I’m not going to pretend I’m an expert on the housing market. But I don’t think it takes a rocket scientist to see what the speed of this move in yields has done to a lot of these stocks. They all have their own issues, and some have more than others, but I think rates have been a big part of the beating.

The 10-year went from roughly 4.8% in early September to 5.3% in early October, and has since backed off to around 5.15%.

To me, the bigger issue has been how quickly rates have risen. A 10-year around 5% isn’t particularly unusual by historical standards. The years of near-zero rates and extremely cheap borrowing after 2008 were the unusual part, but we had plenty of time to get used to them.

Plenty of people have made this point already, and I tend to agree: the pace of the adjustment has been a big part of the pain.

It’s hard for businesses, buyers, or investors to get comfortable when financing costs keep climbing and everyone is wondering how much higher they’re going.

That’s why I think there’s a trade here even if rates stay around these levels. After how badly some of these stocks have been beaten down, a stretch of stable or slightly lower yields could be enough to get a decent recovery going over the next six months or so.

Read more

I’m still bullish, obviously. Roughly 50% cloud growth is the assumption I’m working with for the September quarter, and I’m hoping to see cloud EBITA margins continue trending higher after we finally got a meaningful increase last quarter.

I also continue to think quick-commerce losses can narrow fairly quickly from here, helping e-commerce profitability recover. Some of the earnings revisions below point in that direction, though there’s still plenty Alibaba needs to deliver on.

Citi

Citi maintained its Buy rating and raised its target from $190 to $193. Its September-quarter forecast has cloud revenue growing 52%, with a 12.5% EBITA margin. That margin estimate was raised from 12% and compares with 11.6% in the June quarter.

That’s pretty close to what I’m looking for. Around 50% growth would be a strong result on its own, but I’d like to see Alibaba convert more of that growth into earnings as the business gets larger. Last quarter gave us some real improvement in margins. I want to see them build on it, even if the next increase is more gradual.

Citi also expects the growth to hold up beyond this quarter. Its model has cloud revenue growing 54% in FY27 and 52% in FY28. For reference, Alibaba’s FY27 ends in March 2027 and FY28 ends in March 2028.

Read more

The market clearly disagrees with me, and I’m probably being a bit stubborn. But at roughly ~6.5x forward earnings and a ~15% trailing free cash flow yield, I’m still very confident FOUR is too cheap.

There are legitimate concerns about the business, and I’ve underestimated how much those would weigh on the stock. I just think the price now reflects a level of pessimism that the business doesn’t deserve. It’s trading like it’s dying, and I don’t see that in the results.

A big reason for the discount is that people don’t trust the growth. Organic growth in revenue less network fees was 11% overall in Q2, with the payments business growing 14%. That’s a lot less exciting than the acquisition-heavy headline numbers, and some investors argue even the organic figures overstate how well FOUR can grow without buying another company.

The concern is that Shift4 acquires a business with an existing merchant base, converts those merchants to its payment processing, and gets a few years of growth from doing so. Once those conversions slow down, it needs another acquisition to keep things moving. Growth from older acquisitions can still count as organic, so the reported number doesn’t settle that debate. I think that’s a fair thing to question.

I’m just not nearly as negative about the strategy or the organic growth they can generate from here. I think there’s still a lot they can do with the businesses they already own, particularly Global Blue.

Global Blue gives them established retail relationships where they can sell payment processing alongside tax-free shopping. A retailer already using Global Blue for tax refunds could still be using someone else to handle its payments. Winning that processing would let Shift4 earn more from an existing customer without needing another acquisition. Shift4 One combines payments, tax-free shopping and currency conversion on one device, and it was already live in 12 European countries at the Q2 update.

There’s also an opportunity to use that international presence to win customers beyond the businesses they acquired.

Management has explained that getting the payments infrastructure operating in those countries makes it easier to introduce other products, and Shift4 Dine has already launched in Spain and Australia. I think that gives them room to keep growing as they sell more services to existing merchants and compete for new ones. I’m more optimistic about how much growth they can get from those opportunities than the current sentiment would suggest.

Read more

You can see it in TLT below, the 20+ year Treasury bond ETF. Lower prices mean higher yields, and that latest leg down has been especially ugly.

Now I’m usually a little skeptical of lining up today’s chart with some point in the past and expecting the same thing to happen again. You can probably find a similar-looking chart for almost anything if you go back far enough. But I have to admit, the move into the 2018 midterms looks a lot like what we’re seeing now, especially the way yields accelerated heading into October.

I wouldn’t try to pick the exact top from that, but I’m starting to think we’re getting closer to a near-term peak here.

The market is now pricing in roughly four more quarter-point Fed hikes over the next 12 months. Another full percentage point from here seems excessive to me, especially after how much borrowing costs have already risen.

If some of those hikes come back out of expectations, yields could come down (bond price UP) quite fast especially from such an over sold level. We saw how quickly things can turn in late 2023, when the 10-year went from around 5% in October to below 4% by December and stocks recovered from a pretty unpleasant few months.

What I find remarkable is how well the major indices have held up through all of this. Yields have been rising, oil has been rising, and the indices are still hanging around their highs. Plenty of individual stocks have had a much rougher time, which is why the index level on its own doesn’t feel like a very good description of this market. Still, I would have expected more damage given the moves we’ve had in rates and oil.

I think growth helps explain some of that resilience. There’s a lot of investment taking place and demand for the capital to finance it. Companies have a better chance of handling higher rates when their revenues and earnings are growing alongside them. That’s why I’m less concerned about a repeat of 2022, when inflation was running away from the Fed and policy was trying to catch up.

There’s also something in the bond market that gives me a little more reason to think that, although I don’t want to overstate it. So far this month, the increase in the 10-year yield has been almost entirely matched by the increase in its inflation-adjusted yield. The gap between them, a rough measure of the inflation compensation investors are demanding, has barely changed.

That doesn’t prove the whole move is about growth. More government borrowing and investors demanding a higher return to hold long-term bonds can push yields up too. But it makes me less convinced that every new high in yields should be read as another warning about the longer-term inflation outlook.

So I’m thinking about what happens if growth remains decent and the market ends up needing fewer hikes than it currently expects.

Even a period where yields settle around these levels could help. Businesses would still have to deal with higher financing costs, but investors could get more comfortable valuing them without having to keep revising their assumptions about rates.

Small caps and rate-sensitive consumer names are obvious places to look. TLT and IWM are worth watching together here. TLT owns long-term Treasuries, so rising yields generally hurt its price. Small caps can come under pressure alongside bonds when higher financing costs and weaker risk appetite are driving the selloff. Some relief in bonds could help both, provided the economic outlook holds up.

I’d also expect a friendlier environment for emerging markets, particularly if the dollar softened.

For my own portfolio, Alibaba and Shift4 are two names where I’d welcome some improvement in risk appetite. Both have plenty going on within their own businesses, but a more stable rates environment could make investors more willing to pay for their future earnings.

Of course, 2018 is also a pretty good reminder that falling yields don’t automatically mean rising stocks. Equities had a rough end to that year even as yields came down. If yields fall because the economy is falling apart, I’d be much less optimistic about stocks. I’m thinking about a scenario where growth holds up and some of the expected tightening proves unnecessary.

And in that scenario, I think the major indices could have a face-ripping rally too. They’ve already absorbed a substantial increase in yields. If earnings keep growing and the pressure from rates eases, I could see the broader market going considerably higher, with some of the names that have been left behind finally getting a better response.

Share

Disc. Long BABA and FOUR.

Disclaimer: This article is for informational purposes only and does not constitute investment advice. Always do your own due diligence before making investment decisions.

For perspective, that’s roughly one-fifth of the entire world’s estimated data center capacity in 2025.

As someone who already thinks cloud is the most exciting part of this company, I liked what I heard.

I’ve been bullish on the infrastructure side of AI for a while, and Alibaba keeps giving me more reasons to think it could be one of the bigger beneficiaries. The opportunity to serve more customers while bringing down the cost of compute is a big part of that.

