macro uncertainty. But the old tolerance is gone.

For a few years, SaaS companies could talk about product roadmaps and investors would pay high multiples.

That period is over. Now investors want evidence. They want to see whether AI increases revenue, improves retention, expands margins, or creates new usage-based economics. That is why HubSpot falling after a strong quarter is not completely irrational.

Revenue growth was strong. Margins improved. Guidance moved up. Free cash flow was healthy. Customers continued to grow. Average subscription revenue per customer grew. The balance sheet is strong. The company also bought back $211 million of stock in the quarter, with $789 million remaining under the repurchase program.

But I also understand the concern.

HubSpot has to prove that AI is not just a feature layer. It has to prove that AI can become part of the workflow and part of the monetization model.

Customers need to see results before they commit more spend.

HubSpot has the right ingredients: customer data, workflows, nearly 300,000 customers, multiple hubs, a large ecosystem, and a clear need across marketing, sales, and service.

The stock falling below $190 makes the valuation more interesting. At roughly 10-11x enterprise value to guided non-GAAP operating income, the market is no longer pricing HubSpot like a perfect SaaS compounder.

The question is whether HubSpot can turn AI into measurable business outcomes for customers.

Sources:

- HubSpot Q1 2026 results: https://ir.hubspot.com/news-releases/news-release-details/hubspot-reports-strong-q1-2026-results

- HubSpot Spring 2026 Spotlight: https://www.hubspot.com/spotlight

- HubSpot Credits overview: https://knowledge.hubspot.com/account-management/understand-hubspot-credits-and-billing

The first is that AI may weaken the traditional seat-based SaaS model.

The second is that the barrier to building software is falling fast.

Both are valid concerns. But the market is still making a mistake by treating all software companies as if they are the same.

That is where the misunderstanding begins.

Why the valuation reset happened

The reset in software valuations did not come out of nowhere. Investors started to realise that the old way of valuing SaaS may not hold as cleanly as before.

For years, the model was simple enough. More employees at customers meant more software seats. More seats meant more recurring revenue. That created a fairly understandable link between adoption and revenue growth.

Now that link looks less certain.

1. AI agents may reduce seat growth

If AI agents and automation tools start taking over repetitive work, some roles may disappear, and others may change. We are already seeing signs of this. Even SaaS companies themselves are doing it. They are automating repetitive internal work, reducing certain types of roles, and shifting hiring towards more value-added functions.

Salesforce is one example people point to. The company has talked about using AI to automate some internal tasks while still investing in areas like sales. That matters because many software businesses have historically grown through seat expansion. If fewer people are needed to get the same amount of work done, then that old seat-based revenue model becomes less predictable.

That creates a valuation problem.

If revenue gradually shifts from seat-based pricing toward outcome-based, usage-based, or resolution-based models, investors have less certainty. They do not yet know what the new steady-state economics look like. They do not know how durable the pricing will be, how usage will behave, or what margins look like over time.

So part of the sell-off is really the market saying: we are no longer sure how to value these businesses the way we used to.

2. The barrier to building software has fallen

Tools like Claude Code and others are reducing the time, cost, and human effort needed to build software. You no longer need the same size engineering team to get a product off the ground. Development cycles are getting shorter. Similar products can be built faster. A lot of code can now be generated with AI assistance, and that percentage is likely to keep rising.

That does not mean the software is automatically better. That still has to be proven. But it does mean that the resource intensity of starting a software company is falling.

If it becomes easier, cheaper, and faster to launch a product, then competition increases. More teams can enter. More tools get built. More categories get crowded. What used to require a serious technical organisation may now require fewer people, less time, and less capital.

That is another reason valuations reset. Investors are asking whether software should still command the same multiples if the supply of software products increases and the cost of creating them keeps falling.

But the market is still oversimplifying it

Where the market gets it wrong is by taking those two concerns and applying them equally to all SaaS businesses.

That is too simplistic.

Not all software is equally exposed to these risks. Some software is shallow, easy to replicate, and lightly embedded. Some is deeply integrated into how an enterprise actually functions.

Those are completely different businesses.

Where the fear is valid

The fear is real for thinner software businesses.

If a product is basically a narrow interface on top of a database, with limited workflow depth and little integration into the customer’s operations, then yes, it is vulnerable.

A lot of standalone apps, lightweight productivity tools, and simple workflow products fall into that bucket.

If a customer can recreate something close enough quickly and cheaply, pricing power weakens. If the core value is mostly the interface, then the moat was never that strong.

For those businesses, lower barriers to entry are a real threat.

Where the market gets it wrong

The problem is that the same logic is being applied to large enterprise platforms, where the economics are very different.

For scaled enterprise SaaS, code is only one part of the value. Often it is not even the main part.

These businesses are not just selling software. They are selling systems that sit inside the operating structure of the customer. Over time, they become tied to workflows, approvals, compliance, reporting, audit trails, internal controls, training, and decision-making.

A coding tool can help write software faster. It cannot instantly recreate years of trust, integration, implementation experience, security review, legal accountability, and organisational adoption.

The real moat is not just the code

This is the part many people miss.

When they look at a big SaaS company, they assume the value sits mainly in the software itself. But in many enterprise platforms, the visible software is only part of the story.

The real moat often comes from:

• deep workflow integration

• switching costs

• trust built over years

• compliance and security approvals

• embedded data relationships

• global support and implementation

• internal standardisation across large organisations

• distribution and customer reach

That is not something a prompt can reproduce.

Yes, code is becoming cheaper. But enterprise trust is not. Institutional adoption is not. Deep embeddedness is not.

The data and trust issue matters more than people think

This becomes even more important once AI starts doing more real work inside companies.

These systems need data. Not just surface-level data, but real operational data. Customer information, legal contracts, employee permissions, financial records, security controls, internal workflows.

Large enterprises are not going to hand that over to a two-week-old startup just because the demo looks clever.

In regulated industries especially, vendor trust takes years to build. Procurement, legal, compliance, security, and internal audit all matter. These customers do not just buy features. They buy reliability, accountability, and continuity.

So when these companies adopt AI capabilities, the likely outcome is not always that the incumbent gets replaced. Often the incumbent is the one best positioned to deliver those capabilities because it already has the relationship, the permissions, and the trust.

That matters a lot.

What these companies are actually solving

This becomes much clearer when you ask the right question.

Not: Can this product be rebuilt?

But: What job is this company actually doing for the customer?

That is the better lens.

Salesforce is not just a contact database. In many enterprises it is tied into quoting, approvals, pipeline management, territory rules, contracting, and revenue workflows. The value is not just storing customer data. The value is providing reliable commercial infrastructure.

ServiceNow is not just an IT ticketing tool. In many companies it connects IT, HR, legal, security, and internal controls. It creates process discipline and auditable records. That is much harder to replace than people assume.

Adobe is not just image creation software. For large creative organisations, it provides workflow consistency, asset control, collaboration, legal comfort, and a talent base trained on its ecosystem. That is far more valuable than just the tool itself.

In each case, the visible software is only part of the value. The rest comes from being trusted, embedded, and integrated into the way the customer operates.

Ironically, AI may help the incumbents most

If coding becomes faster and cheaper, the businesses with scale may benefit the most. They already have customers, distribution, trust, and installed workflows. Now they can potentially improve products faster and do it with lower cost.

That can increase operating leverage.

Historically, one of the biggest expenses in SaaS has been engineering talent. Alongside that came heavy stock-based compensation to attract and retain it. If AI meaningfully improves developer productivity, large software companies may be able to ship more, maintain products more efficiently, and eventually rely on fewer people for the same output.

That could mean:

• faster product cycles

• lower engineering intensity

• better margins

• less dilution from SBC over time

• stronger free cash flow conversion

So yes, AI may compress parts of the market. But it may also make the strongest platforms more profitable.

