It also happens to go down. And I inevitably start asking myself, “but why?”

It is even worse when my portfolio falls more than the index.

And the waltz of questions begins.

“Have I selected the wrong companies?

Do I have a sizing problem?

Have I chosen the wrong sectors?”

Perhaps you recognize partly yourself in this, and you’re looking for answers too.

The aim of this article is to give you a method to identify the main drivers of your portfolio’s performance, examine companies’ fundamentals, and distinguish changes in business performance from changes in market valuations.

I’m not here to tell you whether your investment decisions were right or wrong.

We’ll focus on a portfolio of individual stocks and cash, without leverage.

And at the end of the article, you’ll find a ready-to-use prompt you can give to your favorite AI to analyze your own portfolio.

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1. Choose a comparison basis

You must first establish a basis for comparison. This means choosing an analysis period and a relevant benchmark.

For a portfolio mainly invested in US equities, the S&P 500 is a natural comparison.

But be careful: comparing returns without comparing risks can lead to wrong conclusions.

It does not make much sense to compare Walmart and Nebius directly. One has a relatively predictable business, while the other has a radically different growth and risk profile.

At the portfolio level, it is the same thing.

If you are 100% invested in technology stocks, you might be tempted to take the Nasdaq-100, but it has many non-tech companies (36% outside tech, with names such as PepsiCo), you can choose an index such as the MSCI World IT.

If you hold European equities, take the STOXX 600, etc.

On the technical side, simply make sure to compare returns in the same currency, including dividends, and to use a return that properly accounts for deposits and withdrawals.

Be careful, in particular, with screenshots of brokerage accounts: the change in account value does not necessarily correspond to its performance. Interactive Brokers, for example, lets you distinguish time-weighted return (TWR) from money-weighted return (MWR).

2. Identify the companies that explain the gap

Generally, most gains and losses are explained by a minority of determining factors. This is an application of Pareto’s law.

If you have a stock that loses 50% but represents only 1% of the portfolio, it will have the same effect as a stock weighing 10% of your portfolio and losing 5%.

Even if returns are explained by a minority of stocks, it is in your interest to study all your companies, because each of them holds an explanation that can help you progress.

The only difference is that the lesson will have cost you less, in the case of a loss.

Also remember to distinguish absolute performance from performance relative to the benchmark.

A company that gains 10% may have hurt you if your benchmark rose 25% over the same period.

Conversely, a position that loses 10% may have limited underperformance if the index fell 20%.

What interests us is each position’s contribution to the gap with the index.

The analysis must also include transactions made during the period, which can explain a large part of positive or negative gaps.

This includes rotations, which will have a positive or negative effect, and additions or withdrawals of capital (or leverage). If you have €50,000 and add €5,000, that is 10% more thanks to your savings, which is an excellent thing for your wealth, but requires an adjustment when analyzing your performance.

If you have a portfolio with 20% cash, and assuming for simplicity that it earns nothing, you miss 20% of the rise or 20% of the fall.

So you mechanically cannot match the S&P 500 with a portfolio made up of 80% S&P 500 and 20% cash during a rising market.

The diagnosis must make it possible to answer four questions:

• Which companies explain most of the gap?

• What was the effect of their weights?

• What contribution came from purchases, sales and additions to positions?

• What was the effect of cash?

3. The two dimensions of the share price

The fact that a company has lost 30% on the stock market does not necessarily mean that it is doing 30% worse.

The key is to split the investment into two parts and study each one separately. And that is fortunate, because the P/E ratio lets us do this easily:

Share price = (Normalized) earnings per share × P/E

The earnings-per-share part corresponds to fundamentals, and the multiple to market sentiment, which itself reflects expectations.

It is often necessary to adjust earnings for exceptional or financial items to establish a sound basis for comparison. Other, more complex indicators can be used, such as FCF, EBIT, OCF, etc.

This formula has the advantage of simplicity.

Example: a company that improves, but whose share price falls

Imagine a company whose normalized earnings per share go from €5 to €6.

Its earnings therefore increase by 20%.

But at the same time, its P/E goes from 20 to 15.

In this example, the decline comes from a contraction of the multiple, despite earning 20% more per share.

At a constant multiple, earnings growth would have taken its share price to €120.

And if the company is not profitable?

When normalized earnings are not positive and usable, we can use sales per share and the Price-to-Sales multiple:

Share price = Sales per share × P/S

The logic remains the same: distinguish the evolution of the business from that of the valuation multiple.

Generally, this type of company is even more difficult to value, which explains large and often unreasonable share-price movements.

4. Start with fundamentals, then study the multiple

The decomposition between earnings and multiple allows us to measure what has changed. It does not prove that the market’s reaction is justified or excessive.

To answer this question definitively, we must start with fundamentals, which will inform us on the following point: “Is the company in a better position than at the beginning of the period?”

The simplest thing is to have an investment thesis, if possible updated at the beginning of the period, then to consider the elements that have changed since:

• What are the results?

  • Margins and profitability.

  • Debt and financial position.

  • The main growth prospects.

• What risks and opportunities could arise?

• How is the competition doing?

A good investment thesis will indicate a bull thesis and a bear thesis, sometimes materialized in the form of key risks to the business, whose realization may draw closer or move further away.

And if you do not have a written thesis, you can still carry out the financial diagnosis. You simply will not be able to verify as reliably what you had initially expected.

The aim is not to redo a complete analysis of the company. We are trying to determine whether its economic position has improved, deteriorated or remained broadly stable.

Think of the market as an evaluating machine. Every new event and every update of a probability will influence the multiple.

The whole aim will be to ask: “Is the development of the business good? Is the development of the price consistent with this development in fundamentals?”

The evolution of the multiple will follow four levels: the company, the sector, market factors and the market.

• Company: for example, the CEO dies or becomes involved in legal cases (or even extramarital affairs that constitute a threat to US national security, to tie in with current events).

• Sector: if your company has lost 25% while its sector has fallen 30%, the reading is different from that of a company that loses 25% while its competitors advance.

• Market factors: some companies move together independently of their sector. Investors may, for example, abandon growth stocks in favor of value stocks, or favor large-cap companies. Momentum also plays a role and is a well documented pattern amongst investors.

• Market: the whole equity market tends to move together according to interest rates or financing conditions.

The evolution of the multiple can encompass all four at once, for example:

• Less favorable growth expectations.

• Deteriorating profitability prospects.

• An increase in risks.

• A rise in interest rates.

• An initially too-demanding valuation.

• A price that has been falling constantly for six months.

As mentioned in my stock analysis article, we are dealing here with pricing, which consists of assigning a price relative to alternatives, such as competitors’ prices or another yardstick. Valuation seeks the intrinsic value of the company, without taking competitors’ valuations into account.

5. What can we really conclude? Luck, skill and learning

Time will make it clear

In practical terms, you will assess fundamentals, then see whether the multiple is consistent.

It is the investor’s whole skill to judge between fundamentals and price, and whether there is an asymmetry between the price (which contains an implicit risk) and the opportunities.

The central hypothesis of investing consists in finding a valuation error and then waiting for the market to correct it and thus join you later in your analysis.

The key to investing is time, because it is time that will prove you right or wrong, and separate luck from talent.

We take a position on a future that may or may not materialize.

I cannot give you a framework for analyzing your portfolio in just a few words.

That is why the objective of this article is to get a first grasp of fundamentals and the evolution of the multiple, to gain clarity and so that you can form an opinion.

In general, here are also a few points to take into account in your study.

Beware of hindsight bias

I come from the world of project management, where studying cognitive biases is an essential part because they influence the decision-making process. There is one that is particularly interesting for lessons-learned reviews: hindsight bias.

It consists of regarding an event as predictable once it has happened. We see the day when the signal appeared and has been visible ever since.

How can you protect yourself against a cognitive bias? Knowing it exists is a first protection, which you can improve by keeping a record of the hypotheses and risks identified before the investment.

The cost of learning

Your experience must also be taken into account.

In my Investing 101 series, I distinguished three stages in an investor’s journey: the learning phase, the transition toward a target portfolio, then the maturity phase.

If you start your journey as an investor, beating the S&P 500 is not necessarily your first objective, and making mistakes is unavoidable. These are your tuition fees on the market.

But I would even add that this mindset and this practice of investing will be useful in your professional projects by giving you an owner mindset, and will allow you to become better in your projects, whether in entrepreneurship, real-estate purchases or other endeavors.

6. Analyze your portfolio with AI

The method we have just seen can be applied to your own portfolio or individual stocks.

Here is the prompt ready to copy, available for free subscribers. I suggest copying and pasting it and adapting it to make a document ready to use with your AI. Or download this article, so you can ask your AI to execute the prompt and make you the same kind of picture.

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So I decided to go a step further, expanding the selection to include more companies, more market capitalizations, and more investment themes.

That’s why I created a watchlist of 209 companies, available for free subscribers.

Historically, stock-market wealth creation has been concentrated in a small minority of companies. Research by Hendrik Bessembinder found that the best-performing 4% of US-listed companies accounted for all net stock-market wealth creation between 1926 and 2016.

Many successful businesses share certain characteristics: strong market positions, leadership in niche markets, oligopolistic industry structures, or sustainable competitive advantages.

My goal is to identify companies with these characteristics and monitor them for potential investment opportunities.

You can now filter the watchlist by company size (large, mid, or small cap) and by investment theme, making it easier to discover businesses that match your investment interests.

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1. Eight investment themes to explore

Not all successful businesses follow the same model.

Some dominate their industries, others operate in highly specialized markets, while others grow by acquiring smaller competitors.

I’ve organized the watchlist around eight investment themes. A company can belong to several themes.

You can filter by any of these themes, or combine several to narrow your search.

The idea is to make discovering interesting businesses easier, without limiting yourself to the same well-known stocks.

Share prices and current P/E ratios are updated through Google Finance.

Of course, the watchlist doesn’t include every successful business.

I’ve deliberately excluded some well-known companies because I’m not convinced by their long-term prospects or competitive advantages.

For example, Visa and Mastercard are absent for reasons I discussed in a previous article.

I won’t go through every exclusion here, but the idea is simple: a company’s past success doesn’t automatically make it an attractive investment for the future.

The watchlist reflects my own research and convictions, and I’ll continue refining it as businesses and industries evolve.

2. Finding the right price: what Microsoft taught me

Finding a great business is only half the job. The price you pay matters just as much.

For each company, I’ve checked the lowest and highest P/E ratios over the past 10 years.

A visual ruler shows where the current P/E stands between these two historical extremes.

This makes it possible to scan hundreds of companies and quickly spot those trading near their historical valuation lows or highs.

Let’s look at a few examples:

The table shows Automatic Data Processing trading closer to its 10-year P/E low than its high, while Booking is below its historical low (shown in green). Bentley Systems is toward the upper end of its range, and Bloom Energy is above its previous 10-year P/E high.

With this simple visual comparison, you can quickly identify companies whose valuations deserve a closer look.

Here’s how I used this information in practice.

In June 2026, I noticed that Microsoft was trading near the bottom of its historical valuation range.

That observation prompted me to investigate further, leading to my Microsoft deep dive, published on June 30, 2026.

Since then, my position has gained 46% (as of November 5, 2026).

Of course, a company trading near its historical P/E low isn’t necessarily undervalued. Its prospects may have weakened, or its earnings may temporarily distort the ratio.

But that’s precisely the point.

The watchlist doesn’t tell me what to buy. It helps me identify what deserves further research.

3. Momentum: avoiding falling knives and FOMO

Valuation isn’t the only factor I monitor, because a company can look historically cheap and continue falling for months. Conversely, a stock that has already risen substantially can attract investors who fear missing out.

That’s why I’ve also included a momentum indicator.

It compares each company’s share-price performance with the S&P 500 over 7, 30, 90, and 180 days, producing a score between 1 and 5.

• Below 2: Weak relative momentum. The stock has significantly underperformed the S&P 500. This can be a warning sign and calls for further research before trying to catch a falling knife.

• Above 4: Strong relative momentum. The stock has significantly outperformed the market. This is a reminder to check whether enthusiasm has pushed its valuation too far.

• Between 2 and 4: My preferred momentum range. It helps me avoid the extremes of relative underperformance and outperformance when looking for potential entry points.

The aim isn’t to predict short-term price movements or mechanically time the market.

It’s to introduce another layer of discipline into the investment process.

Historical valuation helps identify potentially attractive prices. Momentum helps put recent market behavior into perspective.

Together, they help me prioritize which companies to investigate next.

4. How to access the watchlist

The watchlist is available to all my subscribers, including free subscribers.

You don’t need a paid subscription to access it.

Simply subscribe to ORIACON for free.

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Over the trailing twelve months, the portfolio is up 10.28% against 12.04% for the S&P 500 (total return).

Year-to-date, 5.08% against 12.79% for the index.

Since inception (2nd of October 2023): 17.1% vs S&P 500 20.98%.

All figures are pretax, net of fees, and exclude the effect of any cash contributions or withdrawals. This is a pure return on capital already at work.

I don’t use options and I’m currently unlevered.

2. Sentiment

Last month, I explained that my sentiment was mainly based on the fact that my year-over-year performance was below that of the index, for several reasons.

In particular, waiting for the turnaround at Atos, which I now think more clearly is happening after its Q3 results.

After some thought, I plan to write an article called “Why am I underperforming / outperforming?” to make the process more systematic, so that this section is no longer just an expression of my own views, but also shows you how to assess your performance and gives you ways to detect potential mistakes.

I also see a lot of coverage of Anthropic’s upcoming IPO. Given the intense attention across every possible platform and in the mainstream press, I find it hard to see how to earn a risk-adjusted return above that of the market.

Here is a chart showing the performance of a few large caps over the five years following their IPO.

What I take away from this chart is that after a bullish phase in the market, the company tends to lose valuation, then grow steadily. So, given the exuberance surrounding Anthropic, I am in no hurry to buy the stock.