We’ve already started to see some encouraging progress. In the June quarter, AI Cloud and Compute Services revenue and external-customer revenue both grew 45% year over year. The segment’s adjusted EBITA margin reached about 11.6%, up from roughly 7.2% a year earlier on the restated comparison. As I wrote in my last update, the margin was the number I cared about most.

I want cloud to become a much larger contributor to Alibaba’s earnings, and seeing profitability improve alongside that growth makes me more confident it can.

With growth like that, I can understand why management wants to add so much capacity. There is still a lot to build between now and 2032, and we don’t have a price tag or a yearly build schedule for the 20GW target yet. I expect this will mean more capex, which I’ll come back to. But the chip announcements also give us something to think about on the cost side.

Read more

Read more

For me, the valuation and buybacks were the initial draw. If you read my recent Dropbox post, that probably won’t surprise you. I do like a good share cannibal, particularly when the stock looks cheap. There’s a lot more to Domino’s than I’d initially appreciated, which made it a good company for us to work through together.

Domino’s Pizza serves almost a billion pizzas a year. But Domino’s is not just a pizza chain. Look under the lid, and you will find a story of networks, supply chains, behavioral economics and incentives.

The business was started in 1960 by two brothers, Tom and James Monaghan. Tom pioneered the delivery and franchise model that Domino’s is now known for. While almost everyone is familiar with Domino’s pizza and its unmistakable logo, the business remains somewhat poorly understood.

The stock has fallen a long way from its highs, which brings the valuation into the discussion. When you look under the Domino’s hood, you find a durable, low-cost machine operating in an environment where its competitors are struggling. We think Domino’s has room to take more share of the pizza business in the US and internationally.

The stock is now nearly ~40% below its highs. Looking at it today, though, I do wonder whether investors have become too pessimistic.

Domino’s still has the scale to keep prices low, and we think it has room to take more share as competitors struggle. If the business holds up, a stretch like this also gives the company a chance to retire more shares with the same amount of cash. Given my fondness for buybacks, you can probably see why I wanted to spend some time on this one.

Subscribe now

Domino’s business model

Domino’s looks simple from the street. You order a pizza. A store makes it. A driver brings it.

Underneath, three systems work as one:

A supply chain that buys and prepares ingredients

A franchise network that owns and runs the stores

A technology platform that links the customer, kitchen and driver

The goal: sell more pizzas, keep the price low and get each order to you fast.

The franchise model

Franchisees run about 99% of Domino’s stores. The company keeps a small group of corporate stores, mostly to test new ideas. Outside the United States, the network is fully franchised.

A US franchisee generally pays a royalty of 5.5% of sales, with technology fees charged separately. International royalties average around 3%. If a US store sells you a $20 pizza, the parent company collects about $1.10 in royalties before the franchisee pays its other expenses.

Franchisees also help fund the advertising. US stores generally contribute 6% of sales to the national advertising fund, giving the system a marketing budget that an independent pizza shop would struggle to match.

At the end of 2025, Domino’s had roughly 7,200 US stores and 15,000 international stores. Together, they generated just over $20 billion in annual retail sales.

The supply chain

Domino’s supplies ingredients, from dough, meat and vegetables to cheese, to its franchise stores through its supply-chain network. The supply-chain business generates roughly $3 billion in annual revenue. In FY25, $193 million was shared with participating US and Canadian franchisees through the profit-sharing program.

Cheese is the largest food cost in a pizza. Domino’s applies a fixed mark-up to the cheese it sells to franchisees. That way, even if the cheese price moves, revenue and percentage margins can fluctuate while the dollar mark-up per unit remains the same.

Scale drives the flywheel. More stores create larger orders. Larger orders cut the cost per ingredient. Lower ingredient costs and profit sharing put more cash in a franchisee’s pocket. That makes the network harder to leave.

The profit-sharing cheque changes the economics of that store.

That money goes back into the economics of the franchise network. It helps make the stores more profitable and gives franchisees another reason to keep buying through Domino’s supply chain.

Fortressing

Domino’s began doing something that looked wrong. Alongside entering new markets, it started to split existing territories and open more stores in the same area.

You might ask: does that not steal sales from the old stores?

It can.

Domino’s called this strategy fortressing because the new store can strengthen the whole territory.

Carryout gets easier. Customers will not drive far for a pizza. A closer store puts more households within a short trip of Domino’s. With carryout, the store does not have the cost of delivering the order.

Delivery gets faster. Shorter routes let one driver carry more orders each hour. More stores in the same territory can shorten delivery times, lower the labour cost per pizza delivered and get the pizza to you hotter.

It makes life harder for competitors. In a neighbourhood where there are already three Domino’s stores, a new Papa John’s franchise may have a harder time competing on delivery speed and store economics.

People and operations

Opening stores closer together helps with delivery times. You still need people who can run them properly, though. A Domino’s store can have a pizza ready for delivery in six or seven minutes, and keeping that pace across roughly 22,000 stores depends on the people running them.

That helps explain why you can’t just show up with $500,000 and buy a US Domino’s franchise. The company wants owners who have already worked inside the system. A future franchisee must first run a store and prove they can follow the operating model.

That rule creates a visible ladder. If you start in a store, learn the job and perform well, you can save enough to own one.

It also lowers execution risk. A new owner already knows how to schedule a shift, bake a pizza, control food costs and push for faster delivery. The store does not start from zero on day one.

Inside Domino’s, that path creates an intense culture. The company even runs pizza-making championships. Competitors train for months. Some design custom ladles and rehearse each hand movement to shave seconds from the clock.

This is not a soft HR program. Domino’s has turned speed into a craft.

Technology

Domino’s third system is technology to speed up the process. You know the Pizza Tracker and the ordering app. But it goes beyond what the customer sees.

Domino’s has also invested in automated dough production. At its Indiana facility, machines help measure, move and stack the dough, taking work out of a process that has to be repeated at enormous scale.

The company also created the spoodle, part spoon and part ladle. A worker can portion and spread sauce with one tool. It saves only seconds, but seconds matter when you repeat the move millions of times.

Domino’s controls the order, production and delivery flow. That gives it decades of data.

In Australia, the local master franchisee, Domino’s Pizza Enterprises, has said its technology can predict whether an online customer will complete a purchase with up to 98% accuracy. That gives stores a head start on preparing orders before checkout is complete.

In September 2019, the Domino’s Eatons Hill store in Brisbane reported an average delivery time of 4 minutes and 58 seconds for an entire week. That was one store’s result, but it shows how far the process can be pushed.

Keeping control of delivery is part of that approach. When the US business announced its Uber Eats agreement, it said those orders would still be delivered by Domino’s drivers. Customers could order through another app while Domino’s continued to handle the delivery itself.

Why people order Domino’s

We now know what Domino’s wants: get a cheap, hot pizza to you fast.

But why do you order it?

Clayton Christensen, author of The Innovator’s Dilemma, framed it differently: think about products as things people hire for a job.

A pizza does one of two jobs.

Feed a group right now, with almost no planning or debate

Feed you or your family without the risk of a long wait or a bad surprise.

Think about the last time you ordered Domino’s. It would fall into one of these two categories.

If friends gather at your house for a match or a party, choosing food can become a negotiation. You want everyone to find something they will eat. More than that, you do not want the food to become the event.

You want to place the order, trust the clock and return to your guests.

The other moment is quieter. It is Wednesday night. You did not plan dinner. You are hungry now. Cooking feels like work, but restaurant prices feel too high. You want something close to the cost of cooking and much easier.

Domino’s has spent decades removing friction from those two moments. The app cuts the order to a few taps. The tracker shows you where the pizza sits. Fortressing cuts minutes from the drive. The supply chain holds down costs. Store contests train people to move faster. Forecasting helps the kitchen prepare.

All of it makes the decision feel small.

Why your mind reaches for Domino’s

When hunger hits, Domino’s still has to beat the pizza shop down the road, the freezer aisle and every restaurant on Uber Eats.