The real mistake is that the market is mixing up two very different categories.

One is software that is easy to copy, lightly embedded, and vulnerable to falling barriers to entry.

The other is software that sits deep inside enterprise workflows, with trust, integration, compliance, and switching costs built over many years.

The first category deserves more caution.

The second may actually become stronger.

Bottom line

The SaaS sell-off reflects two real fears: that AI may weaken the old seat-based revenue model, and that software is becoming easier and cheaper to build.

Both concerns are valid.

But the market is going too far by treating all SaaS as if those risks hit everyone equally.

If a software business is shallow and easy to replicate, then yes, the threat is real.

But for deeply embedded enterprise platforms, the story is different. Their value was never just in the code. It was in the trust, the workflow integration, the distribution, the compliance layer, and the fact that they are already part of how large organisations operate.

In that world, AI is not just a threat. It can also be a productivity tool that helps the incumbents build faster, run leaner, and become even more profitable.

Disclaimer: This article is for informational purposes only. It is not financial advice. I am not a financial advisor. I may buy or sell these stocks at any time. You must do your own research before investing

By reading this email, you agree to the full disclaimer found here: https://www.thevaluethesis.com/p/disclamier

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Now Salesforce trades around 13–14x free cash flow. The S&P 500 is closer to 21x. Coca-Cola is around 22x and grows slower. That gap tells you expectations have flipped, the market isn’t paying for the best case anymore. At 14x, Salesforce doesn’t need to prove it can grow at 20% to make sense; it just needs to stay stable, keep customers, and keep converting revenue into cash.

They’re managing costs better

Stock-based comp is now around 8% of revenue, down from over 10%. They also stopped hiring as many people. When costs slow down and revenue stays the same, profits go up.

This is the first time in a while the company seems to care about shareholders.

Customers don’t leave easily

About 90% of the Fortune 500 use Salesforce. It’s not just software. It holds years of customer data, workflows, integrations, and reports. You can’t just turn it off. Replacing it takes years and comes with risk.

So even if growth slows, the customer base stays.

It’s an Ecosystem, Not an App

If Salesforce were just a place to store phone numbers, you could export a file and switch to a competitor in an afternoon. But for the Fortune 500, Salesforce is more like an operating system.

Companies build custom applications on top of Salesforce using proprietary languages like Apex and tools like Flows. These custom apps do not translate to other systems. To leave, you have to rebuild them from scratch.

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A typical enterprise has Salesforce connected to their ERP system, their marketing tools, their customer support lines, and their email. Unplugging Salesforce breaks the data flow across the entire company.

Data Gravity

As a dataset grows, it becomes harder to move.

Years of customer interactions, purchase history, and support tickets are stored there. Migrating this data to a new structure is a large project with a high risk of corruption or loss.

Most companies have messy data. Moving requires cleaning it first—a project that can take months on its own.

The “Rip and Replace” Risk

Replacing a core system like Salesforce is often compared to changing the engine of a plane while it is flying.

If the new system fails or has bugs during the switch, sales stop, support tickets get lost, and revenue takes a direct hit.

You have thousands of employees who know exactly where to click to do their jobs. Moving to a new interface causes a large dip in productivity for 6–12 months as users relearn how to work.

What could go wrong

The stock is cheap for a reason.

1. If teams start working through AI agents, they might not log into Salesforce anymore. The AI just talks to Salesforce in the background. If Salesforce becomes invisible, they lose pricing power.

2. Salesforce charges per user. If AI makes teams more efficient, companies need fewer people. Fewer people means fewer licenses. The question is whether they can replace that revenue fast enough with usage-based pricing.

Why I’m looking at it now

At $175–$190, Salesforce isn’t priced like it has to keep growing fast.

If it becomes like Oracle with customer data, that’s not exciting, but it can generate cash for years. And at ~13x free cash flow, the market already treats it that way.

That’s the point and that’s why it’s worth watching.

Disclaimer: This article is for informational purposes only. It is not financial advice. I am not a financial advisor. I may buy or sell these stocks at any time. You must do your own research before investing

By reading this email, you agree to the full disclaimer found here: https://www.thevaluethesis.com/p/disclamier

What surprised me was the lack of real coverage that explained what actually happened. Most posts just repeated the headline: “Gartner missed” or “guidance”.

Adjusted EPS was $3.94. Revenue grew 2% to $1.8 billion. Free cash flow was $271 million in the quarter.

They bought back $500 million of stock in Q4 and $2.0 billion for the full year.

The stock still fell because the market fixated on one metric: contract value growth.

In Q4, global contract value reached $5.2 billion but grew only 1% year over year. Ex-U.S. Federal, growth was 4%. That number alone was enough to change perception. Not because it is a collapse, but because it is far from what investors were used to paying for.

This was not driven by client losses.

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Clients are renewing. In Global Business Sales (GBS), client retention was 86% and wallet retention was 99%. The issue was expansion. Companies are keeping Gartner but delaying decisions to add seats, expand usage, or increase scope.

Management described the pattern as budgets are under pressure, approval levels are higher, and buying cycles are longer. When spending decisions move from CIOs to CFOs, expansion slows first. Renewals hold, but growth inside the account gets harder.

Government was a clear headwind.

U.S. Federal clients faced efficiency initiatives and funding changes, and management said this reduced contract value. They also said that at year-end they had only $126 million of U.S. Federal contract value remaining. Ex-federal growth was roughly 330 basis points higher, which helps isolate the impact.

But it was not only government.

In the core Global Technology Sales (GTS) segment, which is roughly $3.9 billion of the total business, contract value was flat year over year. That matters because it shows the behaviour across private enterprise too. This was not a single customer problem. It was broad budget behaviour.

Some investors pointed to AI as the cause. Management pushed back on that.

They said they track whether clients raise AI as a substitute during sales and renewal conversations, and they do not see it as meaningful. They also said AI is the biggest topic clients ask about. Gartner said it produced over 6,000 AI-related documents and had about 200,000 in-depth client conversations on AI in 2025. The message was simple: clients are not replacing Gartner with AI tools. They are using Gartner to make AI decisions.

The seat model is still the pressure point.

Gartner’s model works best when organisations are hiring. Hiring has been flat. When employees leave and roles are not refilled, seats get removed. That hurts expansion even when the relationship is stable.

Management is responding by trying to increase engagement and speed so the value stays clear even when headcount does not grow. They gave an example: they reduced creation time for some high-value research outputs (like Magic Quadrants) by 75%.

Why does that matter?

Because Gartner compounds through renewals. More engagement now can show up as higher contract value later, often 12 to 24 months later when contracts come up for renewal. The company is investing now to affect that later outcome.

Management guided for 2026 revenue of at least $6.455 billion and adjusted EPS of at least $12.30. The market did what it always does: it discounted uncertainty immediately.

Why the market listened, and why other software names moved

Gartner is a read-through on enterprise budgets.

When Gartner says expansion is slower because approvals are tighter and buying cycles are longer, the market applies that logic across other companies that rely on seat growth, upsells, and budget confidence.

That’s why names like $CRM, $NOW, $SAP, and $TTD moved with it. Different products, same behaviour: expansion is the first thing customers delay.

The Nasdaq was down about 2% on the day. In that kind of market, any confirmation of slower demand leads to multiple compression. This was not “bad news.” It was “less certainty.”

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Valuation reset

When a stock drops hard, investors assume the business is in trouble. Sometimes that is true. But sometimes the business is fine and the market is repricing the stock because the growth story changed.

The cash flows can still be there. Retention can still be there. Margins can still be there. What changes is the expected pace of expansion, and the multiple investors will pay while they wait.

That is what this felt like.

Gartner did not show stress in the core subscription model. Renewals held, margins held, and buybacks continued. The market reaction was about contract value growth slowing, which reduces confidence in the next 12–24 months.