For Alphabet, the market was quite skeptical in its early days, so the company went public at a reasonable price.

For Tesla, part of Elon Musk’s genius is knowing how to get his companies valued for what they could do, rather than for their short-term prospects.

The company on the list that seems closest to me is Uber, because of the risk of commoditization of LLMs.

I am also pleased to see my subscriber growth since last month.

My articles on 48 Western quality small-caps and on Baviera were editorial successes, and I am glad you enjoyed them.

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I looked across 20 Western countries, and 32 companies passed.

Some of them have delivered amazing returns

Let’s look at a few examples:

For the most part, these are exceptional long-term returns.

The studies

In terms of stock market performance, Bain & Co compared in 2025 companies’ annualized total shareholder returns (TSR) according to their acquisition frequency. The firm defines frequent acquirers as companies making more than one acquisition per year.

The gap is large: from 2012 to 2022, frequent acquirers achieved 8.5% per year, compared with 3.7% for companies that made no acquisitions.

It is not the acquisition itself that drives performance, as will be shown in the studies later in this article. The initial quality of the companies, their size, or their industry can also play a role.

McKinsey compares acquisition strategies among large global companies. The firm defines programmatic M&A as repeated small or medium-sized acquisitions, generally at least two per year, cumulatively representing a significant share of the market capitalization.

This suggests that acquisition discipline and regularity matter more than a few exceptional large deals. The latter are often harmful to shareholders.

There is a potential survivorship bias: companies that were no longer publicly traded at the end of the period are not included in the study’s sample.

In a study published in 2025 in The Review of Corporate Finance Studies (Solving Serial Acquirer Puzzles), on 55,482 acquisitions carried out by 8,640 publicly traded US companies, between 1989 and 2018, Macias, Rau & Stouraitis identified four profiles:

• Loners: one or two acquisitions.

• Occasional acquirers: infrequent acquisitions.

• Sprinters: acquisitions concentrated over short periods.

• Marathoners: regular acquisitions, practically without interruption.

Their main results:

• 17.5% of acquirers carried out 60% of acquisitions.

• The most frequent acquirers were more likely to acquire private companies.

• After adjusting for market expectations, the returns associated with the marathoners’ acquisitions do not decrease over successive acquisitions.

• Marathoners accumulate significant economic gains thanks to numerous small transactions.

In a study published in the Journal of Financial Economics (Extraordinary acquirers), Golubov, Yawson & Zhang found that:

• The abnormal returns at acquisition announcements vary considerably from one company to another.

• The best companies show some persistence in their strong performance.

• This persistence does not necessarily disappear when an executive is replaced.

• Company-specific characteristics explain a significant part of the differences in performance.

This provides academic evidence supporting the idea of organizational skill in making acquisitions.

I also found studies that challenge the outperformance of serial acquirers:

• Laamanen in 2008 (Performance of serial acquirers: toward an acquisition program perspective) found that frequent and irregular acquisitions were associated with poorer performance.

• Hossain, Pham and Islam in 2021 (The performance and motivation of serial acquisitions: Evidence from Australia) suggest that serial acquirers obtain lower stock-market returns around announcements, with higher risk. Saccuman & Schraa report similar findings in Europe in their 2024 study, The Impact of Deal Frequency and Acquisition Blocks on Bidder Performance.

What Makes a Good Serial Acquirer?

I see six characteristics specific to a good serial acquirer:

-The acquisition strategy is clear and disciplined. It knows what type of company it is looking for, consistent with its business model, and what price it is willing to pay. It also knows when to walk away if the price becomes excessive.

-The return on invested capital is high. The acquisitions must generate sufficient profits relative to the amounts invested. The incremental return on invested capital (ROIIC), which can reflect both acquisitions and organic investments, remains high over time.

-The company can finance its acquisitions internally, which helps limit new share issuance and shareholder dilution. Here, we look at the growth in earnings per share and FCF per share.

-Debt remains under control. With high debt levels, the company can accelerate its growth, but at the cost of greater vulnerability if interest rates rise or the economy slows down. The ability to weather difficult periods without endangering the whole group is essential.

-The acquired companies must continue to function well. They must at a minimum maintain their activity, and ideally continue to develop their sales and their margins. Persistently negative organic growth can hide operational problems.

-The serial acquirer must be able to reinvest for a long time and on a large scale. As it grows, it must also deploy more capital to maintain the same pace of growth. This is why small serial acquirers operating in very fragmented markets can offer particularly attractive potential.

The central principle: a good serial acquirer is not the one that carries out the most acquisitions, but the one that consistently reinvests substantial amounts at high returns, for the benefit of shareholders.

For readers who want to learn how to evaluate these companies themselves, I strongly recommend FluentInQuality’s article:

Here’s How to Spot and Evaluate a Great Serial Acquirer in 10 Minutes.

But buying companies is not a guarantee of success. Acquisitions can also destroy considerable value. The risks are the negatives of the points mentioned above, with operational consequences.

What’s Included in My List

A conventional stock screener cannot identify serial acquirers reliably. I therefore identified historical serial acquirers, companies that follow similar models and companies that regularly make acquisitions, even when acquisitions are not the sole driver of their growth.

Once I had identified an initial pool of companies, I applied the following filters:

I added a Serial Acquirer score, comprising six criteria. Each criterion receives a score from 0 to 3, for a maximum score of 18. The criteria are the following:

1. Capital Returns

2. M&A Discipline

3. Balance Sheet

4. Funding

5. Organic Growth

6. Reinvestment Capacity & Runway

I have also included a few companies that do not strictly fit the definition of a serial acquirer, but whose acquisition strategies are interesting enough to fit in this list.

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It assumed a 100% stock portfolio, which is not the case for everyone.

But we still need to look at allocation across assets. This point is essential because it will guide your returns and the volatility of your portfolio.

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1. Diversification and performance

In 2000, Roger Ibbotson and Paul Kaplan asked the following question: does asset allocation explain 40, 90, or 100% of performance?

As it turns out, all three figures are correct, but they answer three different questions.

The study covers 94 US balanced funds, 1988–1998, and 58 pension funds over five years (1993–97). This tells us nothing about an all-stock fund or a concentrated portfolio.

To better understand, let’s imagine 100 funds that all mix stocks and bonds, but in different proportions: some with 30% in stocks, others with 70%.

• 90% of the variability of a fund’s returns over time is explained by its allocation policy: its performance mainly reflects the markets to which it is exposed.

• 40% of the differences in returns between funds are statistically explained by differences in their allocations. The rest depends, in particular, on security selection, timing, and fees.

• 100% refers to the level of annualized return actually achieved by the funds, which is on average close to that of their benchmark allocation. In other words: on average, the manager does neither better nor worse than their own allocation, after fees. On average, active management did not add value after costs.

The conclusion I understand from it: your share of stocks in your portfolio largely shapes your average return and your drawdowns, and which stocks you pick explain the difference of your returns with the market’s return.

Which means if you are 100% in stocks, your results can be above the index, below it, or the same.

A few other studies to corroborate these results:

Vanguard (Davis, Kinniry, Sheay, 2007) finds a similar contrast across 189 US balanced funds: allocation explains, on average, 82.1% of a fund’s variations over time, but around 20% of the differences between funds.

A passive portfolio with the same composition delivers, on average, 108% of the fund’s return: active management therefore did not add value on average. Note that Vanguard sells ETFs, which may influence the results…

Xiong, Ibbotson, Idzorek and Chen (2010) distinguish market movements, investment styles (size, growth, value, etc.), and active management.

The market explains 74 to 88% of variations in returns; the remaining differences are attributed, in comparable proportions, to styles and active management. Their definition of allocation therefore also includes choices made within the stock asset class.

2. What each asset class does

Each class has a role in a portfolio.

Their returns and volatility vary across periods

Over the long term, we can see that cash and short-term bonds earn almost nothing in real terms, over the period observed, because inflation eats away at their returns. They often buy you protection, notably the ability not to sell stocks at the worst moment or to take advantage of a dip in the stock market. Which could take a long time to arrive.

3. What caution costs

Here is what different allocations between stocks and bonds produced in the United States between 1926 and 2019 (high-quality US bond indices, whose composition changed over the period).

Going from 100 / 0 to 60 / 40 costs about 1.5 percentage points of return per year. In exchange, the worst year goes from -43% to -27%, or 16 percentage points less to endure. For example, in 2008, government bonds cushioned the fall in stocks.

There are several limitations to this:

• These are US data from an exceptionally strong period for US equities. US Treasury bonds have traditionally been considered the risk-free benchmark in the global financial system, although the sustainability of US government debt is increasingly being questioned.

• The theoretical long-term optimum is where the annual return is highest. But if you sell at the worst moment, everything falls apart. The practical long-term optimum is the one you can stick with psychologically.

• In 2022, unlike usual, stocks and bonds fell at the same time. Inflation had pushed interest rates higher, and both portions fell together. That year, the S&P 500 fell by about 18%, the broad Bloomberg U.S. Aggregate bond index by a little more than 13%, and a 60/40 portfolio using these two indices by about 16%.

4. How to do it in practice

Calculating your share of stocks

The share of stocks will depend on several factors:

• Time in the market: the longer you plan to remain invested, the more you can increase your share of stocks. At 30, you can wait at least 10 years for a recovery; at 60, much less.

• Tolerance for drawdowns: to be 100% invested in stocks, you must be able to endure portfolio declines of 50% (or even more).

• The point above is difficult to assess, hence my proposal in the Investing 101 series to start with a pilot test by investing in an ETF for one year and in several stocks to see your real reaction.

Keeping the allocation on track: drift and rebalancing

The share of stocks you have chosen does not remain static: in a bull market, stocks rise, sometimes sharply. Imagine a portfolio of 50% stocks and 50% bonds. If stocks gain 30% during the year and the rest 3%, you end up with about 56% in stocks, without having bought anything.

The simplest approach is to rebalance back to your standard allocation once a threshold is crossed. For example: “if my portfolio reaches 65% in stocks, I sell stocks to buy bonds.”

When you go above it, start by directing new contributions toward the rest. Sell as a last resort.

That also means giving up some of the pure performance of stocks to protect against a possible decline.

With the possibility that all assets fall together during a crash, as was the case for stocks and bonds in 2022. That does not mean diversification was useless: stocks and bonds can fall together without falling by the same amount, and their behavior depends on the nature of the crisis. Bonds change the risk of the portfolio, without providing automatic protection.

Final Thoughts

The best allocation is the one you will be able to maintain when markets fall, without having to sell at the wrong time.

Diversification across asset classes does not eliminate risks. It allows you to change their nature and magnitude, with trade-offs to accept in terms of returns. Before looking for the best stocks, you must therefore decide what place they should occupy in your portfolio.

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Disclaimer: This content is for educational purposes only and does not constitute investment advice. See our full disclaimer.

Everyone has their own edge in certain sectors; your profession or your personal experience will certainly steer you toward one of them.

You can also stay on generalist subjects where logical analysis and some market research can bring you to a sufficient level of understanding.

Remember nonetheless the following quote from Warren Buffett:

He is also credited with:

One could give the company that I am going to present to you the advantage of simplicity.

The structure of my deep dive is standard. Learn the process in the dedicated articles in the learning section. The whole article is long because it covers a lot of ground, and short because I try to give you a synthesis of the points. So I start with a “short version” for those of you in a hurry.

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Today, we’ll talk about Storytel, a company based in Sweden and running a leading audiobook and e-book subscription service, with a stake in book publishing.

The Short Version

Storytel is a Swedish audiobook and e-book company with 2.75 million paying subscribers. It operates mainly in the Nordics and Europe, but also owns Audiobooks.com in the US.

Its business model allows it to acquire publishers and then distribute their content internationally through audiobooks, while gaining insights into what its consumers want. The model is profitable, enabling the company to acquire additional publishing houses.

Since 2023, the company has gone from heavy losses to profitability, improved its margins and now has almost no net debt. Returns on invested capital are rising, and Storytel can finance further acquisitions with its own cash.

But the stock has already increased fivefold since its 2023 low. A large part of that increase comes from investors being willing to pay a higher multiple.

The main question is competition. Spotify has entered the Nordic audiobook market, where Storytel makes most of its money. Subscriber growth is slowing there, and we still don’t know how much pressure Spotify and potentially YouTube could put on Storytel in the coming years.

I’m not investing in the stock for now, and I’m keeping an eye on how the share price and competition evolve. A great company with long-term prospects, and one to add to my watchlist.

1. What Storytel does

History

In 2005, Jonas Tellander and Jon Hauksson founded Bokilur, an audiobook service in Sweden with a unique product. The launch of the iPhone in 2007 made listening on the move practical, and in 2011 the first audiobook produced by Storytel came out on the Swedish market.

Jonas Tellander, CEO from 2005 to 2022

The company then grows by buying what it lacks. In 2013, it acquires the audiobook publisher Storyside and then embarks on buying publishing houses and an audiobook subscription service in the Nordic countries. The company has been listed on the Nasdaq First North Growth Market since December 2018 and passes one million paying subscribers in 2019.

In 2022, it buys the American service Audiobooks.com, reaches two million paying subscribers and its catalogue exceeds one million titles. The same year, Jonas Tellander hands over the reins of the company, remaining on the board and as a shareholder. Johannes Larcher then took over until 2024, when he was replaced by the current CEO, Bodil Eriksson Torp.

On 8 June 2026, the company transferred its shares to Nasdaq Stockholm.

What Storytel sells

The company sells stories, in two forms: access to a catalogue of audiobooks and e-books by subscription, and books that the group publishes itself (paper, audio, digital).

The group describes itself as an “ecosystem” that combines technology, distribution and content creation, through its two complementary businesses: Streaming and Publishing.