There are four psychological tendencies at play here.

Operant Conditioning - When an action gives you a good result, you repeat it. If Domino’s arrives hot and on time, your last order trains your next one. Amazon benefits from the same loop. It is also the same reason you automatically open the Amazon app to buy something. Consistent behaviours get reinforced.

Doubt-avoidance tendency - It’s a natural human tendency to dislike uncertainty. When faced with confusing or unclear situations, we try to make quick decisions just to feel mentally settled. On a busy night, you may not search for the best meal. You may choose the meal most likely to arrive without trouble.

Availability Bias - What you see comes to mind first. More stores mean more signs, delivery cars and branded boxes in your neighbourhood. When you open an app, Domino’s already sits in your head.

Conflict Avoidance - We are conflict-avoidant creatures. A group does not want a food debate when there is a game going on. Pizza is the familiar, low-risk answer.

When these psychological tendencies play together, they form a powerful force. Charlie Munger called this the Lollapalooza effect, when several tendencies reinforce one another.

Some argue that food apps weaken Domino’s delivery model advantage. That is true, but only up to a point. You often hire Uber Eats to browse. You hire Domino’s when you want certainty.

The competition also includes the ready-to-eat meals you can throw in an oven, or a meal you can cook yourself in twenty minutes.

If delivery times fall by another two or three minutes over the next decade, a Domino’s pizza could arrive in 15 to 20 minutes. That puts it close to the time it takes to heat a frozen pizza.

You will not eat pizza every day. But when dinner becomes a problem you need to solve now, Domino’s becomes hard to reject.

Competition

Domino’s still has to compete on price, and customers have plenty of alternatives. We think its advantage is being able to offer those prices while keeping franchisees profitable. CEO Russell Weiner explained the argument on the Q1 2026 earnings call:

Competition within the QSR pizza space also increased in Q1 as the national pizza players offer deals comparable, if not identical, to the renowned value Domino’s has made famous. While this created some short-term pressure, we believe Domino’s wins in the sustained value environment. Our advantage is profit power, the ability to offer compelling ongoing value while driving profit growth for Domino’s franchisees.

Our industry-leading advertising budget drives the order counts needed to make this value model work profitably over time. Our pizza competitors simply don’t have that same capability. As a result, we believe that when competitors match our value, it places significant pressure on their franchisee economics. Over time, we expect this pressure to contribute to more store closures on top of the roughly 450 closures our 2 public pizza competitors have already announced for 2026. I believe these dynamics will translate into more sales, more stores and more profits for Domino’s franchisees.

We think that’s a reasonable argument, though competitors closing stores won’t automatically send all of those orders to Domino’s. And the latest numbers show why we wouldn’t get carried away: in Q2 2026, US same-store sales grew just 0.1%, while international same-store sales fell 0.1% excluding currency. We still need to see those advantages translate into profitable growth.

Valuation and buybacks

That brings me back to what first caught my attention: how much of the business is left for each share. The share count has fallen from roughly 48 million to 33 million over the past decade, a reduction of about 31%. Even fairly modest profit growth can look a lot better per share when that keeps happening.

In FY25, for example, net income grew 3.0% while diluted EPS grew 5.3%. Repurchases helped bridge that gap. This is part of what appealed to me about Dropbox too: a business can reward its shareholders without suddenly becoming a fast grower.

Domino’s spent $354.7 million retiring 785,280 shares in FY25, an average of about $452 a share. At $312, the same amount of cash would buy roughly 45% more stock. Assuming the business holds up, we’d be quite happy for repurchases to continue at these prices.

At roughly $312 per share, the stock trades at 17.8x FY25 diluted earnings of $17.57, or $601.7 million in net income. The forward P/E in the chart is lower at about 15.4x because it uses the next twelve months’ expected earnings. Those estimates still have to be earned.

The FY25 earnings figure is after the $193 million of supply-chain profit sharing. We’d leave that out of any estimate of what shareholders earn. It is a recurring obligation to the franchise network, recorded as a reduction in revenue. Those payments help support the store economics we like, and we can’t also count them as cash available to DPZ shareholders.

Over a few years, we think 4–5% annual net income growth is a reasonable assumption to work with. Same-store sales growth of around 2%, alongside 2–3% net store growth, could support that, provided margins and financing costs cooperate. That does require better same-store sales than we just saw, and adding stores won’t translate dollar for dollar into higher profits.

If net income grows 4–5% and the share count falls 2–3% a year after new issuance, earnings per share would grow roughly 6–8%. The current $1.99 quarterly dividend adds $7.96 a year, or about a 2.5% yield at $312. Put those together and we get roughly 9–11% annual returns if the earnings multiple stays around today’s level and the dividend keeps pace with earnings.

That assumes the buybacks remain affordable. Domino’s generated $671.5 million of reported free cash flow in FY25, after capital spending. It also ended Q2 2026 with about $4.8 billion of securitized debt and a reported leverage ratio of 4.3x adjusted EBITDA. Servicing and refinancing that debt come before buying back stock. If interest costs rise or franchisee profits weaken, there may be less cash available to retire shares.

We can see a path to 13–15% if profit growth is stronger or investors eventually pay a higher multiple. We wouldn’t make that the base case, and a lower multiple could drag returns below the range above. What we like at this price is that modest growth, a dividend and a shrinking share count could still produce a worthwhile result. We’re more interested in whether Domino’s can keep doing that for years than in whether the stock gets back to its highs any time soon.

Share

Disclaimer: This article is for informational purposes only and does not constitute investment advice. Always do your own due diligence before making investment decisions.

Read more

This feels like a good time to remind everyone that none of this is financial advice.

Subscribe now

I did eventually buy some shares myself, then sold a couple of months later at a slight loss because I wanted fewer positions and more money in my best ideas. I’d love to tell you I saw this coming, but I just got lucky with the timing.

Anyway, I’ve kept following VNET, and the slightly awkward thing about revisiting it is that I still like the business. It builds and operates data centers in China, providing the space, power, cooling and connectivity that other companies need to run their servers.

I still think China is going to need a lot more compute capacity. VNET is winning orders, its wholesale business is growing, and customers are filling the data centers. There is quite a bit here that has gone the way we hoped.

So why has owning the stock been such a miserable experience?

Well, building all of this costs an absurd amount of money, and I’m increasingly focused on how much of the eventual upside actually reaches shareholders. You can be right about the demand and still underestimate what it costs to serve it.

I still think there’s a case for owning VNET. I just think this one requires a bit more work than I originally thought.

Demand still looks pretty good

The wholesale business did pretty much what we wanted it to do.

Wholesale revenue grew 58.1% in the first quarter and another 29.3% in the second. Adjusted EBITDA grew 30.6% and 25.4%, respectively. Wholesale also passed retail revenue for the first time, while Q2 adjusted EBITDA margin reached 33.0%, up from 30.1% last year.

Taken at face value, those are very decent numbers… The whole point of the original thesis was that wholesale would become large enough to change the earnings profile of the company. That is happening.

The order book is even crazier. VNET signed 862MW of wholesale orders in the first half and disclosed another 355MW of reservations. Add those together and VNET booked or reserved more capacity in six months than it currently has in service. Is demand the problem here? I really don’t see how.

But I am now more focused on the gap between committed and utilized capacity. At the end of June, VNET had 1,007MW in service and 970MW committed, but only 744MW utilized. That leaves roughly 226MW already built and committed where the customer has not fully moved in yet.

This is where I struggle a bit... Committed capacity is great. Reservations are great. Giant orders are obviously great. But VNET already spent the money to build a lot of this capacity, and I want to see customers actually move in and start paying for it.

Mature wholesale facilities were 92.5% utilized, while the newer ramp-up capacity was only 36.6%. That tells me most of the low utilization is coming from recently delivered projects. It also explains why Q2 gross margin fell from 22.5% to 18.2% even as adjusted EBITDA grew 25%. Depreciation starts when the facility is ready. Revenue shows up as the customer installs equipment.

