Phenomenal businesses that don't require any capital

[LearningMachine]

Todd Combs: "So, we have $10 trillion in market cap amongst 5 phenomenal businesses that really don't require any capital whatsoever."

 

Todd said the above in Fireside chat with Charlie at https://youtu.be/aciej48jbFk .
 

Which 5 businesses do folks think Todd meant?

 

AAPL, GOOGL, MSFT, META, and TCEHY?   That added up to only $7.79 T on the day of the chat. 
 

 

 

Thoughts?

Edited March 26, 2023 by LearningMachine

[mcliu]

Amazon?

[LearningMachine]

13 minutes ago, mcliu said:

Amazon?

 

I didn't include Amazon because it requires a lot of capital, i.e. $186.7 Billion of property & Equipment on Balance sheet, many multiples of its last peak positive FCF.  In 2022, AMZN spent $58B on purchases of property and equipment, and $7.9B on principal repayments of finance leases.

[Gregmal]

Land 

[LearningMachine]

2 hours ago, Gregmal said:

Land 

 

Land, defined as the right to exclude others from a boundary marked on earth, indeed doesn't require any capital. 

 

It could become a phenomenal business if the right to the marked boundary could be rented out to generate FCF year after year, e.g. farmland or the Permian basin, instead of eying to get some value for the marked boundary in the distant future that has to be discounted to current value.

 

That phenomenal business could become a phenomenal investment if it could be bought at 10% unleveraged FCF, but this right is too well known & interest rates have been too low so far for this right to trade directly at that level.

Edited March 27, 2023 by LearningMachine

[Spekulatius]

META and Google each spent more than $30B in Capex last year. That’s hardly asset lite.

[LearningMachine]

1 hour ago, Spekulatius said:

META and Google each spent more than $30B in Capex last year. That’s hardly asset lite.

 

That is a little high, but still all funded as a percent of net cash provided by operating activities without having to raise any capital, and PP&E-to-last-peak-FCF & PP&E-to-net-cash-provided-by-operating-activities are still quiet low compared to other businesses. 

[Spekulatius]

6 hours ago, LearningMachine said:

 

That is a little high, but still all funded as a percent of net cash provided by operating activities without having to raise any capital, and PP&E-to-last-peak-FCF & PP&E-to-net-cash-provided-by-operating-activities are still quiet low compared to other businesses. 

Self funded or not, META spent more than 25% of the revenues last year on Capex. This is definitely not Capex light. Google was a bit higher than 10%. a typical steel company spends less than 10% of the revenues, but they are also lower margin business, so not Capex/Revenues my not be the right metric.

 

Most industrials have become quite Capex light in terms of business model and spent less than 5% of the revenues on Capex and often less than 3%.

 

Capex light business models are virtually any software company (unless they build swanky office buildings), $V, $MA and most wholesale/distribution business. Apple also also surprisingly Capital light with only ~2.5% Capex spent/ revenues which is less than any other FANG.

[LearningMachine]

4 hours ago, Spekulatius said:

Self funded or not, META spent more than 25% of the revenues last year on Capex. This is definitely not Capex light. Google was a bit higher than 10%. a typical steel company spends less than 10% of the revenues, but they are also lower margin business, so not Capex/Revenues my not be the right metric.

 

Most industrials have become quite Capex light in terms of business model and spent less than 5% of the revenues on Capex and often less than 3%.

 

Capex light business models are virtually any software company (unless they build swanky office buildings), $V, $MA and most wholesale/distribution business. Apple also also surprisingly Capital light with only ~2.5% Capex spent/ revenues which is less than any other FANG.

 

@Spekulatius, we are pretty close.  We are both looking at this on a spectrum based on percentages.