At the end of 2025, the subscription business had more than 2.67M paying subscribers, in more than 25 markets, with a catalogue of more than 1.8M titles in more than 55 languages. The market is essentially local: about 85% of listening relating to local authors and languages. A catalogue is therefore not sold in the same way in every country: publishers and authors on the ground are needed.

The company lives mainly off its subscriptions, which are billed in advance. A very appreciable part, as this revenue is recurring and predictable. The main costs are content (copyright fees, third-party publishers, printing) and marketing.

Streaming: the platform

Streaming is the consumer-facing platform, under three brands: Storytel, Mofibo and Audiobooks.com. The customer pays for a monthly subscription to listen or read with several offers that we will review in the competition section.

Added to this are distribution partnerships such as Klarna (Premium members in 14 markets access the catalogue), Vodafone Turkey, Onet Premium in Poland, and RDF Media in Chile. In addition, the company launched single-title sales in 2025 for best-sellers in English, to complement the subscription.

Publishing: the content factory

Publishing is the creative base of the group: it secures rights and works with authors on print and digital titles. It groups together publishing houses, mostly in the Nordics.

Publishing also has a licensing agreement with Spotify in the Nordic countries, so Spotify is both a competitor of Storytel’s Streaming business and a customer of Publishing.

Customers

Storytel mostly sells to individuals.

At the end of June 2026, the service counted 2.67M paying subscribers. Usage is a strong habit: 37% of paying subscribers listen every day.

The company divides its revenue by operating segments, i.e. Nordics, Europe, Americas and APAC.

Unfortunately, this segmentation does not clearly show the dynamics in the US, as the US is grouped with all of Latin America. This suggests that the figures are not exceptional in the US; otherwise, the company would show them separately.

The streaming segment represents 82.3% of 2025 consolidated revenue. No customer accounts for 10% or more of revenue.

Suppliers

Storytel mostly buys stories. In 2025, the cost of goods sold is 2,190.1 MSEK, and its main item, 1,858.1 MSEK, or 46% of consolidated revenue, consists of payments to the rights holders of digital and printed books. To this are added the fees of payment providers and the cost of printed books. The other suppliers account for much less. The catalogue contains more than 1.8M titles, with more than 600,000 authors.

Some of them publish through publishing houses belonging to Storytel.

In the company’s documents, no content supplier is named as dominant: the group publishes neither the list nor the weight of its main publishers.

For the other supplier items, there is paper and printing, as well as technical infrastructure (such as Google Cloud), and payment providers.

Competitors

85% of Storytel’s listening relates to local authors and languages. Indeed, people still often prefer to listen to a book in their native language. Storytel faces four types of players: a local leader (itself), challengers backed by publishers, global platforms that serve each language with translated titles, and a few small local players. Here is an overview of direct competition:

Storytel is linked to Spotify because its publishers have signed a licensing agreement with it in the Nordic countries. Spotify is therefore both a customer of Publishing and a competitor of Streaming.

We can also add indirect competition: every day the user will choose how to be entertained. This can be through listening to a book, watching a series, watching a video or listening to a podcast, browsing a social network, or any other distraction. Storytel says it fights for subscribers and content, but also for consumers’ time in general, and expects this competition to increase. I had already talked about it in the Netflix deep dive on the notion of “moment of truth”.

Here is a breakdown of usage in Sweden, compiled by Nordicom in 2025 based on nearly 6,000 people aged 9 to 85.

This image shows that audiobook listening remains a minority activity: 15% of Swedes on an average day, all services combined (Storytel, BookBeat, Spotify, libraries), far behind social networks, streaming video and YouTube. However, it is a lasting habit: of these 15%, 12 percentage points listen for more than 30 minutes, i.e. four listeners out of five.

Competitive advantage

Let’s take the different types of advantages:

Switching costs: low

The subscription is monthly (3, 6 or 12 months in certain markets), with no long-term commitment or loyalty program. People tend to stay out of habit, but they can leave very quickly when they see another offer.

Brand: medium

This point is difficult to evaluate quantitatively, but I suggest drawing a parallel with luxury: products belong to brands, grouped within “houses” (Vuitton, Tiffany, Gucci, etc.), and those houses are grouped within a company.

Each author is like a “house” in luxury whose books are unique products, and each publishing house is like a portfolio (or a collection) of authors to whom the public becomes attached.

Storytel owns publishing houses and therefore the distribution rights of the catalogue.

But if the author leaves, the public leaves, which puts the strength of the “Storytel brand” into perspective. The public’s attachment goes to the author before going to the service.

Its brand advantage currently exists mostly in the Nordics, where Storytel says it has been the leader of Nordic audiobooks for some twenty years, ranking first by number of subscribers in Sweden, Denmark, Norway and Iceland, with 65% of Streaming sales.

Norstedts, founded in 1823, saw one of its authors, László Krasznahorkai, receive the 2025 Nobel Prize in Literature.

Product (what Storytel does) hard to copy: low

The service itself (app, recommendations, synchronized listening between audio and text) is not rare: Spotify added it to its subscription in four Nordic countries in November 2025, and Bonnier operates BookBeat in 10 markets.

Product (audiobooks): protected by intellectual property law

Publishing also produces its own content through its publishing houses and Storyside, including Storytel Originals reserved for the service. The rest of the catalogue (more than 1.8M titles) is licensed. Backlist titles, released more than a year ago, make up 62% of consumption, and according to Storytel about 85% of listening is tied to local authors and languages: an entrant must redo this licensing work market by market, and it cannot be improvised.

This advantage protects the country-specific share of the catalogue, not the translated international titles, which any service can license in each language.

And we do not know if these licenses are exclusive: if not, a rival can license the same titles, and Spotify already does so with local publishers, including Bonnier.

AI changes the game particularly in distribution, making it easier to translate an existing book.

Network effects: the company has, in my view, a very interesting flywheel, described below.

This flywheel means the moat strengthens over time, through external acquisitions, provided that they are made at a good price.

2. Financials

Key financial metrics

Commentary

Revenue

Growth is slowing: from 22.1% in 2022 to 8.8% in 2024 and 5.9% in 2025. The majority of the decline comes from the exchange rate, with the appreciation of the Swedish krona: growth at constant exchange rates is 9.2%.

This growth comes mainly from volumes, because the number of paying subscribers increases by 7.2% over one year (2.75M at the end of June 2026), whereas ARPU is stable at 116.4 SEK per month (116.5 a year earlier).

A word on the publishing business, which is a bit complicated from an accounting perspective.

Say Norstedts publishes a novel. It sells the book to bookstores (external sale), and it also gives the audio and e-book rights to the Storytel service, which puts them in its catalogue (internal sale).

In the group’s accounts, both are recorded as revenue in the Publishing segment. But when the accounts are consolidated, the internal sale disappears from revenue, and the corresponding purchase disappears from Streaming’s content costs. Only the real costs remain (copyright fees, printing, etc.).

Operating Margin

The 2023 loss includes 671.6 MSEK of exceptional items, including 465.4 MSEK of goodwill impairment of Audiobooks.com and 167.6 MSEK of content impairments, mostly in expansion markets.

The improvement since then comes from operations with the increase in operating leverage: in 2025, each additional krona of revenue generated about 0.78 krona of operating profit. In the first half of 2026, it was about 0.51, depending on the evolution of costs and revenue.

Net Income and Free Cash Flow

The 2025 net income is inflated by tax. Storytel accumulated losses in the past, and these losses are deductible from its future profits. Until now, it had not recorded them on its balance sheet. In 2025, it judged that it would have enough profits to use them. It therefore recorded them as an asset, which creates an accounting tax gain of 205.0 MSEK. Without this gain, net income would be 299.0 MSEK, about 40% more than in 2024.

This is the main cause of the gap between net income and FCF in 2025. For H1 2026, they are within about 5% of each other, because depreciation and amortization exceed investments, alongside changes in working capital.

Balance sheet

As of 31 December 2025, goodwill and intangible assets make up 51% of the balance sheet total (3,570.4 MSEK). Equity is 1,899.3 MSEK: once goodwill and intangibles are deducted, 68.4 MSEK remains.

Necessarily, for a company that grows through acquisitions, the amount of goodwill is bound to be large. The risk, in the event of a downturn in activity, is that an impairment will be recorded as a net loss. With the next acquisitions, this ratio of goodwill to balance sheet total could increase, which would weaken the balance sheet.

At the end of June 2026, net debt is 13.7 MSEK, or 6.6% of EBIT, which leaves room for acquisitions, or returns to shareholders via dividends or share buybacks. All covenants, including the one on net debt relative to EBITDA, were met in 2025.

3. Management

The new CEO

Bodil Eriksson Torp has led Storytel since 1 October 2024, taking over as head of the group after the founder, who stepped back from his duties in 2022, and after Johannes Larcher (who came from HBO Max) who served until 2024.

Born in 1968, she spent fifteen years at Bonnier, eight of them in general management positions, then eight years at the head of the press group Aller Media, and she most recently led the investment company VO2 Cap. Her profile is that of an executive from subscription media and major consumer brands. She comes from Bonnier, owner of BookBeat, Storytel’s direct competitor.

Under her leadership, the company reaps the fruits of the turnaround carried out by her predecessor. Almost all the executives have held their current roles since 2025.

The CEO received about 9.7 MSEK in 2025. Her personal exposure mainly goes through the share plan, as she only holds 12,634 B shares, or about 1.5 MSEK at the current price (about $150,000). That is a small amount and does not, on its own, ensure alignment with shareholders.

She also holds 108,010 share rights (about 12.7 MSEK if all are vested), linked 60% to the performance of the share and 40% to sustainability criteria, exercisable in the summer of 2028.

The other executives hold few shares (50,000 for the chief financial officer, a few thousand or tens of thousands for the others, i.e. about 0.13% of the capital for the whole team, general manager included), and 430,098 share rights.

The shareholders

Storytel has no controlling shareholder. The capital is dispersed (27,099 shareholders at the end of 2025), the top ten hold 40.55%, and each B share gives one vote (the 635 A shares give ten, which is negligible). The company has been listed since June 2026 on the main market of Nasdaq Stockholm, after nearly eight years on First North.

Roxette Photo SA is a holding company located in Luxembourg, with Jonas Sjögren as co-owner. It owned 20% of the capital in 2019; its stake fell to 7.31% at the end of 2025, then, in 2026, it bought 110,000 shares at 83.21 SEK (9.2 MSEK) and now holds 5.75 million shares, or 7.44%.

Capital allocation

The company has capacity for profitable reinvestment with a ROIC clearly above the cost of capital.

Capital finances what it should finance: first internal growth, then acquisitions, then returns to shareholders.

In 2025, the group invested 193.9 MSEK, or a third of its operating cash flow, and spent 883.6 MSEK on sales and marketing (22.0% of revenue). It also devoted 154.9 MSEK to development, of which 25% were capitalized.

In M&A, Storytel acquired two publishers between January 2025 and May 2026, paying in cash: Bokfabriken in Sweden, at 7x its EBIT, which is a good price, and Overamstel in the Netherlands and Belgium, at about 11.9 times its 2025 EBITDA, allowing it to enter these markets.

The company has a habit of paying a dividend, which represented 24% of 2025 net income attributable to shareholders. Storytel also buys back shares, in amounts corresponding to the incentive plans. This part therefore aims only to counter dilution.

4. The two theses

Why did the stock go up?

The stock trades at about five times its 2023 low, while profit went from -813M SEK for FY 2023 to 504M SEK at the end of FY 2025.

In logarithmic terms, about a quarter of the rise comes from earnings and three quarters from valuation. The market therefore pays more for the same company, or judges it less risky. I see several reasons:

Storytel returned to profitability after its 2023 losses, linked to the purchase and impairment of the goodwill of Audiobooks.com, while improving its operating leverage.

Meanwhile in 2024, the group exceeded its guidance, at the same time as it progressively improved its balance sheet, and as subscribers increased by 25% since 2023.

The fear of competition from Spotify, a potential competitor in 2025, has diminished, and it is now seen more as a distribution partner.

Bear thesis

The increase in competition

For me this is the major point of the bear thesis, which is why I am not entering the stock for the moment.

The arrival of Spotify on the audiobook market could weigh. The Nordics, Storytel’s main market, account for about 59% of the group’s revenue, with growth of only 2.4% in 2025 and subscriber growth of 3.6% over one year at the end of June 2026. Spotify integrated audiobooks into its Premium subscription in the Nordic countries starting in November 2025, and announced on 7 October 2026 that it is extending its offer from 22 to more than 180 markets by the end of the year.

Net subscriber additions are already slowing: 83,000 in the first half of 2026 versus 110,000 a year earlier, and 12,000 in the second quarter versus 32,000 (my calculation from the tables by segment). Management expects net growth in 2026 at least equal to that of 2025: about 129,000 net subscribers would therefore be needed in the second half, versus 102,000 in the second half of 2025.

YouTube is reportedly considering officially integrating an audiobook offer, potentially attached to its YouTube Premium subscription, as competitors such as Spotify do.

Growth through pricing is limited

The group’s ARPU is stable: price increases in local currency are absorbed by exchange rates and by the subscriber mix, with more subscribers in Europe, where ARPU is 72 SEK (about $7), versus 154 SEK in the Nordic countries (about $14). In America, ARPU falls by 6.5%. Europe’s gross margin declines (40.7% versus 42.1%). Growth therefore comes from markets where the subscriber brings in less, and Storytel cannot raise its prices indefinitely.

The price of acquisitions grows over time

Bokfabriken cost about seven times its operating profit, Overamstel about 11.9 times its 2025 EBITDA (14 MSEK), and when entering the US with Audiobooks.com, Storytel clearly overpaid for an acquisition that is not developing for the moment.

Bull thesis

We are talking about a company without debt whose margin is rising, which finances its acquisitions and its returns to shareholders with its own cash.