When confidence drops, the multiple compresses first. The income statement follows later, if the slowdown persists.

Valuation

Disclaimer: This article is for informational purposes only. It is not financial advice. I am not a financial advisor. I may buy or sell these stocks at any time. You must do your own research before investing

By reading this email, you agree to the full disclaimer found here: https://www.thevaluethesis.com/p/disclamier

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​Charlie Munger didn’t succeed just because he was smart. He succeeded because he understood the math of reality better than most. He knew that algebra is a filter for making decisions.

The first thing I had to unlearn was how I valued potential. If a deal had a 40% chance of making $1 million, my brain went straight to the $1 million. I started with the upside.

​But that was wrong.

​If I have a 40% chance of winning $100, I do not have $100. I have a ticket worth $40.

​$100 x 0.40 = $40.

​That is the reality. Once I accepted this, I stopped chasing “potential”.

​The Standard of Misery

​Most people try to maximize happiness. I have learned it is mathematically more efficient to minimize misery.

​In algebra, you can have a string of great numbers: 10 x 10 x 10. You are doing great. But if you multiply that string by Zero, the answer is Zero.

​In life, “Zero” isn’t just nothing. It is ruin, disaster.

​I assign values to these outcomes:

• ​Success: +100

• ​Misery: -1,000

​If I look at a decision and there is even a 2% chance of Misery, the math breaks.

​2% of -1,000 is -20.

​That penalty is so heavy it destroys the value of the decision. I don’t care what the upside is. You cannot average out a ruined life.

​We often judge our success by our current results.

​It looks different depending on the game you are playing.

If you are a value investor, you don’t need to be right every time. You might only have a 60% win rate on individual stocks. You will have losing years.

​But your Overall Success Probability is 75%.

Why? Because you have removed the “Zero.” You don’t use leverage. You don’t buy scams. Even if a stock drops 40%, you don’t panic sell. Because your downside is capped at “temporary pain” rather than “total ruin,” the math guarantees that if you just keep playing, the 60% win rate will eventually compound you into a millionaire.

The gap between your current value and your real value is the value of your discipline. You are richer than your bank account says. You just have to wait for time to print the receipt.

If you are an entrepreneur, the math flips. You are like Jeff Bezos. You accept that your success probability on any single idea is naturally low, maybe 10%. But your upside is 100x. (Asymmetric Upside)

​Most people look at a founder with three failed launches and see a loser. If you have ten ideas, and each has a 10% chance of a 100x return, your Expected Value is massive. You don’t need to be right often; you just need to be right once.

Imagine you have to decide whether to launch a new product line.

• ​Cost to Launch: $50,000 (Capped Loss).

• ​Probability of Failure: 80%.

• ​Probability of Success: 20%.

• ​Upside if Successful: $1,000,000.

​Most managers say “No” because there is an 80% chance of failure. They are scared of looking bad.

But run the algebra:

(0.20 x $1,000,000) - (0.80 x $50,000)

$200,000 - $40,000 = +$160,000.

​The decision has a positive value of $160,000 the moment you say “Yes.” Even if it fails, it was the right mathematical move.

​Jeff Bezos says if you have a 10% chance of a 100x return, you take the bet every time. He is right.

​The goal isn’t to be a genius.

​If you survive the downturns, avoid the -1,000 zeros, and let the probabilities play out, the math takes care of itself.

Disclaimer: This article is for informational purposes only. It is not financial advice. I am not a financial advisor. I may buy or sell these stocks at any time. You must do your own research before investing

By reading this email, you agree to the full disclaimer found here: https://www.thevaluethesis.com/p/disclamier

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Since that post, the environment changed.

The software sector crashed this week. Gartner stock fell in sympathy. The price is down roughly sixty percen…

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The biggest reason people lose money is simple: they buy a ticker symbol, not a business. If you cannot explain how a company makes money, you have no business owning it.

• Understand the “Why”: Does the company sell a product people need (like toothpaste) or just want right now (like a trendy gadget)?

• The 5-Year Test: If you aren’t willing to hold the stock for at least 3-5 years, don’t own it for 10 minutes. In the short term, stock prices are random and unpredictable. In the long term, they follow the business’s actual profits.

Price vs. Value: They Are Not the Same

A stock price tells you what people think a company is worth today. It does not tell you what the business is actually worth.

• Valuation Matters: You can buy a great company at a bad price and still lose money. Always ask: “If I bought the whole company at this price, would the cash it produces give me a good return?”

• Ignore “Adjusted” Earnings: Wall Street loves to pretend expenses like stock compensation aren’t real. Ignore them. Look at GAAP earnings, the real cash left over after everyone gets paid.

The Balance Sheet: Your First Line of Defense

Before you look at how much money a company makes, look at what they owe.

• Debt: Companies with heavy debt burdens are fragile. If interest rates flip or the economy slows down, debt can wipe out equity holders overnight.

• The Safety Net: A strong balance sheet gives a company the power to survive hard times and buy back their own stock when it’s cheap.

Think Like a Business Owner

Be a business owner. Warren Buffett doesn’t buy a stock hoping it goes up next week; he buys a business because he wants to own its future cash flow.

• Ignore the Headlines: The news is noise designed to make you emotional.

• Look 18-24 Months Out: As Stan Druckenmiller says, don’t buy for today. Buy for where the business will be in two years. If you can’t see that future clearly, stay away.

Betting on What Won’t Change

Predicting the next big invention is nearly impossible. It is much easier (and more profitable) to bet on what won’t change.

• The Jeff Bezos Principle: People will always want lower prices, faster shipping, and better selection.

• The Moat: Invest in companies with a competitive advantage that is hard to break, whether it’s a brand people trust (Coca-Cola) or a network effect that locks people in.

Risk, Growth, and the “Downside”

Never invest based solely on a “growth story.” Stories change quickly.

• Multiples Matter: If you pay 50x earnings for a company, everything has to go perfectly for you to make money.

• Know the Downside: Before you ask “how much can I make?”, ask “how much can I lose?” There is always risk you can’t see.

• Normalized Margins: Don’t trust a single boom year. Look at what the company earns in a “normal” year to understand its true power.

The Power of Doing Nothing

Activity is the enemy of returns.

• Tax Efficiency: Every time you sell, you trigger a tax event and interrupt the compounding process.

• Decision Fatigue: The more decisions you make, the more likely you are to make a bad one. Keep your process clear and simple.

• Let Winners Run: If a great company is growing its earnings and reinvesting wisely, do not sell just to “take a profit.” You interrupt the magic of compounding.

Master Your Psychology

Investing is not a game of IQ; it’s a game of temperament.

• Think in Probabilities: Nothing is 100% certain. Ask yourself: “What is the probability of this going right vs. going wrong?”

• Detach Emotionally: The market exists to serve you, not to instruct you. When stocks crash, don’t panic, get interested. That is when the best businesses go on sale.

Final Thought: Success comes down to this: Buy great businesses with clean balance sheets and wide moats. Pay a fair price. Then, do the hardest thing of all, wait.

Disclaimer: This article is for informational purposes only. It is not financial advice. I am not a financial advisor. You must do your own research before investing

By reading this email, you agree to the full disclaimer found here: https://www.thevaluethesis.com/p/disclamier

This wasn’t about one issue. Two things hit at the same time.

First: the earnings headline.
UnitedHealth reported very low GAAP earnings and guided to lower revenue next year.

Most trading systems don’t read context. They see “lower revenue” and “no profit” and sell.

Second: the government headline.
The night before earnings, the US government proposed a 0.09% increase in Medicare Advantage rates for 2027.

With inflation running closer to 3–4%, that effectively means getting paid less in real terms.

Put together, the message the market heard was simple:

• Revenue down

• Profits under pressure

• Government pushing back

That combination spooked investors.