Could move-ins take longer than expected? Sure. Could some reservations fail to convert? Also possible. I just don’t see much evidence that customers are disappearing. VNET already won the damn orders. Now I want those orders to turn into revenue and cash, and sooner rather than later.

I’m offering 30% off annual subscriptions for the first year. That includes the rest of this VNET update, the paid archive, and all new paid posts throughout the year.

Get 30% off your first year

Read more

The stock is trading at roughly $36 at the time of writing. I’m used to seeing it somewhere around $25. That’s basically where Dropbox has traded for most of the past five years.

I have followed the company on and off since 2020 and owned it twice during that stretch. Both times I sold because I found something I liked better. Nothing really broke at Dropbox. It was just easy to move on from a stock that never seemed to do much.

I last wrote about Dropbox in October 2025. Growth had basically stopped by then, but customers were sticking around and the company was still generating a lot of cash.

The thesis was pretty boring... Dropbox had a sticky product, almost no growth, strong margins, a lot of free cash flow, and management was using a ridiculous amount of that cash to buy back stock.

The buyback was really the whole reason I liked it. Dropbox didn’t really need to grow all that much if the core business stayed stable and management kept making the share count disappear. It was becoming a genuine share cannibal, and the stock sitting in the same range year after year was actually helping.

At the end of that post, I said I wanted to see a few more quarters of flat revenue, strong cash flow, and continued buybacks before starting a small position.

Dropbox gave me almost exactly that. I still never bought it.

Now the stock is near the highest level it has traded in years, so I wanted to go back through the original thesis and see what actually happened.

So did the thesis work?

For the most part, yes.

The core business looks pretty much the same as it did when I last wrote about it. Revenue has stayed around $2.5 billion and the business excluding FormSwift has returned to slight growth. Dropbox has now added paying users for three straight quarters, while average revenue per user is still sitting around $140.

That is really all I wanted to see. I do not care whether core revenue grows 1% or 2% in a given quarter. The question was whether Dropbox could hold onto its users and pricing while Microsoft, Google, and Apple continued bundling storage into their much larger ecosystems. So far, it has.

There are now 18.19 million paying users, up 96,000 sequentially in the latest quarter. ARPU was $139.68, compared with $138.32 a year ago. Management expects some pressure as its cheaper Simple plan becomes a larger part of the mix, which is fine if that plan attracts and retains more users. I would only become concerned if the user growth is coming entirely from cheaper plans while the higher-value customers keep leaving.

Cash flow has also held up. Dropbox generated a little over $1 billion in unlevered free cash flow last year and now expects at least $1.07 billion in 2026. The company is still producing roughly $1 billion of cash from a revenue base that barely grows.

More importantly, it is turning that cash into much better results on a per-share basis.

Dropbox repurchased 60.4 million shares in 2025 and another 26.9 million during the first half of this year. Diluted shares were down roughly 18% year over year in Q2, which helped drive a 25% increase in unlevered free cash flow per share.

That is basically the entire thesis.

Dropbox does not need to grow much when every remaining share represents a meaningfully larger piece of the business each year. I originally figured the company might reduce its share count by 6% to 8% annually. It has been moving much faster than that. The diluted share count has fallen from roughly 419 million in 2020 to about 227 million in the latest quarter.

That is nearly half the company gone in six years.

The board also added another $900 million to the buyback authorization in June, leaving about $1.4 billion available at the end of Q2. Against a market cap of roughly $8 billion, that is still a massive amount of firepower.

Read more

I spent most of Friday and Saturday morning writing this with no idea why it sold off. Then Saturday afternoon word started going around that Alibaba is raising HK$80 billion, roughly $10.2 billion, through a share placement to fund the AI buildout. I don’t know if that leaked Friday. It would explain a lot if it did.

The dilution isn’t ideal, but the raise itself I’m fine with. I trust this management team more than I did a year ago, and given what cloud is doing I understand why they want to keep spending. Would’ve been nice to know before I added on Friday, but I probably would’ve bought anyway.

Quick background for anyone who hasn’t been following the name closely. Alibaba is still an enormous Chinese e-commerce business that barely grows, and for the past year it’s been eating the cost of an expensive instant-delivery fight with Meituan that wrecked group margins and did most of the damage to earnings. Those losses are coming down quickly now.

Cloud has been going the other direction the whole time. Nine straight quarters of acceleration, and this was the first one where the margin finally followed.

The quarter itself was good, and I liked the business more after reading the report than I did going in. Almost all of that is cloud, so that’s where I’ll start.

Cloud

AI Cloud and Compute Services revenue came in at RMB 48.4 billion, up 45%. Total segment revenue and external customer revenue both grew 45%.

That 45% was also pretty close to what analysts were already using. Alibaba does pre-earnings calls with the sell side, and the previews I saw in early July were around 45% growth with the segment margin moving from roughly 9% to 11%. Alibaba printed 45% and 11.6%. I thought it was a great quarter, but the headline numbers themselves were basically in line.

Still, this was the ninth straight quarter of acceleration, from a 3% decline in the March 2023 quarter to 45% growth now. Eddie Wu said it was the fastest cloud growth in 22 quarters, which takes you back to late 2020.

AI product revenue was RMB 12.4 billion, the 12th straight quarter of triple-digit growth. That annualizes to RMB 49.5 billion, or about $7.3 billion, and it is now 35% of external cloud revenue. A year ago it was a little over 20%.

Management thinks that annualized number will be close to $10 billion next quarter. It also said the model and application services business, including model-as-a-service, had crossed RMB 16 billion of ARR in August. There is some overlap in those figures, so I wouldn’t add them together. AI is 35% of external cloud revenue now and is moving the whole segment.

I’ve written about the revenue acceleration for long enough. The margin was the number I cared most about this quarter.

Read more

Baidu reports Tuesday morning, Kingsoft Cloud follows Wednesday, and Alibaba reports Thursday. PDD is currently expected next Monday, although the company still has not officially confirmed the date, which is very helpful.

Here is the order:

• Tuesday: Baidu ($BIDU)

• Wednesday: Kingsoft Cloud ($KC)

• Thursday: Alibaba ($BABA)

• Monday, August 24: PDD ($PDD), expected but not officially confirmed

Each report gives us a slightly different look at what is happening in China tech. Baidu and Kingsoft Cloud should tell us more about AI and cloud demand. Alibaba gives us cloud, e-commerce and quick commerce in one report. PDD should help fill in the remaining pieces around domestic e-commerce market share.

I cover Baidu and Alibaba much more closely, so that is where most of my attention will be.

We already got a few early clues from Tencent and JD last week.

Tencent’s advertising revenue grew 22%, AI demand remained strong and capex jumped again. JD’s report may have given us an even more useful signal for Alibaba.

JD is still the third and smallest player in quick commerce behind Meituan ($MPNGY) and Alibaba ($BABA), so I do not want to read too much into one quarter. But profit jumped and food delivery losses narrowed quite a bit, which suggests the price war across e-commerce and quick commerce has cooled.

That lines up with Alibaba’s pre-earnings guidance. Management has already told the Street that quick commerce losses are falling faster than expected and e-commerce margins are improving.

Put those together and the early read is that the price war has finally started to cool quite a bit.

That should help margins across the entire e-commerce and quick commerce market, including Alibaba, Meituan and JD. Alibaba may have the most room to improve given how much it has been spending, but the signal is good for the whole group.

Baidu

Baidu reports Tuesday morning.

The main things I am watching are Cloud growth, guidance and margins. More importantly for the stock, I want details on the Kunlunxin chip spinoff.

Last quarter, Baidu’s AI-powered business generated RMB 13.6 billion in revenue, up 49%, and crossed 50% of General Business revenue for the first time.

AI Cloud Infrastructure grew 79%. GPU Cloud revenue grew 184%.

Those are massive numbers, although I obviously do not expect Cloud to grow 79% forever. What I want to hear Tuesday is whether demand remains strong, what the pipeline looks like and how management is thinking about growth through the rest of the year.