The company has a flywheel

Storytel’s cycle links a publishing activity (authors, rights, backlist) to a streaming platform (audience, data). See the section “The flywheel” for details. Its size is an advantage here. YouTube and Spotify are much bigger than Storytel. For groups of that size, buying a small publishing house changes nothing, and buying a publisher large enough to matter is difficult: the larger the publisher, the greater the risk of paying a high multiple. Storytel, on the contrary, can buy houses whose size matters to it, without endangering its balance sheet.

Furthermore, the company is profitable enough to finance its growth through acquisitions. After several purchases, the company manages to reinvest and to pay a dividend, with almost no debt, while increasing its operating leverage quarter after quarter.

The market is growing and Storytel still has a lot to conquer before reaching saturation

According to the group, the number of monthly active audiobook users in its core markets (Europe and North America) almost doubled between 2020 and 2025, and industry projections point to continued growth. Storytel has 2.75 million paying subscribers for an addressable audience that the group estimates at about 400 million people (130 million excluding the United States) in its ten core markets, i.e. less than 1%. It therefore still has a lot to conquer before saturation.

And the growth figures in Europe are good, with Europe’s revenue growing by 18.2% at constant exchange rates in the second quarter, including 12.8% more subscribers (1.07 million). Europe contributed 121,000 of the 185,000 net subscribers of the last twelve months.

Competitors have not stopped the trajectory for the moment

Spotify has offered audiobooks in its Premium subscription in the Nordic countries since November 2025, and yet the group’s growth at constant exchange rates is accelerating: 9.2% in 2025, 10.3% in the first half of 2026, 12.7% in the second quarter.

The giants of the sector have, moreover, made other choices: Spotify announced in November 2021 the purchase of Findaway, an audiobook distributor, and licenses catalogues, including that of Storytel in the Nordic countries, rather than buying publishers.

If competitors want to oust Storytel, they will not be able to remove its catalogue without harming themselves.

They would therefore have an interest in making a distribution agreement with Storytel, and that is what can be seen in the figures, with external Publishing sales outside the group growing by 31.6% at constant exchange rates in the second quarter of 2026. This is also the path Storytel is taking with its agreements with Klarna in the United States (for audiobooks.com), Vodafone in Turkey, or RDF Media in Chile.

Blind spots

Neither the licensing terms nor the contracts with Spotify are published, so it is unclear whether Spotify will be more of a competitor or a distributor in the future.

The agreements with Klarna, Vodafone Turkey and RDF Media

The group is not very clear on the churn rate, and the share of family subscriptions and the conversion of end-of-quarter trials are not documented.

5. Price scorecard

The numbers only make sense if you’ve read the section on the two theses.

As Aswath Damodaran puts it, “numbers without stories to back them up are exercises in financial modeling.”

The scorecard below requires an important assumption, namely, the continuity of a normal economic environment, i.e. without a recession, a major credit event, or a market crash. I will someday write an article about how to deal with these conditions.

Any of these could push the stock below the bear case shown here, temporarily, independently of the company’s underlying performance.

All figures in the scorecard are pre-tax and pre-fees. Run the numbers for your own situation before drawing conclusions.

The horizon is three years, in October 2029.

The assumptions are the following:

• Revenue growth goes from 0% per year in the bear case, to 7.5% per year in the central case, and 10% per year in the bull case.

• The margins go from 8.3% in 2026 (net margin) to 7% in the bear case, 10% in the central case, and 12% in the bull case.

• Payout ratio of 34% in the bull case, with none in the bear case; dividends are reinvested with no tax and no fees.

The selected range of P/E ratios displays the different estimated scenarios. We cannot display a 10-year history, the company having been loss-making over most of the last 10 years.

My conviction sits at the SEK 133 scenario, which isn’t enough for me to invest in the company, given the growth assumptions and the factors in the bear thesis.

The re-rating will mainly depend on the catalysts covered in the next section.

6. Momentum

Combining fundamentals (covered above) with momentum is an excellent way to improve your returns compared with using fundamentals alone. You’re never right on your own, especially since a significant part of returns comes from the multiple, particularly if your horizon is under 5 years.

The catalysts are the third-quarter results on 27 October, then the annual results on 10 February 2027.

As mentioned in the bull thesis, the development of acquisitions and the conditions of content distribution will be important.

On the competition side, the Swedish competition authority must rule on Bonnier’s acquisition of Nextory.

The arrival of YouTube in the audiobook field is another possibility in the bear thesis.

Final Thoughts

Storytel is a good example of why I put together my list of 48 quality small-caps. There are some genuinely interesting businesses out there that I would probably never have looked at otherwise.

investments. But the list is full of interesting businesses, across different industries and countries.

I have already invested in Baviera in the past, and I recently exited my position in EverQuote. For more on these companies, have a look at my previous article.

Not all 48 companies are cheap, and not all of them will turn out to be good

I suspect there are still plenty of good discoveries waiting for us. And that’s the whole point of the list: finding businesses worth understanding, and then waiting for the right opportunity.

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Disclaimer: This content is for educational purposes only and does not constitute investment advice. See our full disclaimer.

Last June, I published a deep dive on Booking Holdings, whose valuation was under pressure due to fears of disruption from AI. Then the Q2 results came out: no disruption in sight.

Then, on September 8, Meta launched Muse, and Booking’s stock price fell nearly 10%, with its PE ratio under 18, one of its lowest levels in recent years.

The purpose of this article is to see the threats that Muse and AI agents pose to Booking.

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1. Muse AI

What it does

Muse is Meta’s personal assistant, launched on September 8, 2026, initially in the United States. It can be accessed via an app, on the web, or through WhatsApp. It is powered by Muse Spark, Meta’s model.

Each user has a dedicated computing environment, and Muse takes action for the user, even when the app is closed. It can also connect to their email, calendar, or Instagram and Facebook accounts.To process payments, it uses Stripe Link, which provides a one-time virtual card limited to the approved amount. Each purchase must be approved by the user within the conversation.

Here’s a video from Meta showing how it works:

The app has been downloaded more than 9 million times since its launch. For now, it is only available in North America.

How Muse Books Trips

For flights, Muse connects to Duffel, a company that provides API access to airline inventory.

It allows users to search for, book, cancel, and manage flights through Muse, with human assistance available in case of any issues.

The reservation is issued through Duffel, while the airlines generally remain the primary merchant.

For hotels, Muse opens a browser and visits websites (like Expedia or Hotels.com), just like a human would. Expedia announced on September 22 that it would join Muse.

Duffel said that accommodations would come later. Booking, for its part, has not partnered with Muse.

Performance

Gizmodo published a test earlier this week, where the agent booked a restaurant (but one that was over budget) and failed to book flights: it couldn’t connect to Expedia; United Airlines (and Amazon) blocked bots, and the conversation proved slow and confusing.

Its performance could improve very quickly. For now, however, the experience is still far from perfect.

2. The easier the purchase, the more prone it is to disruption

To assess the risk of disruption, I distinguish between three levels of purchasing and how a personal agent can transform each one.

The first category includes routine purchases and changes in commoditized products, like curbside grocery pickup (Meta just partnered with Walmart), standardized products, cell phone plans, or basic insurance. Here, the products are comparable, and you know what you will get. This is where the agent can operate almost independently.

In case of error, the stakes are low. This is the area most prone to disruption.

In the case of travel, this would mean returning to a hotel where you are a loyal customer for a repeat stay.

The second level involves more complex processes and decisions, like comparing insurance policies, or switching providers when the procedures are more difficult, or filing a complaint with a company or government agency. The AI can run almost the entire operation, but this requires more interaction with the user, and the AI must be reliable. The potential for disruption is moderate, and many see this as a step forward for users.

The third level involves high-stakes purchases, like vacations, cars, or healthcare.

Here, the decision is too important and the information sometimes too sensitive to be entirely entrusted to an AI.

Booking a two-week family vacation involves a large budget, personal preferences, and the risk of a bad experience. Personally, I don’t want to ruin what is often the best time of the year (and the memories that go with it) because an AI that’s still in its early stages might have misunderstood or mishandled my requests. Especially when several thousand euros or dollars are at stake.

AI could become the universal consumer interface without necessarily replacing the companies that carry out transactions and provide services.

My core scenario is that AI plans and compares options, the traveler chooses and confirms, and then Booking makes the reservation and provides support. The agent can even process the payment through Booking. Other scenarios are also possible.

3. Booking’s Moat Evolution

The advantage of Genius remains the same

In the second quarter, Genius members at Levels 2 and 3 accounted for nearly 60% of Booking.com’s room nights, up from a year ago. Travelers still have every reason to take advantage of these benefits, which should be reflected in Muse’s comparison.

Brand Erosion

In my deep dive, I explained that Booking’s customers often return to the platform out of habit. This is a distribution moat, and likely the one that Muse could weaken the most.

If a traveler starts their search with a personal assistant, they may no longer think to open Booking. AI can influence which hotels are displayed and how they are displayed. Booking may still process the reservation, but it loses visibility early in the journey.

To counter this, Booking may need to invest more in its brand through ads and pay to increase its visibility among travel agents.

Direct Access to Hotels

Even though Booking continues to list 4.4 million properties, the temptation for a hotel to accept direct bookings with no commission is very real. European regulations already limit Booking’s use of rate parity clauses, and hotels can offer lower rates on their own websites. An agent could highlight these differences more prominently.

The risk for Booking is that hotels will have a new channel to reach their customers and thus gain greater bargaining power, even if they continue to sell their services through Booking. They could also use SiteMinder.

However, the hotel would have to handle sales and manage the service, which isn’t a problem for large chains but is more complicated for an independent hotels, the Booking’s core target market.

Trust and Problem-Solving: A Reason to Stay

I once tried to contact Abritel (Vrbo, part of Expedia Group) on a weekend because of a booking issue, but no one answered. I had to wait half a day to check out because the host didn’t respond to my messages. I swore to myself I’d never use that platform again. It was a bit less expensive than Booking, but in the end, it wasn’t worth it.

With Booking, I only had one issue out of more than ten reservations: I was billed twice. It was quickly resolved by customer support. I was actually glad to have a real person on the other end of the line who understood my situation and followed up with me to confirm the resolution.

My only major incident happened last year with Airbnb, at a beachfront house. Right in the middle of summer, we had an electrical problem. Despite our host’s reassuring words, the issue wasn’t resolved quickly. Airbnb refunded our reservation and added 10% so we could book another place to stay on the platform. That allowed us to bounce back without too much trouble.

For me, one of the main advantages of platforms like Airbnb and Booking is their ability to step in when a reservation goes wrong. An agent couldn’t provide that.

AI replaces part of the pre-booking process

Today, the “standard” process is to search on Google, then make a selection on Booking, then book the hotel on Booking. Tomorrow, the search and selection could take place on Muse, ChatGPT, or Gemini, followed by the reservation on Booking. That’s what I was explaining in the third image. The acquisition cost could change, depending on the scenario.

If the agent brings a customer who previously came through an ad, it is only a change in the type of acquisition.

If the agent brings a customer who was too lazy to book, it’s a new business.

If the agent directs the customer to the hotel’s website, and Booking is removed from the transaction, Booking loses a customer. That’s the worst-case scenario.

4. Competitors’ Response

Agentic AI and the commoditization of a competitive industry

I remain skeptical about the existence of a sustainable competitive advantage based only on automated web browsing. Google, OpenAI, and others are certainly also developing agents that will have similar capabilities in the future.

Agent-based transactions are likely to become a low-margin commodity.

In this case, Meta’s potential strength lies instead in the distribution and customization enabled by its applications. But a stronger distribution than its competitors? And if the brands and applications of Meta stop growing while others continue to grow, that marks the end of its distribution advantage.

Lola: the recommendation agent

Booking now offers Lola.com, which provides access to travel and experience bookings, with offers that remain within the group.

Lola is free for most uses, with a freemium model.

Vayo: Booking’s latest response

Yesterday, October 14, Booking announced a planned investment of $100 million in Vayo, a personal travel assistant.

According to the website, it uses the booking history in your email inbox to understand your preferences and offer you a personalized trip, without feeding your data to an AI.

It will allow users to book hotels and flights directly, and will redirect them to the hotel’s website or another platform if a better deal is available. Thus, Booking is seeking to maintain its customer relationships through this tool and appears to be engaging in a price war to preserve its distribution network.

A price war is never good for shareholders, at least in the short term.

How will Vayo be funded? It could be through subscriptions, advertising or transaction fees. Today, the question remains open.

Metrics

It will be important to monitor how these trends develop, particularly through upcoming reports from Booking, Airbnb, and Expedia, which are scheduled for November 3, 5, and 5, respectively. For Booking’s initial report, you can check out my latest Q2 update. The metrics to track are in the picture below:

Since Muse has just been launched and Vayo is still in private beta, these figures are likely to fluctuate in either direction over the next few quarters.

Here are the metrics to track:

Final thoughts

Muse shows that agents are at the dawn of a new way of making choices and placing orders, which will impact the travel industry. While there are certainly threats to its competitive moat, Booking has all the tools it needs to maintain or strengthen its competitive advantage over time. The risk of disruption is well offset by the platform’s security advantages and its ability to support the AI agent revolution within its ecosystem.

Valuation poses another problem, because as long as investors fear future disintermediation, they may refuse to quickly restore this multiple for Booking, despite solid results or the announcement of a promising product. It may take years to dispel this uncertainty, with no guarantee that the stock price will rebound any time soon.

I think Booking can remain a solid company in the age of AI agents. Whether investors will share my view next quarter, next year, or three years from now remains the unknown factor in this investment. But I’m in no rush.

We hear a lot about bottlenecks related to the rise of AI, particularly in the areas of electricity supply and memory production.

The other day, I came across an article about INNIO N.V., a company benefiting from the growing demand for decentralized power generation.

It caught my attention, so I decided to take a closer look.

In this article, I’ll walk you through the business, its products, competitors, and competitive advantages.

Then I’ll share what I took away from this research, and the bigger problem it revealed about investing in bottlenecks.