What Was Actually Going On in the Quarter

Disclaimer: This article is for informational purposes only. It is not financial advice. I am not a financial advisor. I may buy or sell these stocks at any time. You must do your own research before investing

By reading this email, you agree to the full disclaimer found here: https://www.thevaluethesis.com/p/disclamier

The quarter looked bad on paper, but most of the damage was intentional.

Management took a large one-time charge to deal with existing issues:

• Costs from the cyberattack

• Closing weaker parts of the business

• Cutting underperforming teams and contracts

They chose to deal with these problems now instead of letting them linger.

When you adjust for that, earnings were $2.11 per share, ahead of expectations. The business continued to generate strong cash. The headline numbers just didn’t show it.

Shrinking on Purpose

This is the part that really unsettled the market.

For the first time in years, UnitedHealth is planning to get smaller.

• 2025 revenue: about $448 billion

• 2026 guidance: about $440 billion

This is deliberate.

Management expects to lose:

• Around 1.3–1.4 million Medicare members

• Around 700,000 Medicaid members

These are members that were costing more than they were paying in.

Revenue goes down. Profitability improves.

Instead of chasing size, the company is focusing on margins and control. That usually looks uncomfortable at first.

The Government Question

The biggest unknown is still the government.

Medicare is expensive, and the US is trying to slow cost growth. The message from regulators is essentially:

“We’re not increasing payments. Become more efficient.”

If rates stay tight, insurers reduce extra benefits like dental, vision, and gym memberships. That affects real people.

UnitedHealth covers roughly 8.4 million seniors under Medicare.

Cutting benefits at that scale creates political pressure, especially going into an election year. The final decision hasn’t been made yet.

How AI Fits Into This

AI wasn’t mentioned as a buzzword. It was mentioned as a cost tool.

UnitedHealth plans to spend around $1.5 billion per year on AI, with the goal of saving roughly $1 billion per year starting in 2026.

Where that shows up:

• Call centres: AI helps staff find information faster

• Claims: more decisions handled automatically, with fewer manual steps

If revenue growth slows, lowering costs becomes the main lever. This is how they do that at scale.

Cash Tells a Different Story

While reported earnings were close to zero, cash flow was not.

UnitedHealth generated about $19.7 billion in operating cash flow over the year.

Earnings can be shaped by accounting choices. Cash reflects what the business actually produces.

Management plans to focus on paying down debt in early 2026. After that, they expect to restart share buybacks later in the year.

That matters more than short-term headlines.

Short-Term Issues vs. Long-Term Ones

It helps to separate what’s temporary from what really matters.

Short-term pressures:

• Higher medical usage

• Strong flu seasons

• Temporary cost spikes

These come and go, and are already factored into future pricing.

Long-term pressure:

• Government reimbursement levels

That’s the real debate. It may cap growth and force efficiency, but it doesn’t mean the business stops working.

Management described 2026 as a year to fix things, with expectations of returning to more normal growth in 2027 or 2028.

Looking Ahead: The Possible Paths

Everything from here depends on one thing:

The government’s final Medicare rate decision in April 2026.

From that point, the business likely follows one of three paths.

2026: A Year of Adjustment

This part is fairly clear, based on management guidance.

Revenue comes down slightly as unprofitable members are removed.
Costs improve.
Cash flow remains strong.
Buybacks return in the second half of the year.

Despite lower revenue, earnings still grow because margins improve.

Scenario A

Trigger:
The government raises Medicare Advantage rates to around +1.5% to avoid large benefit cuts for seniors.

Result:
UnitedHealth stops shrinking. Membership stabilises. Share buybacks accelerate in 2027.

Numbers:

• 2027 revenue: approximately $465 billion

• 2027 earnings per share: approximately $20.50

Stock implication:
At a normal valuation, the stock could recover to $430 or higher by 2027.

Scenario B

The government makes a small concession, around +0.5%.

Result:
UnitedHealth continues to shrink slightly for another year but protects margins through cost controls and AI efficiency.

Numbers:

• 2027 revenue: approximately $450 billion

• 2027 earnings per share: approximately $19.75, largely driven by buybacks

Stock implication:
The stock likely moves gradually higher into the $355–$375 range.

Scenario C

The government keeps rates near the original 0.09% proposal.

Result:
Benefits are reduced further, membership declines again, and revenue remains under pressure.

Protection:
Even in this case, UnitedHealth is expected to generate around $18 billion in annual cash flow.

Stock implication:
That level of cash generation should limit downside, with the stock likely trading in the $295–$315 range rather than breaking down.

Summary

The short-term outcome depends on regulation, not demand.

The downside is supported by strong cash generation. The upside depends on how quickly the government eases pressure on the system.

The market is currently focused on the worst-case outcome. The next 12–18 months will show which path becomes reality.

Disclaimer: This is not financial advice. Investing involves risk.

The Trade Desk as a marketplace where brands buy ads across the internet.

Old world: Ford wanted TV ads → call a network → negotiate → slow, inefficient.
New world: Ford’s agency logs into TTD, uploads the ad, picks the audience (“men 25–40 who like trucks”), and presses go.

Within milliseconds, TTD’s system bids on ad slots across:

• Connected TV (Disney+, Hulu, etc.)

• Spotify, podcasts

• Websites (NYT, ESPN, etc.)

What they don’t do: they don’t buy ads inside Google Search or Meta (Facebook/Instagram). Those are closed ecosystems where outsiders can’t bid freely.

They take a small fee on every ad dollar that flows through their platform.

The moat

Google both owns a lot of the ad inventory (like YouTube) and runs one of the tools used to buy ads. That’s like the referee also owning one of the teams. Even if they try to be fair, the incentives are messy.

TTD is different:

Disclaimer: This article is for informational purposes only. It is not financial advice. I am not a financial advisor. I may buy or sell these stocks at any time. You must do your own research before investing

By reading this email, you agree to the full disclaimer found here: https://www.thevaluethesis.com/p/disclamier

• They own zero media

• They don’t own TV channels, websites, or ad space

• They’re just the buying tool

So big brands trust them more to spend money where it actually works, not where the platform owner wants it to go.

They’ve kept over 95% of customers every year for 11 years. Once agencies train on TTD, they rarely switch.

The “real” profits (GAAP)

The stock compensation

TTD pays employees a lot in stock. That cost shows up in GAAP earnings, and it matters because it dilutes shareholders over time.

In the first 9 months of 2025:

• Stock paid to employees: $378m

• GAAP profit: $256m

• “Adjusted” profit (Wall Street’s version): $589m

Why growth is slowing

Growth used to be 40%+. Now it’s more like low-20s.

Main reasons:

• Bigger base: it’s harder to grow 40% when you’re already doing $2.5B revenue.

• Market maturing: digital advertising isn’t “new” anymore.

• Management’s Q4 2025 guide implies roughly 18–20% growth (excluding political ads), which is likely the new normal.

1) It’s harder at this size
40% growth on $500m is easy math. 40% on $2.5b means finding about $1b of new revenue every year. That’s a huge ask, even for a best-in-class platform.

2) The market is maturing
Digital ads aren’t a fresh “land grab” anymore. Growth now comes more from taking share (from other platforms or old TV budgets) than from a wave of new adoption.

3) Amazon changed the game in CTV
Amazon is moving aggressively into premium streaming inventory and often makes buyers use Amazon’s own tools to access it. That locks TTD out of part of the best inventory, which limits how fast budgets can shift onto TTD.

The long-term growth range: 15% to 20%

If you’re underwriting the next 5 years, don’t anchor to the 40% era. This looks more like a steady “compounder” profile.

• 2026: roughly 16%–20% revenue growth

• 2027–2030: a gradual fade toward 14% as the company gets larger.

What keeps growth above 15%?

Management’s main levers are:

1) International
They’re still heavily US-weighted. If they truly crack Europe and Asia, that’s meaningful runway.