 

For percentages, I was suggesting PP&E-to-last-peak-FCF & PP&E-to-net-cash-provided-by-operating-activities.  I was suggesting PP&E because it is the cumulative capex on the books that has not been depreciated away, and something that will have to be replaced at inflated prices.  I was suggesting net-cash-provided-by-operating-activities because that is the line-item from which capex is spent beyond opex, and stops the cash from coming to the owner's pocket.  I was suggesting last-peak-FCF to ignore any special things in a given year. 

 

Overall, if we we are going to look at annual capex expenditure itself instead of PP&E, I'd suggest capex-to-net-cash-provided-by-operating-activities, or capex-to-last-peak-FCF-before-capex i.e. what percentage of cash that would have come to the owners' pocket is going to capex.  

 

By the above measures, GOOGL and META should be better than other businesses.  

Edited March 27, 2023 by LearningMachine

[Luca]

Perhaps he just rounded to 10T to make the number easier to digest? For sure Microsoft, Apple, Tencent

[Spekulatius]

1) Insurance brokers  $AJG, $BRO etc.

2) Health insurers $UNH, $ELV etc. (they need to hold some capital, but very little)

3) Distribution business ($WSO etc) - very little fixed assets, some working capital that is mostly balanced out by accounts payable

 

None of these Fangs can match the capital light business model of the above.

 

4) I could even add the Title insurers. They need to hold some capital, but the claims are ridiculously low, so they can ramp up volume like crazy when refinance activity surges and make a lot of dough. This is cyclical though and I am not sure it meet criteria for "great", but in my opinion it's pretty good. $FNF, $FAF etc.

 

5) Exchanges. Zero capital requirement basically, except some cash  $CME, $NDAQ, $ENX, Not that great iof a business than they used to be, due to fees going to zero.

 

6) $V, $MA -payment rails. I almost forgot about those because they are so obvious. Best business model of all time probably.

Edited March 31, 2023 by Spekulatius

[Whensthepaintdry?]

Airbnb could qualify. 

[Sweet]

3 hours ago, Spekulatius said:

6) $V, $MA -payment rails. I almost forgot about those because they are so obvious. Best business model of all time probably.

Agree but I see disruption coming potentially.  I’ve always had a reason not to buy these companies and it’s always been a mistake.  Probably no different this time.

[LC]

Everyone “sees disruption coming” for these types of companies because they’re incredibly asset light.

[Spekulatius]

3 hours ago, LC said:

Everyone “sees disruption coming” for these types of companies because they’re incredibly asset light.

They seem too good to be true. We discussed disruption of these 4-5 years ago, but I don’t  

see it. I am curious what @Sweet is seeing.

[sleepydragon]

Data companies: SPGI, FDS, MCO, VRSK, LSEG

[Sweet]

7 hours ago, Spekulatius said:

They seem too good to be true. We discussed disruption of these 4-5 years ago, but I don’t  

see it. I am curious what @Sweet is seeing.

Apple Pay.  I use it almost exclusively now.  If Apple had their own card I’d see it as a risk to both MA and Visa.  I posted a topic in this a while ago:

https://thecobf.com/forum/topic/19573-can-the-visa-and-mastercard-moat-be-bridged/#comment-480798

 

I don’t see how Apple doesn’t go after this segment of business eventually.

[ourkid8]

BAM and BX, both are asset light businesses which do not require a lot of capital. 

[frommi]

I see my whole nicotine/tobacco basket as an incredibly capital light business, in fact they return 80% of the money earned as dividends/buybacks. I studied returns in inflationary periods and these were the best performing stocks in these times. Maybe this time is different i dont know. Holding them since some time now, so maybe i am just wrong, or the market simply still hasnt come to the same conclusion as i did.

Brokers like IBKR or OTCM (should have held onto this one) are also capital light. FAST, SPGI, MCO are also in this bucket, but not cheap at the moment.

[Luca]

Just now, frommi said:

I see my whole nicotine/tobacco basket as an incredibly capital light business, in fact they return 80% of the money earned as dividends/buybacks. I studied returns in inflationary periods and these were the best performing stocks in these times. Maybe this time is different i dont know. Holding them since some time now, so maybe i am just wrong, or the market simply still hasnt come to the same conclusion as i did.