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1. What INNIO does

History

INNIO was carved out of General Electric. This is a transaction that separates a business unit from its parent, often through a sale to an outside investor or a separate stock market listing. How does this differ from a spin-off? In a carve-out, the parent company may retain a majority or significant stake. Advent International, a private equity firm, acquired what was General Electric’s Distributed Power business, which includes two brands, Jenbacher, based in Austria and Waukesha Motor Co. in Wisconsin.

The company went public in June 2026 at $27. The principal shareholder (44.6%) is now AI Alpine (Luxembourg) S.à r.l., co-owned by funds managed and/or advised by Advent and ADIA (the Abu Dhabi sovereign wealth fund).

What INNIO sells

INNIO sells gas engines ranging from 220 kW to 10.6 MW, fueled by natural gas, biogas, landfill gas, industrial gases, or mixtures with hydrogen. The group has two segments.

The first is Equipment, which is divided into three business lines:

-The data center business line delivers the prime and backup power required for AI workloads. This is the main area we’ll be focusing on during this Deep Dive, as it’s experiencing very strong growth.

Due to the massive growth of data centers, connecting to the power grid has become a major bottleneck. It takes years to connect a new site to the existing grid.

To bypass these delays, data centers can generate electricity on-site without relying on the public grid, and we call it “behind the meter”. These installations can serve as temporary solutions or remain in operation over the long term. Once supplied through the public network, we refer to it as “in front of the meter”

-The Power Solutions business line provides baseload and peaking power to stabilize utility grids (in-front-of-the-meter) and power independent microgrids (behind-the-meter). There are three main uses:

Electric utilities and independent power producers, to adjust to peaks of demand or low supply due to low wind or sun.

Factories, hospitals, and airports generate their own electricity, often through cogeneration. In this system, the heat generated by the engine is used to heat buildings or power an industrial process.

A third group of buyers recovers the gas that would otherwise escape or be flared. Engines convert this gas into electricity.

-The compression business line includes the engines that drive natural gas compressors to force gas through wells, gathering lines, and gas pipelines. I won’t develop much on this one, as it is just 8% of the total revenue and its part will shrink over time.

The second segment is the Services segment. To deploy and maintain the installations in the Equipment segment, it is necessary to provide services through qualified technicians and to organize the implementation. This segment includes spare parts (approximately 85% of service revenue), maintenance, overhauls, and multi-year contracts indexed to inflation.

Here is a summary from the company’s prospectus:

Clients

All of the clients are businesses.

In the Data Center segment, INNIO sells directly to hyperscalers, colocation providers, data center developers, and “Energy-as-a-Service” providers.

For Compression, INNIO sells exclusively through indirect channels, such as system integrators or distributors. Customers include operators of landfills, wastewater treatment plants, livestock farms, and oil fields.

For Power Solutions, INNIO’s subsidiaries sell directly, and distributors resell under the INNIO brand. Most have an exclusive contract limited to a specific territory, lasting one to three years. Major customers (“key accounts”) are not subject to exclusivity agreements. The customer base is very broad: electricity producers, public utilities, municipalities, factories, hospitals, airports, greenhouses, and operators of landfills, wastewater treatment plants, livestock farms, and oil fields.

Concentration on a few customers is increasing:

The top five customers account for approximately 39% in the first quarter of 2026; Clarke Energy, the top indirect customer, accounts for 15% of 2025 revenue;

VoltaGrid, an Energy as a Service Provider, accounted for approximately 41% of Équipement’s order intake in 2025.

Data centers accounted for 63% of equipment orders as of June 30, 2026, even though they represented only 21% of revenue for the half-year.

Management states that no single customer accounts for a disproportionate share of the order book and indicates most hyperscalers as customers.

Suppliers

INNIO uses two suppliers for most components and three for some, and manufactures critical parts in-house. Some equipment comes from a single supplier. Steel is the primary raw material, followed by copper, aluminum, rubber and plastics.

In most cases, INNIO does not purchase raw materials itself; its suppliers handle that. Their prices often include a cost-pass-through mechanism or an indexation clause.

Rare earth elements are needed in the manufacture of equipment. Restrictions on Chinese exports are a key risk.

The names and weights of the main suppliers are not disclosed.

Since August 2025, INNIO’s equipment has been subject to tariffs of up to 200 percent, corresponding to the proportion of aluminum and steel imported into the United States.

In response, the company launched the “local-for-local” initiative, which involves producing and purchasing within the markets it serves to minimize customs duties. This limits tariffs on trade between regions.

Competitors

Competition Overview

Here is a list of competitors ranked by how similar their technologies are.

Customers are looking for time-to-power, reliability (99.9% availability in data centers), fast startup (approximately 15 seconds), resilience to sudden load fluctuations, part-load efficiency, modularity, and the service network.

As long as there is a bottleneck in the electrical grid connection, the customer is paying for speed and reliability of power, and the price is less important.

Goldman has raised its forecast for on-site capacity to 67 GW by 2030, including approximately 18 GW of fuel cells worldwide, or about 27 percent.

Why gas engines, and not turbines, other engines or fuel cells?

The image below is from INNIO:

(1) Transient capability: ability to rapidly change power output in response to sudden changes in load or grid conditions while maintaining stable operation.

(2) Part load efficiency: calculated as the electrical output divided by the fuel energy input at a defined load level. It is commonly assessed by comparing efficiency at partial and total load.

With a gas-powered engine, an AI-based data center is essentially buying time. This allows the data center to start operating without waiting years for a grid connection. These engines aren’t the best in every aspect. Their strength lies in the balance they offer between delivery times, flexibility, and cost, especially compared to gas turbines, whose order books are full.

Here is another comparison chart of the different technologies:

A combined-cycle power plant is a facility that generates electricity in two stages using the same gas. First, a gas turbine burns the gas and drives a generator. This is the simple cycle. Next, the (very hot) exhaust gases pass through a boiler that produces steam. This steam drives a second, steam-powered turbine connected to a second generator.

The benefits cited by INNIO, Wärtsilä, and Bloom Energy come partly from the manufacturers themselves, so these comparisons deserve some caution.

Compared to turbines, gas engines are faster, more adaptable, offer better tuning performance, are available more quickly, and are less expensive.

The prospectus cites SemiAnalysis, which states that the larger the production unit, the more reserve capacity must be planned for: a factor that gives 5 MW engines an advantage over 50 MW turbines.

Large-scale and combined-cycle turbines remain better suited for centralized generation, larger installations and stable loads. Aeroderivative turbines compete with engines for peak load and rapid response.

Fuel cells can be more expensive (around $117/MWh, approximately 45% above the gas-turbine and combined-cycle alternatives), but offer higher efficiency, faster response times, and potentially shorter delivery times.

In short, there is no perfect solution here.

The best choice depends on what customers need, when they need it, and how much they’re willing to pay. And these choices may look very different in a few years.

Compared to other gas engines

Even within gas engines, the competition is tough and so is finding a decisive technological advantage in this group.

Competitive advantage

Here are the five typical sources of a moat.

• Intangible assets: low to moderate; no patents are essential.

• Switching costs: high after installation; this is the core of the moat (Services account for 48% of 2025 revenue).

• Network effect: none.

• Cost advantage: low compared to other engines.

• Efficiency scale: average, depending on the market.

INNIO’s products are good, but not unique.

Its competitive moat is narrow and comes primarily from the switching cost of the service segment.

The equipment order backlog and production slot reservations exceed 15 GW, more than four times the power delivered over the past twelve months.

According to the CEO, 2026 and 2027 are nearly fully booked; available slots are in 2029 and 2030; and projects are already being discussed for 2030 and 2031. He also explained that if demand is strong and supply is limited, the company is always in a strong position when it comes to pricing, and he sees no signs of a decline.

But this strong position could be temporary and linked to a surge in business. How long these conditions will last is another question.

That’s not enough for me to invest in this company, as there are too many questions.

I usually devote the rest of my deep dives to examining the financials, management, bear and bull cases, and then to setting a price and reviewing catalysts.

However, bottlenecks are among the most discussed investment opportunities on Substack and X, from electricity and memory to photonics.

So I think it’s worth going a step further.

Why am I passing on INNIO despite its impressive growth? And more importantly, how should investors approach these bottlenecks in the first place?

That’s what I’ll explore in the second part of this article.

Subscribe for free to discover the six questions I believe every investor should ask before investing in a bottleneck and how I decide between stock picking, ETFs, and simply staying away.

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Small companies that few people follow get far less attention, and some of them have the numbers of a future giant.

I ran the screen across 21 Western countries and 48 companies passed.

Small-cap stocks are among the best opportunities in the market: they are covered by fewer analysts and often too small for an institution to build a position.

Less attention leaves more room for mispricing.

They start with a liquidity discount and become more closely tracked as they grow, and the discount vanishes.

Warren Buffett has pointed this out many times in the past:

Small-caps are interesting, but not all small companies are equal. The higher-quality end of the universe has historically outperformed over long periods.

The result is even more striking when you look at some of the best individual winners that grew significantly over time.

In Berkshire Hathaway’s early years, Warren Buffett also invested in a high-quality small-cap: See’s Candy, in 1972.

That is the kind of profile I am looking for: a small business that can grow without needing proportionally more capital.

What’s Included in the List

I left out entire industries for several reasons:

Too complex, like banks, asset managers or too speculative, like biotechnology.

Too risky, like passenger airlines and commodity producers, with low pricing power, or chemicals and trading companies, where margins swing with the cycle.

Against my principles. Tobacco, defense, and gambling.

The idea is to keep the list understandable, especially for newer investors, without filling it with businesses where a screen can look great right before the cycle turns.

Here are the selection criteria for the Tier 1

It is deliberately restrictive. This selection naturally excludes cyclicality, or companies that could also perform well, but with more risks, like value or deep value.

I also provide a Tier 2 for companies that meet the other criteria, but have increased their share count by less than 2% per year over the past three years. That still leaves room for some excellent businesses while keeping dilution limited.

Moat Score

The screen gets me to the first group of companies, but good numbers are only the starting point.

I also give each company a Moat Score, a personal assessment of the competitive advantage of the firm, which explains how the company will be able to protect its future profits. I use it to rank the companies that pass the financial filters.

The screen tells me whether the numbers are good; the Moat Score asks why they might stay good.

The companies are ranked by Moat Score, then alphabetically.

Three names already covered

• Baviera: I recently published a full deep dive on the company.

• EverQuote: I owned it and followed the company quarterly. I sold in September for reasons unrelated to the fundamentals.

• Kri-Kri: Here is a link to an excellent article by Joe | Goldman Won’t Cover This.

I will also publish a new deep dive on one of the other companies on this list over the coming quarters.

Why I won’t keep the full list public forever

Many of these companies have a market cap under $1B, and most trade only a few hundred thousand dollars a day. So an article that became too popular would end up backfiring on its readers, and I need to prevent too many buyers from driving up the price because they all come from the same source.

That’s why the full list is free for the first 500 subscribers.

After that, it will move behind the paywall and remain available to paid subscribers only.

You’ve seen 3 of the 48 companies. The other 45 are below.

SUBSCRIBE FOR FREE TO SEE THE OTHER 45

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The market is full of extremely attractive small-cap stocks with a long-term growth outlook and appealing valuations. These are compounders to hold for years, providing a stable foundation for your portfolio. The real difference isn’t in making 50% a year for 3 years, but 20–30% for 10 years or more.

And the company I’m recommending today is one of them. Far removed from the AI hype and its speculative valuations, it’s a long-term play in a sector with a lot of room to grow.

This is the logic of Chris Mayer’s book, *100 Baggers*, which examined 365 stocks that increased 100-fold between 1962 and 2014.

Mayer’s criteria are described in the image below:

And the company I’m suggesting to you meets almost all of the criteria.

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It is Baviera, a Spanish eye surgery group, formerly Clínica Baviera.

The structure of my deep dive is standard. Learn the process in the dedicated articles in the learning section.

The whole article is long because it covers a lot of ground, and short because I try to give you a synthesis of the points. So I start with a “short version” for those of you in a hurry.

The Short Version

Baviera is a Spanish eye surgery group that has grown steadily for almost twenty years. It has not raised capital since its 2007 IPO, it earned 21.6% on invested capital in 2025, and its new clinics are paid for by its own cash flow.

The growth is not spectacular, but it is steady. And what could happen to it? The business is very solid, and it relies on opening new clinics and making acquisitions to expand internationally or consolidate its position in a given country. The market is regulated because it requires doctors to perform surgeries. They have already succeeded in doing so in Spain, where they are the market leader; they have established a presence in Germany and Italy; and they are well on their way to establishing a profitable presence in the United Kingdom.

I think Baviera is the kind of stock you can hold for ten years and end up with around four times your money, with peace of mind.

1. What Baviera does

History

Baviera was founded in Valencia in February 1992 as Clínica Oftalmológica Baviera, a single eye consultation center started by Dr. Julio Baviera and his family. Starting in 1996, the company began opening clinics throughout Spain, at a rate of about three per year beginning in 1997. The company was led for nearly thirty years by Eduardo Baviera, Julio’s brother.

The 3i fund, which currently owns the Action stores, acquired a stake in the company in 2005 and then sold all of its shares during the initial public offering in March 2007 on the Madrid Stock Exchange. At that time, the group had 36 clinics, all located in Spain.

The company’s expansion into Europe took place in June 2008 with Baviera’s acquisition of CARE Vision Germany GmbH and Care Medical Services Holland, giving it a presence in Germany and the Netherlands. By early 2009, the group had 15 clinics in Germany, the Netherlands, Italy, and Austria.

In August 2017, the Chinese group Aier Eye Hospital acquired an 86.83% stake in the company. It has since sold a portion of that stake and still holds 73.23%.

In July 2024, Baviera acquired Optimax, a British group of 19 clinics that was undergoing restructuring. Finally, in December 2025, the company was renamed simply Baviera. Luis Grávalos succeeded Eduardo Baviera as CEO on March 26, 2026.