2) Retail media / shopper marketing
Partnering with retailers and using purchase data to target and measure results is a big growth pocket, because it ties ads to actual sales.

3) Connected TV
As cable declines, ad budgets keep moving to streaming. Programmatic buying is a natural fit here, and TTD is one of the key pipes.

What holds it back?

1) US saturation
They’re already big in the US. It’s hard to double when you’re already in almost every major agency relationship.

2) The Amazon wall
If Amazon keeps premium inventory increasingly “closed,” that’s a real ceiling on how much of the best CTV spend TTD can touch.

Valuation: where to feel comfortable

Once you accept 15%–20% as the likely long-run growth range, the price you pay matters a lot.

Scenario A: $35/share
You’re paying roughly 40x “real” earnings for 15–20% growth.

Scenario B: $25/share (your $12B–$13B market cap zone)
You’re closer to 27x real earnings.

Bottom line

The hyper-growth phase is likely over. This is becoming a high-quality compounder.
Your $12B–$13B market cap target is a sensible entry point for this phase of the business, because it matches the slower (but still strong) growth reality and gives you margin of safety.

5) My comfort-zone price

At about $35/share:

• Market cap $17.2B

• Real P/E 39x (not cheap)

At my target $12–13B market cap:

• Share price roughly $24.50–$25

• Real P/E around 27x

27x GAAP earnings for a company growing 20% with a real moat and 95% retention is reasonable.
At 39x, you’re paying extra for perfection, basically betting growth re-accelerates (AI, international, etc.).

My take

The good: best product in its niche, trusted “neutral” platform, insanely sticky customers.
The bad: heavy stock pay means your real earnings are lower and you get diluted. Growth has normalised to 20%.
I want margin of safety, wait for $25. At $35, it’s a great company, but the price is a bit stretched.

Disclaimer: This article is for informational purposes only. It is not financial advice. I am not a financial advisor. I may buy or sell these stocks at any time. You must do your own research before investing

By reading this email, you agree to the full disclaimer found here: https://www.thevaluethesis.com/p/disclamier

As I write this, markets are taking the headlines badly.

But this is exactly when you pay attention. The best chances are rare. They don’t show up often. When they do, you need to be ready.

Charlie Munger said opportunities come to a prepared mind. That’s the point: you do the work early.

Investing is mostly study, not action. Most of the time, the right move is to do nothing.

Right now, many good companies still look expensive. The prices leave no room for mistakes. So I’m building my watchlist, deciding what I’m willing to pay, and then waiting.

In late 2025, I shared Watchlist #1.

Here are 5 more businesses I’m watching, and the prices I’m waiting for in 2026

What they all have in common:

1. High Switching Costs — once you’re in, it’s hard to leave. These businesses become part of how customers operate.

2. Disconnected Narratives — the story around them is worse than the reality. Headlines and sentiment are driving the price more than the actual business performance.

3. Real Free Cash Flow — they generate cash after paying for what the business needs. That gives them options: reinvest, buy back shares, or strengthen the balance sheet.

4. A Moat I Trust — I believe they have real protection around the business. Something that makes it hard for competitors to take customers and profits.

All five are currently hated or ignored for reasons that are likely temporary or exaggerated.

And because sentiment has already pushed them closer to what I think is fair value, I’m watching these names more closely than the rest, to see if the price drops to where I’d actually want to buy.

My prices might surprise you. But my job isn’t to be optimistic. It’s to avoid big mistakes. I want a price that gives me breathing room.

That’s what a margin of safety is.

Disclaimer: This article is for informational purposes only. It is not financial advice. I am not a financial advisor. I may buy or sell these stocks at any time. You must do your own research before investing

By reading this email, you agree to the full disclaimer found here: https://www.thevaluethesis.com/p/disclamier

1. HubSpot (HUBS)

Current Price: $311 Market Cap: $16.3B

The business is solid. They generate roughly $3 billion in revenue and are free cash flow positive. Growth is steady at around 15%.

The Problem: The stock price is priced for 25%+ growth forever. At $329, the math doesn’t work. If AI slows their seat expansion or margins compress even slightly, this stock has a long way to fall.

The Price I’m Waiting For: $215 – $235 I want a margin of safety. If the price drops to this range, the risk/reward flips in my favor. Until then, I’m not interested.

2. Adobe (ADBE)

Current Price: ~$296 Market Cap: ~$124B

Adobe stock is “dead money” right now. It’s trading near $296 because the market is convinced AI will kill their business.

I disagree. Corporate workflows are built on Adobe. Switching costs are high, and compliance is messy. The financials tell a different story than the narrative: Adobe generates $23.8 billion in revenue and a massive $8.9 billion in Free Cash Flow.

The Price I’m Waiting For: $243 I am looking for a further 18-20% discount. At $243, you pay just 10x Free Cash Flow. That prices the company for zero growth. If they grow at all, you win.

3. Salesforce (CRM)

Current Price: ~$227 Market Cap: ~$212B

Salesforce is down significantly, trading around $227. The business is a cash machine, pulling in $40 billion in revenue and over $12 billion in Free Cash Flow. But even at this lower price, it’s not a screamimg buy yet.

The Price I’m Waiting For: $175 At $175, you would be buying a software monopoly for roughly 14x Free Cash Flow. That is a bargain for a company with this level of customer retention.

4. SAP (SAP)

Current Price: ~$233 Market Cap: ~$287B

SAP has a premium valuation because investors treat its cloud backlog as a safety net. Revenue is steady at $40 billion, but you are paying nearly 33x Free Cash Flow for that safety.

The Price I’m Waiting For: $116 To get interested, I need the price to be cut in half. At $116, you pay roughly 16x FCF. This treats SAP like the utility company it is, rather than a high-growth cloud stock. I want to pay for the cash, not the hype.

5. Uber (UBER)

Current Price: ~$85 Market Cap: ~$176B

Uber has successfully pivoted. They are generating $49.6 billion in revenue and $8.7 billion in Free Cash Flow. The market currently pays about 20x FCF for this.

The Price I’m Waiting For: $55 I want to pay 12–14x Free Cash Flow. At $55, you are buying a global logistics network for the same multiple as a boring industrial stock. If the economy slows, this entry price protects you.

Disclaimer: This article is for informational purposes only. It is not financial advice. I am not a financial advisor. I may buy or sell these stocks at any time. You must do your own research before investing

By reading this email, you agree to the full disclaimer found here: https://www.thevaluethesis.com/p/disclamier

Happy Holidays to you and your families. It is the most beautiful time of the year to be with loved ones.

As we end 2025, I want to share my learnings, experiences, and a reflection on how the year went for the portfolio.

I have been in the investing world long enough to know that the downside matters the most. If you do not respect it, hard lessons will be learned.

As a result, the first principle of my investment approach is shaped by Warren Buffett’s two rules: never lose money, and never forget rule number one.

I believe this concept is not well understood by many. These rules are the foundation of everything I do because, in investing, the downside matters more than the upside. If you lose 50% of your capital, you need a 100% gain just to recover your initial investment. That is why I focus on what can go wrong before I look at what can go right. For this reason, I view my job primarily as risk management, rather than just investing.

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Performance

As of today, the portfolio has appreciated 39.5% in 2025. By comparison, the S&P 500 has returned 17%. This marks the third consecutive year of outperformance against the index.

Annual Returns vs. S&P 500:

• 2023: Portfolio +33% (Index: +21%)

• 2024: Portfolio +36% (Index: +23%)

• 2025: Portfolio +39.5% (Index: +17%)

Cumulative Return (3-Year Total):

• My Portfolio: 150%

• S&P 500: 75%

Portfolio Changes

I sold my positions in Alibaba and Tencent.