The margin commentary will be important too. Baidu is spending heavily to build capacity, so I want some evidence that the economics are improving as the business scales. Another big Cloud number would be great, but guidance and margins will probably tell us more than the reported beat or miss.

Meanwhile, online marketing revenue fell 22% last quarter.

Baidu does not need search advertising to suddenly return to strong growth. It does need the decline to become less ugly while AI takes over more of the business. Another 20% drop would leave Cloud doing even more of the work.

Then there is Kunlunxin.

I think this is probably the biggest piece for the stock right now. In January, Baidu officially announced⁠ that Kunlunxin had confidentially submitted an application for a proposed spinoff and separate listing in Hong Kong. Baidu expects Kunlunxin to remain a subsidiary after the listing.

Since then, The Information reported that Kunlunxin is targeting a $50 billion IPO valuation. Reuters could not independently verify that figure⁠, and Baidu has not confirmed it, so I would treat it as a target.

Baidu reportedly owns around 58% of Kunlunxin. The basic math would value that stake at roughly $29 billion if Kunlunxin actually lists at $50 billion. That calculation ignores dilution from the IPO and any holding-company discount, but it would still represent a huge portion of Baidu’s current market value.

For context, Kunlunxin’s December funding round valued the company at only about $3.1 billion. Going from $3 billion to $50 billion within a year would be fairly ridiculous, so I am not plugging the full $50 billion into my valuation and calling it a day.

The official filing also says that the offering size, structure and Baidu’s ownership after the deal have not been finalized. The listing still requires regulatory approvals, and Baidu has given no firm timetable.

That is why management’s commentary could be so important Tuesday. I want any update they can give on timing, the potential offering size and how much of Kunlunxin Baidu expects to own afterward. Even if the final valuation comes in well below $50 billion, a completed listing would finally give the market a cleaner way to value an asset that is mostly buried inside Baidu today.

Kingsoft Cloud

Kingsoft Cloud reports Wednesday morning.

I do not follow the company closely enough to pretend I have some big opinion on the stock, but the report should give us another useful look at AI infrastructure demand in China.

Q1 revenue grew 37%, public cloud revenue increased 48%, and gross billings from AI customers grew 90%. AI represented more than half of public cloud revenue for the first time.

The weak part was gross margin, which fell from 16.2% to 12.8% as server costs and investment increased.

Demand clearly has not been the problem. I want to see whether margins begin stabilizing as all of this new capacity comes online.

For me, Kingsoft Cloud is mostly a read-through for Baidu and Alibaba. Strong AI demand would be another sign that China’s cloud buildout still has plenty of room to run.

Alibaba

Alibaba reports Thursday morning, and this is the one I care about most.

The two biggest numbers for me are Cloud growth and Cloud adjusted EBITA margin.

I think Cloud revenue grows more than 45%. Parts of the sell side are already around the same number, so this is no longer some wild estimate that nobody expects.

Cloud growth has accelerated from 29% to 34%, then 36%, and most recently 38%. AI-related products accounted for 30% of external Cloud revenue last quarter, and management expects that figure to exceed 50% within roughly a year.

I think the bigger surprise could come from margins.

Alibaba Cloud’s adjusted EBITA margin has been stuck in the high single digits while the company invests aggressively in capacity. Last quarter, it was around 9%.

Management said margins should improve over the next one or two quarters. I think we could see Cloud EBITA margin move back into double digits for the first time in years.

That would be huge.

Cloud has been growing quickly for a while, but the market has been reluctant to give Alibaba much credit because margins were barely moving. That concern has been fair. Revenue growth only goes so far if the company has to consume every dollar building more capacity.

A 45%+ Cloud print with double-digit EBITA margins would show that some operating leverage is finally showing up. I think that combination could force investors to value the Cloud business very differently.

If Cloud grows quickly and margins remain stuck around 9%, I will want to understand why. This is the quarter where we should begin seeing some of the improvement management has been talking about.

Quick commerce is the other big piece.

I wrote in July that management’s pre-earnings calls were noticeably more positive than the calls held before the previous quarter. Quick commerce losses were apparently falling faster than expected, and management wanted the Street to understand that the June quarter should look better than feared.

Alibaba gave analysts the opposite message back in January. Management told them to lower estimates across Cloud, e-commerce and margins, and the quarter eventually came in pretty close to those warnings.

So I take the change in tone seriously.

The core e-commerce business still needs to hold up, but I think the stock reaction will mostly come down to Cloud growth, Cloud margins and how quickly quick commerce losses are falling.

Expectations have moved higher. The stock has bounced sharply from its June lows, 45% Cloud growth is now being discussed openly and investors already know quick commerce is improving.

A 40% Cloud print would normally look great. This time it could be viewed as a disappointment.

But if Alibaba reports 45%+ Cloud growth, moves Cloud EBITA margins into double digits and shows a real reduction in quick commerce losses, I think the stock goes quite a bit higher.

I am very bullish heading into the print.

PDD

PDD is currently expected to report next Monday, although we are still waiting on an official date.

The main thing I want from this report is a better idea of where e-commerce market share sits between PDD, JD and Alibaba.

All three companies have been spending heavily. Alibaba attacked quick commerce, JD moved into food delivery and PDD is increasing investment in its supply chain and first-party brand business.

Last quarter, PDD’s revenue grew 11% and transaction services revenue increased 20%, but net income fell 15%.

Management made it clear that investment will remain high, even if near-term profits take a hit.

PDD does not make market share easy to calculate, so we will have to piece it together using its results alongside what JD and Alibaba report. If PDD’s domestic growth slows while Alibaba’s GMV and customer management revenue improve, that would be a pretty good sign that share is moving.

If all three report strong domestic demand, then maybe the Chinese consumer is doing better than people think.

Temu will get plenty of attention too, especially around tariffs and its international expansion. For me, the more useful part will be what PDD tells us about competition inside China.

By the time PDD reports, we should have a much cleaner picture of Cloud demand, AI spending and e-commerce market share across China.

For Alibaba specifically, this could be the quarter where Cloud finally earns a different valuation. Margin expansion has been the missing proof point for me and probably for the market too.

We will find out Thursday.

Disc. Long &

Disclaimer: This post is for informational purposes only and should not be considered financial advice. I am not a financial advisor. Please do your own research and make your own investment decisions.

The original thesis was pretty straightforward: a payments business growing around 30% a year, showing real operating leverage, with a roadmap to roughly $1 billion in free cash flow by 2027 and a valuation that looked way too cheap if management could get anywhere close.

A lot has happened since then.

Global Blue has become a much bigger part of the story, the stock has gotten smoked, the old $1 billion FCF target disappeared, management has had some pretty obvious issues communicating guidance, and the company has since started shrinking the share count pretty aggressively.

If you’re new to the name, my original writeup is probably still the best place to start.

Anyway, Q2 gave us another pretty good example of why I’m still here.

The actual quarter was strong. Really strong, honestly.

Volume came in at $61 billion, up 22%. Gross revenue less network fees was $624 million, up 51%, or 11% organically. Payments-based GRLNF grew 27%. Adjusted EBITDA was $284 million, up 39%, with margins improving to 46%. Non-GAAP EPS came in at $1.32.

And they beat the quarterly guide they gave us in May.

Management had been looking for roughly $615 million of GRLNF, $278 million of adjusted EBITDA and only about $10 million of adjusted free cash flow. They finished at $624 million, $284 million and $21 million respectively.

So operationally, I really don’t have much to bitch about.

The international payments business continues to fly. Payments-based GRLNF outside the Americas is up 52% YTD versus the high-20s growth management expected coming into the year. The Americas business is up 17%, basically right where it should be, and Shift4 One is now live in 12 European countries with management still targeting at least 15 by year-end.

The Global Blue integration also looks fine from what I can tell.

Remember, this was one of the big concerns when I wrote about FOUR earlier this year. Global Blue was going to temporarily hurt EBITDA margins and free cash flow conversion while Shift4 integrated the business and started pushing payments through the network.

That was expected.