Clients

Baviera treats patients who come in for various types of treatment:

Refractive (laser) surgery to treat presbyopia, myopia, hyperopia, or astigmatism. These are generally patients who want to stop wearing glasses. They pay for the procedure in full, or almost in full, with a reimbursement or a discount from an insurer in such cases.

Cataract surgery: replacement of the natural lens with an intraocular lens, for older patients. Cataracts are covered by the public health systems, so who pays depends on the country. In Spain, Baviera presents private surgery as the answer to public waiting lists, and its patients pay themselves or go through an insurer that has an agreement with the group. In Germany, statutory insurance pays for the operation with a standard lens, and the patient pays for premium lenses.

Patients also come in for other conditions related to general ophthalmology, for consultations and examinations.

In 2025, about 16% of ophthalmology revenue came from agreements with insurers, which provides information on the overall level of patient reimbursement.

The cost of the surgery will depend on the technology used by the healthcare professional, and does not depend on the refractive error being corrected (myopia, hyperopia, etc.). The company also offers 0% interest loans through its partners.

The company, which began in Spain, subsequently expanded into Germany, Austria, Italy, and the United Kingdom, as outlined in the presentation below.

The customer base is very spread out: Baviera received about 180,000 patients in 2024 and says it has performed some 2 million operations since it started. In 2006, about 60% of new ophthalmology patients in Spain came on the recommendation of former patients. Because a laser operation is bought once, growth depends on winning new patients every year.

The data I could find indicate that the market is growing by about 5% a year.

Suppliers

Baviera’s main resource is its doctors, and most of them work for the group as employees. At the end of 2025 it employed 272 doctors: 224 in Spain, 38 in Germany, 9 in Italy and one in the UK. Almost all have permanent contracts, and just over half work part-time. In the UK the doctors are not employees: they work under a commercial contract with the group. The group also calls on outside collaborators, doctors and companies, to cover peaks in demand.

Employed doctors cost €49.2 million in 2025 and outside doctors are included in the €23.6 million “professional services” line item, which could include all service providers, including the housekeeper and the plumber.

Like any ophthalmology center, it requires medical equipment, which is divided into consumables and capital assets (for example, from Bausch & Lomb or Carl Zeiss Meditec). Replacing a machine is complicated because the entire operation relies on mastery of that machine, and there is a risk of delays or failure.

Almost all clinics are rented, so landlords are suppliers too.

Competitors

Competition in this type of business is local, since people generally don’t walk 500 miles to undergo a procedure that is fairly common.

For non-reimbursed procedures, competition comes from other ophthalmology groups, which are listed below by country:

In Spain, it’s mainly Miranza, launched in 2020, and it reached €128 million of revenue in 2025, vs €204 million for Baviera. Our company is more standardized and highly advanced in refractive surgery, while Miranza positions itself more as a network of centers of excellence offering specialized care.

In 2024, the ophthalmology clinic market was worth approximately €720 million, with Baviera holding a market share of about 25% and Miranza holding 15%.

In Great Britain, there is Optical Express, the leader in laser technology, with £146.5 million in revenue in 2022 vs £16 million for Baviera in 2025.

In Germany, while Baviera generated €59 million in 2025 with 32 clinics, there are numerous alternatives, including Sanoptis, with its 220 locations, Artemis (120), Veonet (84), and Augenzentrum Eckert (72).

In Italy, Baviera Italia accounts for approximately 7% of the company’s 2025 revenue with its 11 clinics, or about 21 million euros, less than Vista Vision, its main competitor, which generates 65 million euros with its 12 clinics, with a broader range of ophthalmology services.

In most cases, the market remains fragmented. When it is not large groups, it consists of individual practitioners or small groups of a few practitioners.

Competitive advantage

Since 91% of revenue comes from surgical procedures, this section focuses primarily on that area, with the remainder split roughly evenly between consultations and other conditions (retina, oculoplasty, glaucoma, etc.).

There is little competition with the public hospital as laser surgery and presbyopia treatments are not covered by public systems, so Baviera competes there with private clinics.

Cataract surgery is different: the public system pays for it, with a standard lens and no bill for the patient. What Baviera sells on top is choice of the date, the surgeon, and a better lens if the patient wants one. The average wait for cataract surgery in the public system was 68 days at the end of 2025, and only 2.6% of patients waited more than six months.

Critics also argue that private clinics take the simple, profitable cases and compete with public hospitals for the same doctors. I found no data showing that Baviera weakens the public system.

As for barriers to entry, this is an industry that depends on the number of practitioners, and regulations prevent unregulated entry into the market. Not just anyone can put on a white coat and become an ophthalmologist overnight. And currently in the EU, it often takes quite a long time to find a doctor.

As a result, there is cost pressure to retain doctors within these facilities.

Compared to practitioners working alone or in small groups, the opportunities for reinvestment and cost-sharing result in higher profitability.

The company therefore enjoys, like its competitors—the other groups—undeniable advantages:

• brand visibility,

• very extensive network,

• more consistent processes,

• a strong clinical focus on refractive surgery,

• greater transparency regarding prices and financial performance.

It’s a very profitable business with an ROIC ranging from 20 to 30 percent depending on the year (except for 2020, but that’s because of COVID), far above any reasonable cost of capital.

Buyers are scattered and have no bargaining power. The same goes for insurers, which are fragmented. It’s a network that grows through word of mouth, so switching costs are based on reputation. Buyers don’t have any particular incentive to return. People don’t visit an ophthalmologist regularly to have surgery.

Furthermore, this is a request related to operations that will depend on economic conditions. Although it is a healthcare expense, it can be deferred so that the cost is covered later.

And while this may seem obvious, it is a key aspect of any competitive advantage: customers do not automatically seek out the cheapest option; instead, they prioritize quality and safety.

Here is the summary slide. Note that this image should be read against the alternatives.

2. Financials

Key financial metrics

Watch out when interpreting the figures; these are for a half-year period in 2026. You must double the amounts and adjust for one-time items to compare the years.

Commentary

Revenue

Since its IPO, the company has grown in revenue at a rate of 9% per year. One observes that growth has been slowing since 2023: the trend varies as a function of the opening of new clinics.

Useful clarification: the figures published for 2024-2025 overestimate growth by a few percentage points because of the integration of Optimax (United Kingdom). In the first half of 2026, without revenue from the UK, growth would have been 8.8%.

Operating Margin

The EBIT margin (which accounts for most of the rents in depreciation according to IFRS standards) declined in 2024 and 2025, notably because of the acquisition of Optimax in the United Kingdom. In Germany, profitability fell because of the increase in salaries paid to retain doctors. In Italy, it decreased because the group hired staff in anticipation of its openings and increased its marketing expenses to move from a B2B model to a B2C model. Spain experienced the opposite evolution and recorded an improvement.

The first half of 2026 highlighted an operating leverage effect: expenses increased by 8%, while revenue grew by 10%.

Net Income and Free Cash Flow

The slowdown in net income growth in 2025 is explained by an entire year of losses in the United Kingdom, still linked to the integration and turnaround of Optimax, as well as by a higher tax rate (28.6% versus 26.5%).

The company compares the year 2025 to a pro forma 2024 fiscal year, which gives a net income growth of +15%. The published comparison indicates +4%, and it is the one that should be used. The number of shares remaining unchanged (16.3 million), earnings per share therefore simply follows the evolution of net income.

Baviera also pays a negligible sum in respect of share-based compensation, of approximately 0.44 million euros per year, and 163,043 stock options at 23 euros (1% of the shares) will become exercisable in 2027.

In the first half of 2026, the financial result represents about two points of the 17% increase. The decline in free cash flow (FCF) in the first half of 2026 (−1.6%) is not worrying, because it reflects the timing of payments. Meanwhile, the operating income rose by 12%. After lease payments, the group converted between 66% and 84% of its net income into cash between 2023 and 2025. Quite a good score!

Balance sheet

As of June 30, 2026, Baviera reported a net financial position of +41.7 million euros after paying a dividend of 25.1 million euros during the first half of the year. Including lease obligations, net debt amounts to 19.4 million euros. And given its EBIT, this debt can be repaid in about four months.

The assets held by Baviera consist mainly of what a clinic needs to operate. It would be an overstatement to call this an “asset-light” business, where capex is 3-5% of revenue. Baviera’s capex, spent on medical equipment and clinic fit-out (the interior renovation of a rented space to turn it into a clinic), is closer to 10% of revenue.

3. Management

The new CEO

Eduardo Baviera, the company’s co-founder, led Baviera for 30 years. There is no information available regarding the reasons for the change in CEO. It is reasonable to assume that, after 30 years at the helm and at nearly 60, he would like to slow down while maintaining a more behind-the-scenes role within the company. He remains on the board as vice president and continues to oversee strategy and medical direction.

Luis Grávalos Soria succeeded him on March 26, 2026. He has spent more than 16 years with the group. He first led the Germany division, then the United Kingdom division following the acquisition of Optimax. The board says it is appointing him “to drive a new phase of growth, while maintaining the continuity of the model that has been successful in recent years and strengthening a professional, international management model focused on responsible growth.”

The data does not indicate that the successor created a plan. The only guidance is the board’s statement of continuity and a new growth phase.

Yellow flag: Not only can I find no record of the CEO currently holding shares in the company, but I also see regular sales of shares dating back to 2025. The only known new incentive is the long-term cash bonus approved on May 27, 2026. It pays out in cash, with no shares involved, and neither the amount nor the conditions have been disclosed. Alignment with management cannot be assumed.

The Majority Shareholder

A Chinese group controls Baviera. Aier Eye Hospital Group, based in Changsha, is China’s largest ophthalmology chain and is listed on the Shenzhen Stock Exchange. It acquired 86.83% of Baviera through a tender offer in August 2017. Its stake has since fallen to 73.23%. Its founder, Chen Bang, serves as chairman of both groups. Having a majority shareholder (furthermore a Chinese one) in the company has several implications:

First, the positives. The company is not at risk of a hostile takeover, and Aier is an industrial shareholder in the same industry with a long-term perspective. Also, the company has been doing well for the past nine years with this majority shareholder.

Next, the disadvantages.

Management is in charge of day-to-day capital allocation (clinic openings, capital expenditures), but the board (on which Aier holds four of the seven seats) has the final say.

Liquidity is limited, with a free float of about 18% of the market capitalization. A large seller can cause the price to drop sharply. The same is true on the upside. This also hinders the stock’s inclusion in indices and institutional portfolios.

Having a majority shareholder always carries the risk of delisting. Any significant drop in the stock price (even with solid fundamentals) would be a bargain for the majority shareholder, which could buy out the minority stake at a favorable price (with a premium on the current price), at its sole discretion.

There are currently no major tensions with China, so a scenario of serious deterioration of relations with China is one with significant impact but very low probability. The recent tensions between China and the EU have had no impact on the company.

Capital allocation

Baviera pays for its growth, its dividend and its acquisitions out of its operating cash flow.

Openings come first: capex was about €30 million in 2025, close to 10% of revenue: €15.9 million for new clinics and €14.3 million to renovate existing ones. The group opened 11 clinics in 2025 and 8 in the first half of 2026, taking the network from 148 to 156.

The dividend comes second. Baviera has paid €1.57 per share in each of the last two years, a payout of 68% of 2024 earnings and 62% of 2025 earnings. The cash paid out was €25.9 million in 2024 and €26.4 million in 2025.

Management knows how to seize acquisition opportunities to keep growing, notably abroad. Examples include the acquisitions of Optimax (UK) and Care Vision (Germany). Although Optimax is not yet profitable, we can expect it to become so over the coming quarters, as the business is turned around.

4. The two theses

I believe the best way to decide whether an investment is sound is to pit the bullish and bearish theses against each other. That way, I know what could happen, and knowing your position well helps you endure downturns and protects you psychologically. Considering only the bear thesis is alarmism; considering only the bull thesis is wishful thinking. This section includes both the arguments and the catalysts for each version of the story.

Why did the stock go up?

I usually write a post explaining why the stock price has fallen. But in this case, there’s no problem; the price has been rising steadily since 2023.

This chart shows that the rise in 2025 is driven primarily by the P/E ratio, while the rise in 2026 is driven by earnings growth. The rise in 2024 is driven by both factors.

One might think that the rise in the 2025 multiple stems from the doubling of the free float in April (from 10% to 18%), which reduced the liquidity discount. Another reason is the relatively low starting point for the P/E ratio in early 2025, which was only 13.

Currently, the company is trading near its highest relative valuation levels, with a P/E ratio of 19.

Bear thesis

A technology that reduces the need for laser surgery

We haven’t yet found a cure for presbyopia, myopia, hyperopia, or astigmatism, but who knows? Maybe one day there will be a treatment that can prevent these vision problems. If that happens, it will be the end of Baviera’s core business.

Currently, alternatives such as implantable lenses do exist, but they still require the assistance of a doctor, so this would simply be a shift in technology rather than a true replacement. A 2017 analyst report (Renta 4) indicates that intraocular lenses already accounted for 40% of revenue, so this is a well-established practice.

There’s also the issue of preventing nearsightedness, but if glasses are still needed, that doesn’t change the bottom line: people who undergo surgery want to live without glasses.

People prefer glasses

More people keeping their glasses means fewer surgeries, and therefore lower revenue. In the case of cataracts, surgery is essential to prevent blindness, so revenue from cataract procedures remains steady. The reports do not specify the portion of revenue attributable to cataract procedures.

No recovery in the U.K.

Revenue in the United Kingdom still accounts for a small portion of the group’s total (€10.6 million in H1 2026, or 6%), but investors expect this segment to become a new growth driver. There are 19 clinics out of a total of 156, representing a potential 12% of revenue. If the turnaround is successful, this metric is expected to double. Profitability is a goal for 2027 that has yet to be confirmed.