Tencent is, in my opinion, the best business in China. It is one of the few companies in the world that can grow revenue while also increasing profit margins at that scale. Its ecosystem is unique and powerful. However, I read everything through English translations. I believe that to truly understand a business, you must understand the local life and culture around it. Since I lack that direct insight, I require a massive margin of safety to own Chinese stocks.

Alibaba faces a different problem. E-commerce is a tough business. Competitors like Pinduoduo and JD are fighting for market share and reducing every bit of margin. To keep their market share, Alibaba has to lower prices. As a result, their profit margins have been dropping for the last few years. They are also spending more money just to earn the same amount of revenue.

I bought Alibaba because it was very cheap; the company traded at a very low earnings multiple and had generated strong free cash flow for many years. However, the stock price has gone up about 100% since then, while free cash flow has dropped significantly, even turning negative due to high CapEx. Although they might win in cloud computing and AI, or stabilize their e-commerce margins in the long term, the setup has changed. With the price substantially higher and the business economics getting tougher, there was not enough margin of safety left to justify holding it. I decided to sell and move this capital into 4 high-conviction US-based businesses

UnitedHealth & Molina

UnitedHealth is now my largest holding. It provides massive scale and predictable earnings. Molina is different. It focuses mainly on Medicaid and operates with a very low-cost structure, which makes it highly efficient at managing government contracts.

I saw the recent drop in their share prices as a chance to buy.

Lululemon is my second-largest holding. The stock dropped earlier this year because sales growth slowed in North America. I think it is a good business. They sell premium products and earn high returns on their capital. They also have huge room to grow internationally, especially in China and Europe. We bought a premium brand for the price of an average retailer.

Gartner

In December, I initiated a position in Gartner, which is now a top-3 holding.

Gartner provides essential research and advisory services to executives. I view their service as “risk mitigation” for corporate decision-makers. Before a CTO commits significant capital to software, they require independent validation.

The stock sold off on fears that Artificial Intelligence would displace human analysts. I disagree. AI generates more data, more vendors, and more noise. In a complex environment, trusted, independent judgment becomes more scarce and valuable, not less.

Lessons from 2025

These are not brand-new lessons; they are principles I already knew, but the market has a way of reminding you of them.

1. Catching the absolute bottom is impossible. The most important reminder this year came from my decision to buy into the healthcare sector. I bought these companies after they had already fallen significantly. I believed they were cheap. However, shortly after I bought them, they went down aggressively again.

It was a reminder that you can never perfectly time the bottom. In the short term, there is no floor to a stock price, even if the valuation makes sense.

2. Temperament matters more than intellect. In investing, mistakes are part of the game. You can learn from them and improve your process, but avoiding them completely is impossible. That is why temperament and risk management are the two most important tools we have.

Prices can stay disconnected from value for a long time, even if your thesis is right. Since I never short stocks and I never use options, my only job is to own pieces of great businesses and wait. Attempting to time the market is a fool’s game; having the patience to sit through the volatility is the real skill.

Macroeconomic Outlook

I do not make decisions based on headlines, but I stay aware of the economic environment. When new tariffs were announced, the impact was immediate, especially for companies that rely heavily on specific supply chains. Their stock prices dropped because these changes have a long-lasting impact on their profits.

Rules can change, and the world will not stay the same, so companies that hold debt can be vulnerable. That is why I prefer companies that have strong balance sheets and generate free cash flow. Currently, the S&P 500 pays you back about 2.74% a year in free cash flow. That barely keeps up with inflation. I stick to the basics: Price is what you pay. Value is what you get.

Investment Philosophy

As we look to the future, it is important to repeat the core principles

My goal is to beat the S&P 500 by ten percentage points over the long run.

I believe owning productive businesses is the best way to build wealth over time.

1. Owning great businesses.

2. Buying them for less than they are worth (Margin of Safety).

3. Having the right attitude.

To show the power of business ownership: $100 invested in the S&P 500 in 1957 would have grown to about $77,626 by the end of 2025. That is the power of time. My job is to avoid interrupting that growth.

I prefer a focused portfolio. As Charlie Munger said, “If a thing is not worth doing at all, it’s not worth doing well.”

I do not believe in buying our 20th best idea just to have “variety.” That just lowers our returns. Like the Walton family with Walmart, I believe in holding fewer positions where I am very confident. When the odds are in our favor, we bet big.

I realized that people are what turn a good company into a great one, whether it is the culture at Berkshire Hathaway or the drive at Amazon and Apple. To succeed, I need to find management teams that can handle change over decades, and then let them do their job.

My process is simple. I do not start with the economy. Instead, I start with the company itself. I look at the balance sheet to estimate how much money they will make in three, five, or ten years. I also check who their competitors are and if their product will last. Because the future is hard to predict, I only buy when the price is much lower than the value.

I stay away from most AI stocks right now. In the early 1900s, cars changed the world, yet hundreds of car companies went bankrupt. Similarly, in 2000, the internet changed the world, but for every Amazon, there was a Pets.com that went to zero.

I prefer to buy the winner after they have won. For example, during the internet crash, Amazon stock fell 90% and was risky. Today, it is safe and dominant. Warren Buffett followed a similar path with Apple. He did not buy it early. He bought it in 2016, after everyone already owned an iPhone. I am not looking for the next Amazon. I am looking for the businesses that have already proven they are built to last.

Thank you

Arda Solmaz

Disclaimer: I am not a financial advisor. This letter is for informational purposes only and represents my own opinions and portfolio moves. It is not investment advice. Please conduct your own due diligence.

I’m sharing this not to celebrate a short-term move, but because it’s a good example of one of the hardest parts of investing: buying when most people disagree with you.

I’ve followed Lululemon for years. The product is strong, the brand loyalty is real, and the balance sheet is clean, no debt.

But earlier this year, sentiment turned sharply negative. North America slowed, and the market quickly decided the brand was losing its edge. The stock fell nearly 60% from its highs.

The North America slowdown didn’t change how I saw the business, and international growth still looked like it was in the early stages, and the clearest way to see that was to put Lululemon next to Nike. Even in the most recent reports, the gap is still clear:

• China growth: Nike -17% vs Lululemon +46%

• Gross margin: Nike 40.6% vs Lululemon 55.6%

• P/E: Nike 30x+ vs Lululemon ~15x

Lululemon was delivering stronger growth and better profitability, yet the valuation was still far lower.

And this is where Buffett’s reminder matters: “Be fearful when others are greedy, and be greedy when others are fearful.” It’s simple advice, but it’s difficult to act on when sentiment is ugly and the stock is falling.

That’s why I’m unlocking the original research note today.

I want you to see the work exactly as it was written at the time, the valuation model, the data, and the reasoning. I think it’s more useful to see the process than just the outcome.

You can read the full, unlocked analysis here

If you enjoy this style of research and want access to new notes when they’re published (plus the full library), you’re welcome to join as a paid subscriber below:

Subscribe now

Best,
Arda

Disclaimer: The content of this email and the associated research notes are for educational and informational purposes only and do not constitute financial advice. I am not a financial advisor, and the ideas presented here represent my personal opinions and analysis. All investments carry risk, including the potential loss of principal. Past performance is not indicative of future results. I currently hold a long position in Lululemon (LULU). Please perform your own due diligence or consult with a certified financial professional before making any investment decisions.

By reading this email, you agree to the full disclaimer found here: https://www.thevaluethesis.com/p/disclamier

But while he nails the philosophy, and I highly recommend reading it, there’s another part of the story worth adding. One that often gets missed.

To truly understand the arithmetic of Berkshire Hathaway’s returns, how a dying textile mill transformed into an $800,000-per-share fortress, you cannot view Buffett’s career as a single continuum. You have to split it into three distinct operating systems.

Most people study the first two. Almost everyone misses the third.

Era 1: Pre-Munger

The first era was the “Partnership Era,” defined entirely by the Benjamin Graham philosophy.