What I wanted to see was the underlying payments business continue growing while the integration worked its way through the numbers.

So far, that’s pretty much what is happening.

What’s Up With the Guide?

Shift4 lowered full-year GRLNF guidance from $2.50-$2.60 billion to $2.48-$2.53 billion.

Adjusted EBITDA moved from $1.165-$1.215 billion to $1.15-$1.18 billion.

Adjusted free cash flow went from $490-$510 million to $465-$475 million, and EPS moved from $5.50-$5.70 to $5.15-$5.35. Volume guidance was unchanged.

Obviously, cutting guidance isn’t good.

But I think the reason behind the cut is worth thinking through.

Management said roughly $25 million of the GRLNF reduction comes from assuming continued Middle East-related travel disruption in Q3, with another $20 million from FX translation. The updated FCF and EPS numbers also include the impact from the company’s recent financing.

The strange part is that the Middle East headwind was actually a little better than expected in Q2.

Those aren’t my words either. Taylor Lauber specifically said international performance was better than they originally anticipated during the quarter, while simultaneously lowering the full-year outlook because they are assuming the travel disruption continues into Q3.

“The Middle East conflict remained a headwind and weighed on inbound travel to Europe and across several Gulf countries. However, the overall impact on our Q2 results was slightly better than we had forecast.”

That’s where I’m struggling a little.

If Q2 was better than expected and the worst of the travel disruption appears to have been during the quarter, why assume a fairly meaningful hit in Q3?

Maybe they know something I don’t.

Or maybe management finally learned how to guide.

Back in March, I spent a good chunk of my last Shift4 post complaining about exactly this.

The business kept executing, but management had developed a pretty impressive ability to shoot itself in the foot every time it talked about the future. The $1 billion FCF target disappeared, EPS guidance came in well below the Street, the messaging around Global Blue was clumsy and investors stopped trusting the numbers.

I wrote at the time that they needed to learn the oldest trick in the book: underpromise and overdeliver.

Well… maybe this is them doing it?

I may be giving management too much credit. I own a lot of the stock and I’m obviously looking at this through that lens.

But I’d like to think Taylor and the new team learned something from watching the stock get repeatedly murdered over aggressive targets and messy communication.

Read more

Well, it was.

The margin recovery will take longer than I expected. But the customer behavior looks much healthier than the headline numbers suggest, and I can live with the first if the second keeps holding.

So yeah, there’s plenty here to complain about.

But I actually came away from the quarter feeling better about the part of the thesis I care about most.

The breach happened last November, and Q2 was really the first quarter where most of the fallout showed up at once. The fine was booked. Marketing spend stayed elevated as they tried to win customers back. The logistics network was built for demand that temporarily disappeared. And you still have a chunk of customers who stopped buying after the breach and haven’t returned.

Against all of that, the underlying business held up better than I expected.

Revenue

Revenue was $8.86 billion, up 4%, which came in about $170 million light of consensus. That number is close to useless.

The won hit its weakest level against the dollar in more than fifteen years during the quarter. Translating Korean revenue back into dollars took $548 million off the top line. In constant currency the business grew 10%. Product commerce grew 8% in constant currency, up from 5% in Q1.

Nothing to do about that. I own a Korean business that reports in dollars, so some quarters the currency helps and some quarters it doesn’t. What I care about is whether Koreans are buying more stuff from Coupang, and in local terms they are, at a faster clip than three months ago.

Gross profit was $2.49 billion, down 3% reported and up 3% in constant currency, with margin down 188 basis points to 28.2%.

Customers

The thing that actually got my attention was buried in Bom Kim’s prepared remarks.

If you strip out the specific group of customers who stopped buying during the breach and still haven’t come back, spending across everyone else grew about ~16% year over year. That is roughly what product commerce was compounding at before any of this happened.

“The vast majority of our customer spend never moved. That group is spending at the highest levels in our history and compounding similarly to before last year’s data incident.” — Bom Kim

He also put a number on the older cohorts that I hadn’t seen before. They now spend nearly ten times what they spent in their first year, and they’re still increasing. That’s the part of this business that never shows up in a quarterly print and is most of the reason to own it.

The customers who left and came back apparently return at their full prior spend and grow from there. New customers are signing up faster than they were before the incident. WOW membership is above where it was pre-breach with additions accelerating, though new members start at the bottom of the spend curve, so that shows up in revenue later rather than now.

I’m aware of what this metric is. When a company hands you a growth number that excludes the customers who stopped buying, you hold it at arm’s length. Every business on earth looks healthy once you remove the people who left.

But it does answer the one question I actually care about, which is whether the breach broke anything. If the base that stayed were spending less, or ordering less often, or if WOW were leaking members, that’s where it would show up first. Instead the people who stayed are spending more than they ever have, and the ones who left return at full strength whenever they decide to return.

To me, the missing customers still look angry about the breach. The behavior of the ones who returned doesn’t suggest they found a better service somewhere else. Coupang still has work to do rebuilding trust, but I don’t see much evidence that its actual customer proposition got worse.

Margins

Product commerce adjusted EBITDA margin was 5.1%, down 390 basis points year over year. Segment EBITDA fell $281 million to $382 million. Consolidated margin was 1.8%.

Management points at three things. Supply chain got dislocated when demand dropped. Marketing is elevated because they’re paying to reacquire customers. And the fixed cost base was sized for a demand curve that stopped existing in November, so they’re running a network with slack in it.

That last one was a choice.

“We could cut them significantly, we’ve chosen not to because the right long-term decision is to grow into the capacity and support our customer experience that has always been our North Star.” — Bom Kim

Read more

My last portfolio update was back in February, and the portfolio looks very different today. Some positions have gotten much larger, several names are gone, and a few new ones have worked their way in.

Performance has also been a bit of a roller coaster.

For most of the year, returns were honestly pretty subpar. I wasn’t happy with how the portfolio was performing, and up until this past month there wasn’t much worth bragging about.

A few timely call positions in Alibaba and KWEB changed that pretty quickly. Those trades have worked extremely well and gave the portfolio a meaningful boost over the last several weeks.

As of July 31, the portfolio is up 15.84% YTD versus 10.13% for SPY. Since inception, the portfolio is up 17.92% compared to 8.79% for SPY.

That looks good today, but I’m not going to pretend it has been smooth. A large portion of the outperformance came recently, and it came from taking more risk than I normally would through those options positions.

Below is the full portfolio, along with a quick look at what changed, what drove the recent rebound, and where I currently see the biggest opportunities.

Read more

I opened that post complaining the stock had run 40% in the two weeks it took me to write it.

This one’s been worse. I drafted most of it Tuesday with the stock at $72. Wednesday it closed at $65.30. Thursday it closed at $78.65 and traded up to $81.74 after hours. I’ve rebuilt the math three times in four days and at this point I’ve just accepted that some of these numbers are going to be wrong by the time you read them. Sorry in advance.

Anyways…

Stock closed June at $126.89. Bottomed Wednesday at $65.30, which is about a ~50% drawdown. Back in the high $70s now. Still roughly ~40% off the high, still up roughly ~100% on the year.

What happened

Short version, none of it was stock specific.

The AI trade came into question this month. Nvidia laid out AI infrastructure commitments north of $750 billion and instead of taking that as good news everyone started asking whether the demand behind it is real or just a bunch of companies financing each other in a circle. Everything with a chip in it started coming down.

Korea has been the center of gravity for all of it. The KOSPI’s been getting taken apart all month, SK Hynix and Samsung are the epicenter, and because Seoul trades hours ahead of New York it’s basically been setting the tone for every semi open over here. SK Hynix printed a record quarter and got sold anyway. When Korea has a bad night, everything with a chip in it opens red here.

Then it stopped being a normal selloff and turned into something much dumber.

Situational Awareness, lol

If you haven’t been following this one, buckle up, because it’s genuinely one of the great stories.