A price war or higher competition

That is not currently the case for the price war, and healthcare services tend to be priced consistently, but this scenario is still possible if one of the competitors were determined to win the market at any cost. This is especially true since, in most cases, patients pay out of pocket.

For higher competition, this would involve in particular poaching doctors in the event of a shortage of job openings.

Economic conditions that could cause operations to be postponed

These are mostly non-essential operations that can be postponed. The economic situation in Spain has improved significantly in recent years, but that period of improvement may be coming to an end. Spain accounted for 68% of sales and 81% of EBITDA in the first half of 2026, with 52% of the clinics located there, so the company’s fate remains closely tied to the economic situation in Spain.

No opportunities left for M&A in Spain

In Spain, a transaction must be notified to the competition authority (CNMC) when the combined market share reaches 30 percent, as defined by product or service and by geographic area. This may refer to a sub-segment (such as laser surgery rather than ophthalmology as a whole) and “a substantial part of the territory.” With a 25% market share, Baviera could be affected, as it would have to grow solely through organic growth. It is a notification, and the deal could still be made (or not), depending on the regulator.

Bull thesis

The UK is on the road to recovery, and Italy continues its momentum

UK: In the first half of 2026, revenue rose 28% to 10.7 million euros, and the EBITDA loss narrowed from 3.0 to 1.6 million euros compared with the first half of 2025 (+1.4 million euros in a year), even as the company continued to hire.

Italy: The network grew from 8 clinics at the end of 2024 to 11 in June 2026, with revenue up 9% year-over-year and EBITDA up 25%.

Changes in technology or alternatives are fairly stable

I find it hard to imagine people collectively changing their minds about glasses, whether to wear them or have surgery. In a 2024 survey commissioned by a manufacturer of implantable lenses, 88% of Spaniards said they wanted to live without glasses. Demand shows no signs of waning, and people continue to seek surgery if they can afford it.

As for the possibility of alternatives that would eliminate the need for glasses, such as a treatment that cures nearsightedness or something similar, we can only wait and see for now.

Spain is doing well, and other countries are growing

GDP grew by 0.7% in the second quarter of 2026 (2.7% YoY), driven by domestic demand: household consumption rose by 3.2% over the past year. The unemployment rate fell to 9.87%, below 10%. There will come a time when Spain’s economic performance will slow, and this could affect Baviera. For now, Spain is doing OK.
But until then, other countries continue to grow, driving the push to internationalize sales so that Baviera’s growth rests on multiple pillars. Today, sales in Spain account for 68% of total sales; tomorrow, that figure could be 40%, then 20%, to reach in the long term (or come close to) the revenue share within the EU.

The Moat grows stronger over time

I don’t see any competitive advantage of Baviera over other clinic groups; the main factor is the size and operational efficiency of management. But in terms of competitive advantage over other smaller players, Baviera operates 156 clinics under a single brand across all its countries, has a global advertising budget of 15.1 million euros (which a small practice cannot match), and offers enormous opportunities for profitable reinvestment, with a return on invested capital of 21.6% in 2025.

I’ll finish with the key point of the bull case:

There are still significant opportunities for new clinics

The network has 156 clinics, and the goal reported by the press is 180, about 16 new openings per year. There is still room for growth in countries where the group already operates: Germany has 34 clinics, the United Kingdom has 19, and Italy has 11, compared to 92 in Spain.

Beyond that, there is the rest of the EU to expand into: France, the Nordic countries, the Benelux countries (and Switzerland). Baviera has not announced any plans for these countries, but such expansion remains entirely possible.

Each clinic opening costs approximately 1.4 million euros and is funded by operating cash flow, without borrowing, and generates approximately 0.4 million euros in free cash flow per year. The payback period is therefore approximately 3 years.

When it’s not a new location, it may be an acquisition or a merger. Baviera has already completed three such transactions: Care Vision in Germany in 2008 (8 centers in Germany and 1 in Austria), Clínica Torre Eva in Milan in 2019, and Optimax in the United Kingdom in 2024.

Even in Spain, the two largest firms account for about 40 percent of a market worth approximately 720 million euros, meaning that more than half goes to other firms and independent practices, which remain a driver of growth. Organically though, as mentioned in the last point of the bear case.

Opportunities for external growth remain strong, and the sector could decide to consolidate in order to increase economies of scale and brand strength, including Baviera. The sector remains highly fragmented (outside of Spain), so the prospect of regulatory authorities blocking such moves is still a long way off.

Blind spots

• We cannot yet assess the M&A opportunities in the target countries and the consideration of the regulator

• Will the CEO be successful? We could end up with a “Steve Ballmer scenario” at Microsoft, where the company’s stock price stayed flat for over a decade.

• Will the company seek to expand internationally?

• It is quite difficult to assess the performance of the other groups, which are private and therefore don’t disclose information.

5. Price scorecard

The numbers only make sense if you’ve read the section on the two theses.

As Aswath Damodaran puts it, “numbers without stories to back them up are exercises in financial modeling.”

The scorecard below requires an important assumption, namely, the continuity of a normal economic environment, i.e. without recession, major credit event, market crash. I will someday write an article about how to deal with these conditions.

Any of these could push the stock below the bear case shown here, temporarily, independently of the company’s underlying performance.

All figures in the scorecard are pre-tax and pre-fees. Run the numbers for your own situation before drawing conclusions.

The horizon is in three years, in October 2029.

The assumptions are the following:

• Baviera will open 6 clinics per year in the bear case, +8% openings per year in the central case, and +10% in the bull case. The last one corresponds to the historical trend of the company.

• For the revenue, it goes from 4.3% per year in the bear case, to 8.2% per year in the central case, and 10.1% per year in the bull case. Revenue per clinic is assumed to stay flat.

• The margins go from 14.8% in 2026 (net margin) to 12% in the bear case, 15% in the central case, and 17% in the bull case.

• Payout ratio of 60% in the central case and 55% in the bull case, with none in the bear case; dividends are reinvested with no tax and no fees.

The selected P/E ratios range from the 2022 low to the June 2026 high, and add the possibility of raising the valuation ratio to 25, taking into account the company’s market capitalization exceeding €1 billion and reducing its liquidity discount.

My conviction sits at the €91 scenario or higher (bull case x PE of 20).

The re-rating will mainly depend on the catalysts covered in the next section.

6. Momentum

Crossing fundamentals (covered above) with momentum is an excellent way to improve your returns from doing just fundamentals. You’re never right on your own, especially since a significant part of returns comes from the multiple, particularly if your horizon is under 5 years.

Catalysts

Results for the upcoming quarters: It is necessary to verify whether the overall figures are in line with the forecasts in Part 5, namely, approximately 8–10% revenue growth and a stable margin of around 15–17%.

Any downward trend will need to be examined; in that case, I’ll post a deep-dive update.

Evolution of the low-margin countries: In addition, the United Kingdom and Italy must report margin improvements and increases in revenue.

Announcement of acquisitions: Baviera has made three acquisitions since 2008 (Care Vision in Germany in 2008, Clínica Torre Eva in Milan in 2019, Optimax in the U.K. in 2024), all small, and none is announced today. Its net financial position and profitability leave room for more.

A deal would be the first sign that the last point of the bull case is starting to play out. So far, Baviera has acquired a group to establish a presence in a new country, and may continue to do so.

Increase in the free float by Aier: Aier holds 73% of the capital and the free float is only about 18%. In April 2025, Aier and Vito placed 8% of the capital with a discount of 8.7%, which took the float from about 10% to about 18%. The stock first fell 5.3%, to €33.80, then rose. Aier has sold in steps before, so another placement is possible, but it has said nothing. A new placement would improve liquidity and open the shareholder base to new funds. In the short term, it would put pressure on the price, and would be a good time to add to the stock, all other things being equal.

Review of the strategic plan by the new CEO: For now, Luis Grávalos Soria is following in his predecessor’s footsteps, but he may introduce a new plan whose content and execution could drive the company to a new level of growth.

When to enter the stock?

The main risk for the stock is a decrease in the PE ratio, which could be a good opportunity (depending on the reasons for the selloff) to build a bigger position, because usually, in this situation of top PE, I could start a small position.

From that point on, the price may fall solely because of the multiple, in which case you should increase your position when the decline stops.

For my part, I prefer to wait until the stock price drops before buying more, which also gives me a chance to see and hear what the new CEO has to say.

Final Thoughts

This is a company with good prospects over the next 10 years or more. The growth isn’t spectacular: it’s not Nebius Group. But the model is simple and funds itself. New clinics are paid for with operating cash flow, any excess is available for organic growth, dividends or new acquisitions, and the return on invested capital was 21.6% in 2025.

But it’s the kind of stock you can hold onto for 10 years and potentially end up with 4 to 5 times your initial investment.

As the company had a price of €8 during Covid, it is up 7-fold since. If it keeps up the pace of fundamentals and quadruples in value over 10 years, it will have grown 28-fold. Another ten years or so in the same direction, and it will be a 100-bagger in 26 years, not from this point though.

I see a clear long-term advantage for this company that supports the bullish case over the bearish case. But it will take time. Compounders come out ahead in the long run. This one, with peace of mind as well.

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You liked this article? You may also like the list below, within which Bavaria is located

Disclaimer: This content is for educational purposes only and does not constitute investment advice. See our full disclaimer.

We have three bank cards in our European household and we will keep only one, because we won’t need more.

It all began in April 2024 when I started taking up positions on Visa and Mastercard. I was up 30% one year later, but I decided to exit both, rotating into Nvidia and Alphabet.

The main trigger was an event that I saw coming for them in the European Union; and that I still haven’t seen written about anywhere, not even on Substack.

I am convinced that in a few years, the developments described in this article will come to pass (at least in the EU) with major implications for Visa, Mastercard, and PayPal.

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I. The flywheel

The spectacular growth and competitive advantage of Visa and Mastercard are based on the following flywheel: more issuers attract more merchants, more merchants attract more cardholders, more cardholders generate more transactions, more transactions produce more data, more data enables better value-added services, and better services attract more issuers.

And so on.

Once the scale effect is reached, you’ll have a network of 150 million acceptance points across 200+ countries, with switching costs, that are based on decades of embedded infrastructure in every bank’s core systems.

Visa’s FY2025 results look solid, especially in the United States, where you get rewards: miles, cashback, airport lounges.

II. the vectors of the broken flywheel

1. In EU, fees is all you get

In the US, Visa and Mastercard can afford incentives. In the EU, it’s just a commodity to pay, as the regulator capped interchange (0.20-0.30%), and rewards barely exist.

So when an alternative shows up, nobody has a reason to stay and the cheapest option wins.

Germany is ahead on most tech topics, but not on payments: cash is still widely used and a lot of transfers go through the banks. Paypal commands approximately 30% of German e-commerce transactions, the dominant payment method online. That position was built on a single use case: I want to pay online without giving my card number, with buyer protection.

There is, of course, Wero, but the system launched in 2024 and backed by European banks offers exactly the same features as Paypal. The only benefit is simply that it is a European public service. An “economic patriotism” in short, without much interest beyond the love of the flag.

2. A2A: the disruption already underway

Disruption has already begun in two countries with national initiatives. Credit cards aren’t the only losers; cash is also a collateral victim of the operation. But that doesn’t translate into investment losses for anyone for the latter.

PIX, Brazil, launched November 2020

The initiative was mandated by the Banco Central do Brasil. It is free for individuals; merchants pay 0.33%, compared to 2.3% for cards. Participation is mandatory for any institution with more than 500,000 accounts.

Five years later, in 2024, there were 64 billion transactions (exceeding the combined volume of Visa and Mastercard) and 93% of Brazilian adults were using PIX. A resounding success.

Meanwhile, the use of cash fell from 43% to 6% of all payments. Visa and Mastercard incured combined losses of R$12B between 2021 and 2024, or nearly $2.3B.

It was such a success that in September 2025, the U.S. Trade Representative launched a formal investigation into PIX, calling it an “unfair competitive disadvantage” for U.S. card networks, a claim echoed in a White House report in April 2026. President Lula responded: “No one will make us change PIX.”

UPI, India, launched in 2016

Nine years after its launch, UPI had processed 644 million transactions in a single day in June 2025. In May 2025, the value of UPI transactions was 12 times greater than the cumulative total of all card transactions in India. UPI is growing at an annual rate of 30–40 percent, compared with 10 percent for Visa. Another resounding success.

3. The Digital Euro: Once Bit, Twice Bit, Three Times Bit

The digital euro is a central bank digital currency (CBDC). It is a form of public currency issued directly by the European Central Bank, with the same legal status as cash.

It is a sovereign currency, backed by the ECB, and accessible to all citizens and businesses in the eurozone.

Currently, when you pay by card, you are using bank money (i.e. private money) processed through a private infrastructure owned by U.S. companies. The digital euro would be the first form of public digital currency directly accessible to EU citizens. It would be the equivalent of a banknote, but in digital form. So it is not a stablecoin, but an official version of a currency.

The ECB has made it clear that its goal is to reduce dependence on foreign payment infrastructures.

In practice, you store your digital euros in a wallet provided by your bank, a post office, or any authorized payment service provider. You can make payments in stores, online, or between individuals, whether online or offline. No internet connection is required for offline transactions. There are no transaction fees for users.

Here are the main design features confirmed by the ECB. These may change between now and the go-live date.

Acceptance is mandatory for all merchants in the eurozone from day one. Transactions are off-line, and only the payer and the payee know the details; the Eurosystem cannot directly link transactions to individuals. In principle, holding limits would be capped at €3,000 per individual. Cash and existing payment methods would still be available.

As for the timeline, following a study phase in 2021 and preparatory phases, on July 9, 2026, Parliament approved its negotiating mandate in plenary session by a vote of 416 to 169, with 22 abstentions. Next, a political agreement is expected by the end of 2026, then a 12-month pilot from the second half of 2027, and first issuance as early as 2029 if nothing slips. Some delay is likely. Below is the list of PSPs selected for the pilot.

