Guts

Adding more stocks does not reduce risk, it mostly reduces upside and increases complexity. Want to get better investment results? Do this 👇 1. Fewer great businesses > many good ones 2. Time > tinkering 3. Letting winners grow > constant rebalancing 🌹

The SaaS Profit Story Everyone Believes There is a very common story investors tell themselves about SaaS companies. First they grow fast, then they scale, and then at some point in the future they flip a switch and profits show up all at once. The early losses were intentional and margins will come later. Just be patient. It sounds logical, and it feels reasonable, which is usually a warning sign. This chart looks at public SaaS companies and asks a very simple question. Have any of them meaningfully improved true free cash flow margins since 2021 and also ended up with genuinely high free cash flow margins today. True free cash flow here means real cash after stock based compensation. Not adjusted “excluding SBC.” Actual money that belongs to shareholders. The answer is not complicated because none have done both. The horizontal axis shows true free cash flow margin today. The vertical axis shows how much that margin has improved since 2021. The top right corner is the ideal outcome everyone assumes is inevitable. Strong margins today and big improvement along the way. That box is empty! Some companies improved margins meaningfully, but they are still not very profitable. Others have decent margins today, but they did not improve them much. No one made the clean transition from growth story to cash machine the way the narrative suggests. That matters because a huge amount of SaaS valuation is built on the idea that profits are simply delayed, not structurally difficult. Grow now, monetize later. The problem is that later keeps getting pushed further out. Sales and marketing does not suddenly disappear once a company is large. Competition does not politely step aside. R&D does not stop just because revenue crossed some threshold. And stock based compensation remains a real cost even when growth slows and the stock stops going up. When you actually subtract SBC, many of these businesses look far less profitable than people want to believe. This does not mean SaaS is a bad business. It means it is a more expensive business economically than the story implies. Operating leverage exists, but it is weaker and slower than the models suggest. What this chart is really saying is that growing revenue is the easy part, but turning that revenue into durable, high quality free cash flow without constantly issuing stock is much harder. Investors see a company growing quickly and assume margins will naturally follow. They project a future that feels obvious without asking whether it has actually happened before. 🌹

Meli is indeed superbly managed. I’ll tell you a story from the old days that you guys probably don’t know. For many years, $meli paid a dividend while they used the $ebay model. The reason for the dividend was Marco’s grandpa taught him all great companies pay dividends. It was eventually cut when they switched to the $Amzn model. 🌹