During this phase, Buffett wasn’t a business owner; he was a mechanic looking for broken cars he could strip for parts. He hunted for “Cigar Butts”, mediocre companies trading below their liquidation value. The math was simple: buy a dollar for 50 cents, wait for the gap to close (mean reversion), sell, and repeat.

While this approach produced the highest percentage returns of his career, it had a fatal flaw: It wasn’t scalable.

The Cigar Butt strategy requires constant friction. You are always entering and exiting and most importantly, you are always subject to “reinvestment risk.” Once you sell the net-net for a profit, you have to find another mispriced asset immediately.

As Buffett later realized, “Time is the enemy of the mediocre business.” You can date a textile mill for a quick profit, but you can’t marry it.

Era 2: The Compounder

The second era is the one most value investors obsess over. This was the “Post-Munger” pivot, where Charlie convinced Warren to stop buying fair businesses at wonderful prices and start buying “wonderful businesses at fair prices.”

This shifted the engine from Liquidation Value to Earnings Power.

Buffett began acquiring high-ROIC engines with immense pricing power, brands like See’s Candies, Coca-Cola, and eventually Apple.

The structural genius here wasn’t just “buying quality.” It was that he stopped looking for a price exit and started looking for earnings retention.

When you own a compounder like See’s Candies, you don’t need to sell to realize your gain. The business realizes the gain for you, internally, by producing cash flow. See’s had incredible pricing power and brand-loyal customers. They kept increasing the price, and customers kept coming. It was more than just assets, it was pure earning power, and it taught them a lot about business.

But the catch was that See’s wasn’t able to reinvest that cash into itself, it couldn’t just keep opening stores forever. Instead, it sent that cash to Buffett to invest elsewhere. On the other hand, Coca-Cola was a brand that could travel across the globe and keep scaling. Both models eliminated the friction of taxes and the pressure of constantly finding new ideas. This era is the real lesson behind the ‘Berkshire Phenomenon

But even this era had a limit. Great businesses generate too much cash. Eventually, you run out of “wonderful businesses” to buy.

Era 3: The Legacy Builder (Post-2008)

This is the third, critical era that emerged largely after the 2008 Financial Crisis. This is the era that Wall Street often misunderstands as “Buffett losing his fast ball.”

He didn’t lose his fast ball; he changed the game.

Buffett realized that to make Berkshire last another 100 years, he couldn’t just own light-capital compounders. He needed to own the very arteries of the global economy. He needed Capital Sponges, businesses that could absorb billions of dollars of reinvestment at decent rates forever.

He moved aggressively into capital-heavy, critical infrastructure:

• BNSF Railway: He bought the physical tracks that move the American economy.

• Berkshire Hathaway Energy: He built a utility giant that demands massive CAPEX but guarantees a regulated return.

These aren’t just stocks; they are the physical backbone of the United States.

He extended this logic globally with his recent wager on the five Japanese Trading Houses (Sogo Shosha). He wasn’t just buying cash flow; he was buying recognized stability and essential services, energy, food, materials, that no competitor can disrupt.

The Capital Architect

This is the key lesson of the third era. Each era taught Buffett something important, and he adjusted every time. But after the 2008 financial crisis, he took one big lesson to heart: the financial system was more fragile than most people assumed.

If he wanted Berkshire to last a century, he couldn’t rely only on stock picking or asset-light businesses. He needed to own the hard, essential infrastructure itself.

He wasn’t just trying to get rich anymore; he was designing a fortress that could survive any storm.

Berkshire going from $15 to $750k+ per share didn’t happen because Buffett was a good stock picker. It happened because he treated Berkshire itself as the ultimate Capital Allocator.

He took the cash flows from a dying textile mill and systematically redeployed them into high-ROIC assets.

Most CEOs cling to dying businesses for too long. Buffett didn’t, he pulled the cash out of the loser and put it into the winners.

If you only view him as a “Stock Picker,” you miss the genius. He was a Capital Architect who built a machine designed to cure reinvestment risk. That is the blueprint for the most durable company in history.

North America: Selling More, Earning Less

Nike’s biggest market, is a mix of good and bad news.

The good news is that sales are finally growing again. This is a huge signal that the brand is healthy. The bad news is that they made less profit on those sales. There are two main reasons for this. First, they had to discount old inventory to clear it out. Second, and more importantly, tariffs hit them.

Management said these tariffs took a massive bite out of their profits. In fact, if you removed the cost of those tariffs, their profit margins would have actually gone up, not down. This tells me that the business operations are improving, but government fees are eating up the gains.

Greater China

While North America is showing signs of life, China remains a major weakness. Sales there dropped 17%. The company is struggling with intense local competition and mismanagement in the region.

To understand how serious this is, just look at Lululemon. While Nike’s sales are shrinking double-digits in China, Lululemon is growing about 25% in the same market. Nike stock is priced like a fast-growing company, but right now, competitors are the ones actually delivering that growth overseas. This difference is the main reason I currently prefer Lululemon’s position.

The Numbers at a Glance

• Revenue: Sales were essentially flat at $12.4 billion.

• Profit Margins: Dropped significantly, mostly due to the tariffs I mentioned.

• Inventory: They have successfully lowered their stockpile of unsold goods, which is a good sign.

• Cash: Their cash pile shrank by about $1.4 billion because they spent money on dividends and buying back their own shares.

The Outlook: More Pain Ahead

Nike warned that the next few months will still be tough. They expect sales to drop slightly in the upcoming quarter. They also expect profit margins to fall again, almost entirely because of the tariff costs. Without those taxes, they would be making money, but as it stands, their profits will be squeezed. On top of that, they plan to spend more money on marketing to try and boost demand.

Disclaimer: This article is for informational purposes only and does not constitute financial advice. The views expressed here are my own and should not be taken as a recommendation to buy or sell any security. I do not currently hold a position in the stock mentioned in this report. Please conduct your own due diligence or consult a certified financial advisor before making any investment decisions.

My Take

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I wanted to share a quick update on a meaningful validation of the research process here at The Value Thesis.

Yesterday, Michael Burry (The Big Short) liked a note I posted regarding the Molina Healthcare thesis.

I’m sharing this because it reinforces the framework I use. With over 50,000 stocks globally, the real challenge isn’t finding stocks to analyze, it’s knowing which ones to ignore. I apply four criteria to every analysis: I look for a simple and durable business, an efficient management team, a structural competitive advantage, and a valuation that offers a margin of safety.

This mindset is closer to investors like Charlie Munger, Li Lu, Seth Klarman, and Nick Sleep. They didn’t build great records by chasing whatever was hot. They did it by looking for businesses where the value was structural, but the market was either fearful or simply missing the real issue.

Burry has a similar instinct, he tends to look where sentiment is already broken. And right now, Managed Care is hated because medical costs have spiked, so most people stop at the headline and move on.

But if you look at the structure, government-sponsored healthcare is effectively a commodity. You can’t easily raise prices, and the product is largely the same across competitors. In a commodity business, the edge is being the low-cost producer — and Molina runs one of the most efficient operations in the sector.

Because the sector is so disliked, the valuation can offer a margin of safety relative to long-term earnings power.

I believe the market is efficient most of the time. The challenge is doing the work to understand the bear case and the actual problem, rather than just chasing the upside.

Just to be clear on my mindset: I lean buy-and-hold. I spend time analyzing businesses I’d be comfortable owning for years, the kind that can generate real profits and reinvest at good returns so the business can compound.

If you want to see the full thesis and how I applied my framework, you can read the deep dive here: Full Molina Healthcare Deep Dive

This deep dive is exclusive to premium subscribers. If you are currently a free reader, you can upgrade below to unlock the full thesis and my complete archive:

Upgrade to Full Access

Thanks for reading,

Arda

Disclaimer: I am not a financial adviser. I am not a registered investment advisor (RIA). This content is for educational and entertainment purposes only and should not be construed as investment advice. I am currently long $MOH.