Leopold Aschenbrenner. 25 years old. Columbia valedictorian at 19, joined OpenAI, got fired in 2024 over what OpenAI called improper disclosure of internal information, wrote a 165-page essay about AGI that everyone in the Valley claimed to have read, and then started a hedge fund named after his own essay.

No prior trading experience. Zero.

The fund went from $225 million to as much as $45 billion in under two years and returned 439% through June. Long AI infrastructure, SK Hynix and CoreWeave and Bloom Energy and some crypto miners, short software. Reportedly levered up to 400%.

Then July showed up and took 67% of it.

On July 24 he wrote to his investors telling them the selloff was one of the best buying opportunities since early last year and inviting them to commit fresh capital starting August 1. Six days later he was liquidating the entire public book to Citadel at a discount. Fund’s down to something like $10 billion and most of what’s left is a private stake in Anthropic.

And the thing is, he wasn’t even wrong…

The AI infrastructure thesis has been right for two years. He saw the compute buildout coming earlier than almost anybody and made 439% being right about it. He’s probably still right, honestly. Nothing that happened in July says the buildout isn’t real.

He just borrowed so much money against being right that he didn’t get to stay in the trade long enough to collect on it. At 4x levered you don’t get to have an opinion during a drawdown. The margin clerk has the opinion. Once the prime brokers start calling it doesn’t matter what you think SK Hynix is worth in 2028, you’re selling it Thursday at whatever Citadel feels like paying that day.

Being right is only half of it. The other half is being able to sit there while you wait to be proven right, and leverage takes that part out of your hands.

There’s also a very good conspiracy floating around that Citadel Securities put out a note days before the Fed meeting arguing for a surprise rate hike nobody was expecting, the AI trade cracked, Leopold got margin called, and then Citadel bought his whole book at the lows.

The note is real, for what it’s worth. The rest is fintwit doing what fintwit does, and technically Citadel Securities and Citadel the hedge fund are separate entities. Doesn’t matter. Great meme.

The actual point, and the reason I’m spending this much space on a hedge fund that has nothing to do with ACM: what started as a correction turned into a deleveraging spiral. One of the biggest forced sellers in the market was dumping a levered book into a falling tape and every correlated thing on the screen went down with it. Then Citadel took the book off his hands and the same names ripped. Market’s up two days running now.

That’s it. That’s what happened to this stock.

ACM Research has not said a word since July 15, and that was a press release announcing the date of the Q2 call.

And they sold it on the bull case

Here’s the part I actually can’t get past.

Reporting on the memory rout was pretty specific about the trigger. The selling got set off by fears that China’s CXMT would accelerate its capacity expansion after its IPO, plus reports of Chinese progress on domestic DUV lithography.

Read that again.

People sold semis because a Chinese chipmaker is about to spend a pile of fresh IPO money building more capacity. And ACM went down with them.

ACM sells the tools CXMT buys.

Same thing with the lithography story. If China cracks DUV, the biggest bottleneck on domestic fab construction gets smaller and more fabs get built. ASML dropping on that makes sense, that’s ASML’s revenue at risk. ACM sits on the other end and went down with the group anyway, because it’s got a semi equipment label on it and in a week like that one nobody’s reading past the label.

The two things that took this from $127 to $65 were, on the merits, reasons to own it.

I’ve been adding. Full case below.

Read more

I just thought it would be useful, and honestly kind of fun, to think about what this business might trade at if it were based in the U.S. instead of China.

There isn’t a perfect comparison because Tencent is a weirdly broad company. It’s part social network, part gaming business, part payments network, part cloud provider and part investment company. There really isn’t another business quite like it.

Still, lining it up next to Meta, Google, Apple and a couple of the large gaming companies gives us a decent idea of how differently the market treats Tencent.

Meta is growing much faster than Tencent. Revenue is up 26% over the past twelve months and has compounded at nearly 20% annually over three years. It’s obviously a great business and probably deserves to trade at a slight premium, especially given that it’s U.S.-listed.

But is Meta really that much more dominant of a business than Tencent? I don’t think that’s obvious at all.

Google is growing faster too. Revenue is up 20% over the past year, helped by Cloud going absolutely nuts, and the business has compounded revenue at 12.5% annually over three years.

Tencent is at 10.7%.

That is a difference, but it’s not a massive one. Google trades at 24x forward earnings while Tencent trades at just 12.6x.

Google deserves the higher valuation. I just struggle to believe the underlying businesses are so different that one dollar of Google earnings should be worth nearly twice as much.

Then there is Apple.

Tencent and Apple grew revenue at almost the exact same rate over the past twelve months. Tencent grew 12.84%. Apple grew 12.76%.

Over the last three years, Tencent has compounded revenue at nearly 11% annually. Apple is below 2%.

Apple trades at a whopping 36.5x forward earnings.

Obviously Apple deserves a premium. It has one of the greatest consumer ecosystems ever built, an enormous global brand and a customer base that will happily spend $1,200 replacing a phone that still works perfectly fine.

I own no issue with Apple trading well above Tencent.

Almost three times the multiple is a lot, though…

Some of that gap comes from the premium the U.S. market awards its best technology companies. Some comes from the discount attached to anything Chinese. Put those two together and you end up with a pretty absurd spread.

Then there’s gaming

EA and Take-Two are not perfect comparisons either. Gaming is essentially the entire business for both of them. For Tencent, gaming is one piece of a much larger company.

Still, Tencent owns the largest gaming business in the world, so they’re worth including.

EA has barely grown revenue over the past three years and trades at 23.6x forward earnings.

Take-Two has grown faster recently, mostly as investors look forward to Grand Theft Auto VI and the earnings the company should produce once that arrives. The stock trades at 33.7x forward earnings.

I understand the argument for both.

What feels odd is that investors are willing to look several years into the future for Take-Two while giving Tencent very little credit for what it already owns and earns today.

Tencent already has an enormous and highly profitable gaming business. Honour of Kings, Peacekeeper Elite, League of Legends, Clash of Clans, Brawl Stars, Delta Force and a pile of other franchises spread across China and the rest of the world.

Then, on top of that, you get WeChat, advertising, cloud, payments, fintech and the investment portfolio.

The entire company trades at roughly half EA’s multiple and a little over one-third of Take-Two’s.

China deserves a discount. I don’t think it explains all of that.

The other thing that’s hard to capture in a comparison like this is just how good the business actually is.

Revenue growth and earnings multiples are useful, but they leave out the thing I care about most.

Tencent is a superb business.

WeChat is probably the best example of a true super app anywhere in the world. More than a billion people use it daily for messaging, payments, shopping, food delivery, transportation, entertainment, business and basically everything else.

I would put the moat around WeChat up against almost anything.

People are not leaving. Merchants are not leaving. The mini-program ecosystem is already there. The payments network is already there. Businesses have spent years building their operations around it.

I don’t know what would realistically disrupt that position at this point…

A better messaging app would not be enough. A competitor would need to recreate the social graph, payments layer, merchant network, mini-program ecosystem and all the little habits that have built up over more than a decade.

Good luck lol

That is what makes the valuation so hard for me to understand. Tencent is literally one of the best businesses in the world. It owns one of the most dominant consumer platforms ever created.

And then you have to consider management.

Pony Ma founded Tencent in 1998 and is still running it. Over that period, the company has built WeChat, become the largest gaming company in the world, created a giant payments and fintech business, invested in many of China’s best internet companies and returned enormous amounts of capital to shareholders.

Tencent’s management team belongs in the same conversation as the best teams running any major technology company.

They have repeatedly shown that they know when to invest, when to pull back, when to monetize outside holdings and when to buy their own stock.

The record is not perfect. Nobody’s is. But over nearly three decades, very few management teams have allocated capital this well across this many different businesses.

That deserves a premium too, or at least it should prevent the stock from trading like a questionable melting ice cube.

What would this trade at in the U.S.?

There is no way to know, obviously.

But I have a very hard time believing an American Tencent would trade anywhere close to its current valuation.

Imagine the pitch.