Brokers like IBKR or OTCM (should have held onto this one) are also capital light. FAST, SPGI, MCO are also in this bucket, but not cheap at the moment.

Which tobacco companies do you own? I was interested in the industry too

[frommi]

BTI,PM,MO,IMB,Karelia Tobacco

[Luca]

3 minutes ago, frommi said:

BTI,PM,MO,IMB,Karelia Tobacco

[John Hjorth]

23 hours ago, Sweet said:

Agree but I see disruption coming potentially.  I’ve always had a reason not to buy these companies and it’s always been a mistake.  Probably no different this time.

 

@Sweet,

 

It happens from time to time, that you may be undecided about certain companies, from what you may read here CoBF from other board members and other stuff.

 

Do you really need a firm and high conviction of your own then to engage? It's all about making yourself comfortable with regard to position sizing, based on "if you don't try, you'll never get to grasp the knack of it!"

 

I've now owned for many years V, MA & CSU [based on reading the respective topics of those investments back then in time here on CoBF] [each their own indivial investment cases], based on that approach. Pretty awesome experience, I might say [I and - naturally - should add : Thank you! - to the CoBF posters sharing their work and thoughts with me back then].

 

It is about dividing your own conviction more granular, the "too hard" pile divided from : "Too hard", in to "Too hard" and "Perhaps too hard for me", but if you don't try, you'll never learn it."

 

It is all about personal adaption, adoption & improvement over time, to get better.

[Sweet]

20 minutes ago, John Hjorth said:

 

@Sweet,

 

It happens from time to time, that you may be undecided about certain companies, from what you may read here CoBF from other board members and other stuff.

 

Do you really need a firm and high conviction of your own then to engage? It's all about making yourself comfortable with regard to position sizing, based on "if you don't try, you'll never get to grasp the knack of it!"

 

I've now owned for many years V, MA & CSU [based on reading the respective topics of those investments back then in time here on CoBF] [each their own indivial investment cases], based on that approach. Pretty awesome experience, I might say [I and - naturally - should add : Thank you! - to the CoBF posters sharing their work and thoughts with me back then].

 

It is about dividing your own conviction more granular, the "too hard" pile divided from : "Too hard", in to "Too hard" and "Perhaps too hard for me", but if you don't try, you'll never learn it."

 

It is all about personal adaption, adoption & improvement over time, to get better.

I agree John.  I had the opportunity to buy Visa and MasterCard in 2014, I was exposed to a guy who was as betting heavily on options on both companies going into earnings.  They just kept going up and his bets kept coming off.

 

I was fascinated by the companies, but back then my excuse for not owning them was because they looked expensive and I was waiting for a pull back.  I had only been investing a few years so high PE companies scared me back then.

 

One of my biggest mistakes was not buying MA when I had free cash to do so.  The benefit of hindsight.

I need to be more open to these companies and position size accordingly.  I’m missing out too often.

[Spekulatius]

4 hours ago, frommi said:

I see my whole nicotine/tobacco basket as an incredibly capital light business, in fact they return 80% of the money earned as dividends/buybacks. I studied returns in inflationary periods and these were the best performing stocks in these times. Maybe this time is different i dont know. Holding them since some time now, so maybe i am just wrong, or the market simply still hasnt come to the same conclusion as i did.

Brokers like IBKR or OTCM (should have held onto this one) are also capital light. FAST, SPGI, MCO are also in this bucket, but not cheap at the moment.

Tobacco / Nicotine is very capital light, but it doesn’t matter because the business is shrinking by volume - at least combustibles do. So there isn’t really  any incremental dollar to invest.

The alternatives like heated tobacco and vaping area different story and require significant capital and marketing dollars to win market share. This business is not capital light at all.