By reading this email, you agree to the full disclaimer found here: https://www.thevaluethesis.com/p/disclamier

The economy is strong. Ireland has a high concentration of multinational activity in tech, pharma, medical devices, and aircraft leasing, supported by a young workforce and strong export growth. Employment levels are high, wages have grown, and net migration continues to add demand.

Housing supply remains tight.

Any decent rental listing is gone instantly. Same with buying. Supply is not keeping up, and everyone feels it.

That’s the backdrop for $IRES, the largest residential landlord / residential platform in Ireland, with 3,652 homes, mostly in Dublin.

Occupancy is basically full: 99.5%.

It’s a simple model: own apartments in the most supply-constrained part of the country and collect rent.

The business has

• 3,652 units (mostly Dublin)

• 99.5% occupancy

• 99%+ rent collection

• Average monthly rent around €1,823 across the portfolio

• Net rental income margin: 78% (up 150bps)

The stock is down from €1.73 at the 2022 peak to around €0.93 today, as we head into the end of December 2025.

1) Interest rates repriced property values

When rates rise, property yields expand, and values fall. IRES even shows that Dublin PRS yields expanded 115 bps since Dec 2021, implying roughly a 32% decline in capital values.

So even if rents stay strong, your asset value can get marked down.

2) Rent controls and regulatory uncertainty

Ireland’s rent control framework has been a big overhang. IRES directly says restrictive rent regulations disproportionately impacted valuations.

You can feel this on the ground too:

• Private landlords are leaving.

• Costs are up.

• And the market assumes rental regulation will remain restrictive.

What’s changed

Two things are starting to tilt the setup.

1) Rate cuts = less pressure on valuations

IRES notes that the ECB has already cut rates multiple times since peak inflation (they reference eight cuts between June 2024 and June 2025).

Lower rates help in two ways:

• cheaper funding over time

• less pressure on property yields / capital values

  

2) The regulatory tone is shifting

In June 2025, the government announced reforms aimed at more “clarity and certainty”.

And the big practical point is this: from 1 March 2026, rents can reset to market for new tenancies (in the situations covered).

That matters because IRES believes the portfolio is under-rented vs market, they show 19% reversion.

Rent gap math

IRES currently generates approximately €86.6m in annualised rent.

Management estimates around 19% rent reversion across the portfolio as rents reset to market levels over time. This implies a potential rent gap of roughly €19–20m once turnover and resets occur.

That gives:

• Current annual rent: €86.6m

• Estimated rent reversion: €19.9m

• Implied annual rent: €103–106m

Assuming no additional asset sales, this represents the rental income capacity of the existing portfolio.

Against the current equity market capitalisation of €488m, this implies a gross rental yield in the low-20% range, before operating costs, interest, or reinvestment.

The Investment Thesis

When inflation reached close to 9% and maintenance costs increased sharply, IRES could only increase rents by about 2%. In real terms, earnings declined.

I generally prefer businesses with pricing power against inflation and competition. IRES does not fully meet that criterion, it operates within a regulated framework.

That said, it owns real assets in established Dublin locations, maintains 99.5% occupancy, and generates predictable rental income. Demand for rental housing remains high, and supply remains limited.

Disclaimer: This article is for informational purposes only and does not constitute financial advice. The views expressed here are my own and should not be taken as a recommendation to buy or sell any security. I do not currently hold a position in the stock mentioned in this report. Please conduct your own due diligence or consult a certified financial advisor before making any investment decisions.

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Lululemon shares jumped more than 10% after earnings, and while that might seem surprising given ongoing concerns about U.S. consumer demand, the reaction becomes understandable once you read the earnings call carefully.

If you want more background, I wrote about this business three months ago in Zero Returns in Six Years, and my thinking hasn’t changed much after this quarter.

Three things mattered most to the market:

• Revenue and earnings per share beat expectations

• International growth remained strong, led by China

• A CEO transition was announced, opening the door for a strategic reset

Lululemon Q3 2025 Earnings: Key Financial Results

• Revenue: $2.6 billion (+7% YoY)

• Comparable sales: +2%

• Gross profit: $1.43 billion

• Gross margin: 55.6% (down 290 basis points)

• Operating income: $436 million

• Earnings per share: $2.59 (down YoY, but above expectations)

Despite margin pressure, Lululemon delivered better-than-expected revenue and EPS, the main reason the stock moved higher.

Lululemon Beat Revenue and EPS Expectations

The earnings beat did not come from North America.
It came from international markets, especially China.

China Mainland

• Revenue growth: +46%

• Comparable sales: +25%

• Strong demand for outerwear

• Q3 benefited from timing of 11/11 e-commerce activity

Rest of the World (Europe & Asia-Pacific)

• Revenue growth: +19%

• Comparable sales: +9%

• Continued store expansion and solid execution

International growth more than offset U.S. weakness.
That stronger-than-expected top line also helped reduce the impact of tariffs and supported earnings per share.

North America Remains the Key Weakness

Management was unusually clear about this.

• Americas revenue: –2%

• Comparable sales: –5%

• U.S. revenue down 3%, Canada roughly flat

Importantly, management does not believe this is a brand problem.

They are still:

• growing total and retained guests,

• acquiring new customers across age groups.

The issue is lower visit frequency and spend, particularly among high-value customers.

They also admitted the product mix in North America is not right. Some core franchises stayed on shelves too long without enough newness. In a more promotional retail environment, consumers are trading down and waiting for value.

This looks like a product-cycle and macro issue, not a deterioration of brand equity.

How Management Plans to Fix the U.S. Business

Management outlined a clear three-pillar turnaround plan.

1. Product Creation

• Increase new style penetration to 35% by next spring

• Shorten product cycles from 18–24 months to 12–14 months

• Build “chase” capabilities to quickly reorder winning products

2. Product Activation

• De-clutter stores so newness stands out

• Improve local store curation

• Upgrade in-store storytelling and website experience

• Use membership initiatives to re-engage high-value customers

3. Enterprise Efficiency

• Offset tariffs through vendor negotiations and supply-chain efficiency

• Selective pricing actions

• Tight cost discipline during the reset

This is not a quick fix.

Margins: Short-Term Pressure

Gross margins declined due to:

• higher tariffs,

• increased markdowns,

• a more promotional consumer environment.

However, margins were better than management originally guided, helped by higher revenue and disciplined expense control.

Profit dollars increased even as efficiency declined.

CEO Transition: Why the Market Liked It

After seven years, the CEO will step down early next year. Interim leadership will run the business while a permanent successor is selected.

From an owner’s perspective, the timing makes sense.

This transition comes:

• at the end of a multi-year plan cycle,

• at a moment when the U.S. business needs renewal,

• while international momentum remains strong.

Markets often welcome leadership change when execution needs improvement but the underlying brand remains intact.

Lululemon 2025 Outlook and Guidance

Management reaffirmed full-year guidance:

• 2025 revenue: approximately $11 billion

• 2025 EPS: $12.92–$13.02

They also flagged a meaningful headwind:

roughly $210 million reduction in operating income from tariffs and the removal of the de minimis exemption (net of mitigation).

Margins will remain under pressure in the near term, particularly in Q4.

My Take as a Shareholder

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• Price/Book Ratio = 0.74x.

• P/E Ratio (TTM) = 7.5x

• 3.7% dividend yield.

Total assets sit at $345.7 million. While the bank slightly shrank overall, the loan book increased to $275.5 million, and deposits rose to $280.7 million. Crucially, they lowered their interest expense, meaning they paid less to fund the bank than they did last year. With total equity hitting $40.7 million, the book value is now $40.64 per share. Directors have over $27 million of their own cash sitting in the bank’s deposits.

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