You have one of the most dominant consumer platforms in the world. More than a billion daily users. The largest gaming business. A growing advertising operation. Cloud, payments and fintech. A huge investment portfolio. Net cash. Double-digit revenue growth. Profit growing faster than revenue. A shrinking share count. One of the best management teams in technology.

Then add AI.

Tencent already has the users, merchants, advertisers, cloud customers, payments network and distribution. It does not need to build an audience for AI from scratch. It can push the technology into products people and businesses already use every day.

If that exact collection of assets were headquartered in California and listed on Nasdaq, investors would probably argue about whether it deserved 25x or 35x earnings.

I doubt anyone would suggest 12x was reasonable…

I’m not saying Tencent deserves Apple’s multiple. I’m not even sure it deserves Google’s.

But there is an enormous amount of room between 12.6x and the valuations the market gives these American companies.

At 16x earnings, Tencent would have roughly 27% upside from the multiple alone.

At 18x, the upside would be around 43%.

Even at 18x, Tencent would still trade below Google, Apple, EA and Take-Two. Investors would still be getting compensated for China. The valuation would just begin to resemble the quality of the business.

A Discount, Sure. This Much?

U.S. companies trade at a premium. They have deeper capital markets, more consistent foreign demand and far less political baggage.

Tencent operates in China, trades in Hong Kong and comes with risks that Meta, Google and Apple do not have. Some valuation gap is completely reasonable.

I just think the current gap has become far too wide.

Tencent is still growing. AI should create more opportunities across advertising, gaming, cloud and WeChat. The share count is coming down. The balance sheet is loaded. Management has proven itself over and over again.

Most importantly, the core business is about as difficult to disrupt as anything I have ever seen.

That combination should not trade like an average company.

Maybe Hong Kong leaves it cheap for another year. Wouldn’t exactly be shocking. But I have a hard time believing one of the best businesses and management teams in the world will permanently trade at such a massive discount to companies with similar, and in some cases worse, growth.

If Tencent traded in the U.S., the market would almost certainly value it like the superb business it is.

For now, we get the Hong Kong price.

I’m fine with that.

This article is for informational purposes only and does not constitute investment advice. I own shares of Tencent, and my own money is at risk. Always do your own work before making investment decisions.

Management had just put out 2026 guidance that came in well below what the Street expected. The old $1 billion free cash flow target disappeared from the presentation. Global Blue was dragging on margins and cash conversion. And after years of questionable communication, the market basically decided it was done giving this company the benefit of the doubt.

I understood the frustration. I was frustrated too.

Then the stock went on to fall another 20%.

FOUR eventually traded down to $34 in June before bouncing back above $50. From the low, the stock is now up nearly ~50% in a little over a month. After watching it get pummeled for most of the year, I will gladly take it.

But whenever a stock rallies this quickly, you start hearing the same question: did we miss it?

I don’t think so.

At $39, which is where I built the model below, Shift4 was trading at roughly 4.2x my estimate of 2027 free cash flow. At today’s price around $50, the multiple has increased to roughly 5.3x.

I want to be very clear about the denominator here because this is where the math can get sloppy.

The ~5x figure is not based on the old $1 billion free cash flow target management quietly removed earlier this year. I’m using approximately $740 million of adjusted free cash flow in 2027, with roughly 78 million diluted shares.

That works out to around $9.49 of free cash flow per share. The stock is trading at just over five times that number.

My estimate is actually more conservative than the $800 million to $900 million year-end run-rate I discussed in March. The $740 million represents free cash flow earned across the full year. Shift4 could exit 2027 at a higher run rate without producing $800 million or $900 million during the calendar year itself.

Either way, I do not need the abandoned $1 billion target for the valuation to work.

The Cash Flow Ramp

The whole thesis now comes down to whether cash conversion recovers as the Global Blue integration matures.

Shift4 generated approximately $500 million of adjusted free cash flow in 2025. I have them producing roughly the same amount in 2026, followed by $740 million in 2027, $920 million in 2028 and just over $1 billion in 2029.

That sounds like a large jump, and it is. But the assumptions underneath it aren’t especially wild.

For 2027, I’m estimating:

• $3.15 billion of gross revenue less network fees

• $1.56 billion of adjusted EBITDA

• A 49.5% adjusted EBITDA margin

• 47.4% free cash flow conversion

• $740 million of adjusted free cash flow

The conversion assumption is the most important piece. Shift4 converted roughly 51.5% of adjusted EBITDA into free cash flow in 2025. Management is guiding to only 42% in 2026 as the company works through Global Blue integration spending, heavier interest expense and some ugly working-capital timing.

My 2027 estimate assumes conversion recovers to 47.4%. That would still be below the 2025 level.

Read more

Management had been holding pre-earnings calls with the Street, and notes from those conversations started making the rounds. The message was that quick commerce losses are coming down much faster than people expected and that the June quarter, which Alibaba reports next month, should look better than feared.

That was basically it. The money-losing business is apparently losing less money.

Alibaba did the same thing back in January. Those calls leaked too, and I spent a weekend writing up what management was telling people.

Except in January, the message was the exact opposite. And the stock is now about a third lower than it was when those calls happened.

That’s the part worth sitting with for a minute because it has been a rough few months to own this thing. The stock went from $193 to $140, then slowly bled from around $112 into the mid-$90s during June. I’ve been long the whole way, written about it the whole way, and none of it was fun.

I also put out a post last week saying China tech had become one of the most ignored corners of the market because every dollar chasing AI was getting sucked into the semiconductor supply chain.

Then Alibaba ripped 48 hours later.

I’ll take it, but I’m not going to pretend I saw that coming.

January’s Message

The January message was pretty negative.

Take your cloud numbers down. December-quarter e-commerce was slowing materially and CMR kept decelerating. Quick commerce losses weren’t narrowing because Alibaba was still spending heavily to push its market share above 50%. The buyback was non existent, with management rightly prioritizing investment in AI and cloud growth instead, and there was no suggestion it would pick back up anytime soon.

Somebody even asked directly whether e-commerce growth could fall from 9% to 3% or 4%, and management wouldn’t answer.

I thought they were sandbagging. They mostly weren’t. The quarter came in around where management had pointed, and the stock still sold off.

The interesting part is that management clearly knows these calls move expectations. If they were worried about the quarter they’re about to report, I doubt they’d be going out of their way to tee up good news seven weeks early.

The details inside the notes are worth paying attention to, but the direction of the message probably tells you more. In January, management wanted estimates coming down. This time, they went out of their way to tell people things were improving.

The funny thing is, almost none of what came out of the call should have been a surprise.

Read more

This time it’s two names, calls on both, together a little over ~10% of the portfolio.

I genuinely can’t think of a more hated corner of the market right now. Actually, hated might be generous. Hated implies people are paying attention. These names are just ignored, for now.

Every dollar in the world is chasing the AI bottleneck trade, memory, power, anything with a supply constraint attached to it, and that trade is sucking capital out of everything else. This group sits on the wrong end of that rotation. Money has been walking out the door for months, and a buyer base that supported these names for years recently flipped to net selling for the first time in years.

The index that tracks this group is down more than ~30% from its highs and some of the biggest names in it just traded at their lowest levels since early 2025.

The funny part is that the two biggest names in this corner are about as clear AI beneficiaries as you'll find anywhere. Actual AI revenue growing fast, with real usage behind it, and the market refuses to pay for any of it for reasons that have nothing to do with the businesses themselves.

I've watched enough of these rotations to know how they usually end. The crowded trade gets more crowded, the ignored stuff gets cheaper, and it feels permanent the whole time. Then the valuation gap gets stupid enough that people start looking around. I think that point is very very close.

Now obviously “cheap” alone didn't get me back in the trade. It was cheap a few months ago too and the market did not care. What changed is the buying. There's a very specific buyer showing up in these names every single trading day right now, and the pace picked up noticeably in the last couple weeks.

I got burned last time, and part of that was on me. I didn't buy enough time, so when the trade needed a few more months to work, I didn't have them.

Though in fairness, I'm not sure anyone saw the kind of route these names went on from there coming…

Read more