4. What about me ?

We have three credit cards at home, at about €9 each per month. We’ll keep one for trips abroad, for the insurance and the best international transaction fees.

The other two will go. The digital euro will cover the same things at no cost, and every merchant in the eurozone will have to accept it.

The €9 includes my bank’s fees. What Visa and Mastercard take is about 0.1% of each transaction. The impact could be to 150 million households in the same situation.

As an independent analyst, I may end up with no business card at all. If the digital euro covers everyday payments and domestic B2B transactions, a corporate card isn’t needed anymore, out of business travel abroad. One more brake on the flywheel.

5. The Guillou Case

On August 20, 2025, the U.S. Treasury put Nicolas Guillou, a French judge at the International Criminal Court, on its sanctions list, next to drug traffickers and Al-Qaeda members, for issuing arrest warrants against Prime Minister Netanyahu and former Defense Minister Gallant.

Visa and Mastercard had to comply, and so did PayPal. In France, paying in euros, a French judge couldn’t buy groceries or withdraw cash with his card anymore.

His own words, spoken at the Union of Judges’ convention in October 2025:

I realized that Europe no longer has any sovereignty when it comes to payment systems, since we rely almost exclusively on American payment cards: Visa, Mastercard, and American Express. Even if your bank doesn’t close your account, you no longer have any means of payment.

Nicolas Guillou (French judge at the International Criminal Court)

As reported by Le Monde on November 19, 2025 (in French): the U.S. executive can cut off any European citizen from the banking system and digital life of their own country.

Everyone at the ECB and in Brussels saw it. For the EU, this is a matter of survival, and they know it.

6. Risks perceived by intermediaries

Visa’s 10-K for fiscal 2025 does mention this risk:

The European Central Bank has launched a multi-year project to study the introduction of a digital euro, which would serve as an alternative to foreign digital currencies and payment service providers. If their rollout proves successful, these national payment platforms and digital currencies could have a significant impact on Visa’s domestic and cross-border payments, particularly in terms of potential disintermediation.

Mastercard’s 10-K barely mentions the topic, and PayPal’s report doesn’t mention it at all.

III. The Impact on Visa, Mastercard, and PayPal

1. Expansion Scenario

At first, the digital euro will be open only to eurozone residents, and to non-residents with an account at a eurozone payment provider. Non-residents will still pay with their Visa card. But it could also expand to neighbouring countries, over the coming years.

Central banks could also connect their systems directly and skip the intermediaries. Then, moving money would become a utility run by public institutions, a bit like water or electricity.

With the emergence of nationalism and national pride, paying with the national network could become a way to show your ideological views.

3. Financial impacts

61% of Visa’s revenue comes from outside the United States, and the Eurozone is a big part of it. Since Visa is asset-light, any downturn in revenue would severely affect the operational leverage, and the flywheel would start turning backwards, as shown in the picture below.

Data processing and service revenue follow the decline in revenue proportionally. International transactions and value-added services should hold better.

A drop in revenue hits ROIC immediately, and the premium on the multiple (because of the stability of the business) would shrink. For me, today’s price does not justify the risk premium of Visa or Mastercard.

PayPal has the same exposure as Visa and Mastercard in Europe, but nothing like their international transactions as a last line of defense. So it’s even worse for them.

Conclusion

Given the successful examples of Pix in Brazil and UPI in India, I see no reason why the model wouldn’t be a success in the Eurozone. And since the Guillou affair, this approach has become a necessity, there’s no turning back.

Meanwhile, fintech companies continue to emerge, and the account-to-account payments are growing. I find it hard to look ahead to the future of payment methods with confidence. I think there will be a name for what is happening to Visa, Mastercard and PayPal in Europe.

We’ll call it the “Finpocalypse.”

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Disclaimer

1. The Benefits of Diversification

Diversification involves spreading your money across investments that do not all react the same way to the same events, so that no single event can wipe out your entire portfolio. The goal, therefore, is to reduce risk.

This discussion is limited to diversification within a 100% equity portfolio; the topic will also be addressed in the broader context of asset allocation.

Risks can be classified into two types: specific risks and market risk.

The first type is tied to a specific company and can be diversified. In particular, diversification provides protection against fraud, the loss of a market, a contract, or a key player. The following quote is attributed to Harry Markowitz, winner of the “Nobel Prize in Economics”: “Diversification is the only free lunch in finance.”

What cannot be diversified is market risk. A recession will affect all businesses, since it leads to a loss of purchasing power among all of their customers. If it were possible, insurance companies would offer a policy to cover this eventuality, but that is not the case.

One way to hedge against market risk is to diversify your asset allocation (for example, into gold, bonds, real estate, and so on) which typically respond differently over time.

However, after a while, diversification will reach its limits. The question, then, is how many stocks are needed until the company-specific risk stops mattering?

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2. What the Studies Say

In 1968, Evans and Archer, link to the study, in their founding paper showed that most of the benefit comes from the first 8 to 10 stocks, and beyond that the curve flattens. This is where the old rule of thumb comes from.

In 1987, Statman, link to the study, argued the earlier work ignored costs and the ability to borrow. His conclusion was that the optimum is about 30 stocks for a leveraged investor and 40 for an unleveraged one. But a later version of his work suggested that hundreds of stocks might be needed before the extra benefit fell below the extra cost. I assume that maximizing this diversification would be absurd for a retail investor.

In 2001, Campbell, Lettau, Malkiel and Xu, link to the study, showed that individual stocks became more volatile relative to the market over the previous decades. To reach the same level of diversification, you needed to increase the number of stocks from roughly 20 in the 1960s to around 50 in the late 1990s.

In 2007, Domian, Louton and Racine, link to the study, looked at long holding periods and found that most of the benefit requires 30 to 50 stocks. You can also mitigate the worst outcomes with more stocks.

A 2021 review in the Journal of Risk and Financial Management, which went through the whole literature, concludes by saying that a generalized optimal number of stocks does not exist. It varies by market, by period and by investor.

A summary of the diversification analyzed in this study is shown in the image below:

The first steps toward diversification do almost all of the work. Going from 1 to 10 removes 90% of the avoidable risk. The more stocks you add, the lower the benefit becomes, with marginal benefit beyond 20 stocks. The sweet spot of diversification would be between 7 and 20.

3. The Impact of a Stock’s Price Change on the Portfolio

To better plan for the future, let’s ask ourselves what happens when a stock’s price fluctuates by 50%. The more concentrated the portfolio is, the greater the impact on it will be.

The goal is to see how much volatility you can handle without selling everything at the low point.

The ideal amount depends on how much your stomach can handle.

The graph shows what happens to your portfolio if you endure a 50% drawdon on one line:

This chart provides information about an equally weighted portfolio, which is never the case unless you rebalance your portfolio very frequently.

4. Statement of equal-sized positions

The number of tickers in your account is a poor measure.

Let’s take a portfolio of 10 stocks. After one year, one has doubled in value, two are down 50%, two are up 20%, two are down 20% and three stayed flat. The portfolio is still worth the same amount, but its weightings have changed. You can calculate how many equally weighted positions this corresponds to by dividing 1 by the sum of the squared weights.

In the end, your portfolio, which had led a fairly normal life, became more concentrated.

A portfolio has a natural tendency toward concentration.

But that isn’t necessarily a bad thing. It’s simply the result of the winners gaining ground and the losers losing it.

5. Asset Correlation

You can own 30 stocks without diversification. For example, if you own all the “hot names” in AI, such as Nvidia, Micron, SanDisk, Super Micro Computer, Nebius, CoreWeave, etc., you’re not diversified. That’s because they’re all based on roughly the same investment thesis. Those who show you spectacular annual results usually fail to mention this point.

When this theme falls apart, they all fall apart together.

True diversification relies on assets being uncorrelated across different sectors, different clients, and different sensitivities to interest rates and the economic cycle.

For example, a software company, a luxury perfume manufacturer, and a pharmaceutical company are each influenced by different factors. Three stocks like these provide better diversification than ten stocks in the semiconductor sector. If all your stocks are listed in the United States, you are exposed to the dollar.

It should be noted that investors generally tend to favor their home country, which means they tend to invest only in their own country.

6. The cost of owning too many

I once held 25 stocks. I was diversified, but something I hadn’t expected came knocking at the door. Time and a 10% market drop to all my stocks.

Finding, getting to know, and keeping track of 25 companies is a sport—or even a profession.

And what happens if the price drops by 30% for 5, 10, or 20 of them?

Do you know enough about them to feel at ease and not have to keep revising your plans just to check your portfolio and your hard-earned money?

Each time the price falls, you must be able to hold your position, and so you must know your stocks well enough to do that. There is more risk in owning fifty lines you do not know than ten you do, because in the first case you end up reacting to the price, and in the second you hold steady.

And in my case, I don’t think I have unlimited good ideas, so every new position dilutes my best ideas and convictions.

7. A Few Quotes from Superinvestors

Warren Buffett:

Peter Lynch:

Joel Greenblatt:

8. A simple way to choose your number

No one knows in advance how they will react to a market decline, especially when it is widespread and prolonged. The best way is still to experience a market decline firsthand.

That’s why, in my “Investing 101” series, I suggested starting with a pilot phase—buying three stocks and one ETF and holding them for one year—to get used to market volatility and see how well you can weather market shocks.

The next step is to build a portfolio in which you choose the number of stocks.

Starting with 20 stocks rather than 10 is actually better from an educational standpoint, because each mistake is spread out, and you learn more from 20 stocks than from 10.

This will also teach you to close out positions that haven’t gone as planned. Not necessarily because the stock has lost 40%, but because the investment thesis didn’t play out as expected.

I suggest two starting points:

• 15 stocks make up 50% of the portfolio, and 3 ETFs make up the remaining 50%. Each stock accounts for about 3.3%. If one loses half its value, the portfolio loses about 1.7%. If it triples in value, the portfolio gains about 6.7%. The ETFs (see Part 2) collectively hold hundreds of stocks and provide diversification while you learn, for just a few basis points per year.

• 20 stocks, excluding ETFs. Each stock accounts for 5%. If one loses half its value, the portfolio loses 2.5%. If it triples in value, the portfolio gains 10%.

The real difference is the workload. For a position in your portfolio, it can easily take 2 days to develop the investment thesis if you do it yourself, followed by 2 hours of monitoring per quarter. If you spend less time on the investment thesis, you risk having serious doubts about your position because you didn’t lay a solid foundation for it in the first place. If you only have six companies that you understand and whose declines you can withstand, stick with just those and put the rest into ETFs.

Next, decide on your investment theses:

After an initial period, review each position and compare what has happened with the reasons you bought it. If the thesis is broken, sell, because it will be worse later. If the thesis holds, including those that have fallen in price (you have a better price now) and those that have risen significantly (there is still room to grow, plus momentum).

This only works if you noted, at the time of purchase, what would make you sell, aka in my articles the bull and bear theses. Otherwise, every decision after a 30% drop is based on price.

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Disclaimer: This content is for educational purposes only and does not constitute investment advice — see our full disclaimer.

• Over the trailing twelve months, the portfolio is up 8.71% against +16.25% for the S&P 500 (total return).

• Year-to-date, 11.66% against +13.12% for the index.

• Since inception (2nd of October 2023): 72.9% vs S&P 500 80.57%.

All figures are pretax, net of fees, and exclude the effect of any cash contributions or withdrawals. This is a pure return on capital already at work.

I don’t use options and I’m currently unlevered.

My job here is to own and follow around 15-20 stocks closely enough that you don’t have to — so you can track your portfolio in 1-2 hours a week, and still get access to the great buys when they show up.

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2. Sentiment

My year-over-year performance is well below that of the S&P 500 due to the strong base effect from last year, when I was up 33% during the same period.

My sense is that outperforming the index this year depended largely on your exposure to semiconductors in the first half of the year—a period during which my portfolio had no such exposure; in fact, it was the opposite, with a focus on software.

Furthermore, my strong conviction in Atos Group means that my portfolio does not move in tandem with the S&P 500. My relative performance is largely attributable to the company’s stock price. I remain very confident in the company’s ability to turn things around, as it has already successfully overcome two of the three challenges necessary for the turnaround: the balance sheet simplification, which will be completed by the end of the year, and the improvement in the operating margin. The final step before a re-rating is the ongoing business recovery.

It’s also a message for all those who are underperforming the index or hovering around it. You always need to wait and see if your investment thesis plays out. It may be held back by investor sentiment, but in the long run, if your thesis plays out, the market will prove you right.

Peter Lynch, one of the greatest investors of all time, famously wrote: “There’s always something to worry about. But if you own good companies, you’ll do well over time.”

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• “The streaming market is saturated”

• “Netflix has gotten too expensive”

• “There’s no more growth”

These points may be true, to a certain extent. But the market consensus loves to reiterate its pessimism when the price is at its lowest, while every new rally is met with optimism when the price hits record highs.

Netflix had been riding a wave of excessive optimism, which was reversed by a drop of more than 40% from its highs. But like all great companies, it never ceases to surprise us. Let’s see what the future holds for Netflix.

Like AppLovin, Netflix belongs to my favorite type of investment: a category definer, temporarily beaten down by the market on a below-expectations print.

A category definer is a company that created a new category and occupies the leadership seat in it, crushing the competition in its segment through its products and services.

This is a favorite strategy of Bill Ackman at Pershing Square, where he made a purchase in Q2 2026 for a position that now accounts for nearly 5% of his portfolio, with an entry price of $71.

I had already noticed Netflix when its stock price fell in Q2, but it was hard to know how far the price would drop. It seems to have stabilized since then.

The structure of my deep dive is standard. Learn the process in the dedicated articles in the learning section.

The whole article is long because it covers a lot of ground, and short because I try to give you a synthesis of the points. So I start with a “short version” for those of you in a hurry.

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The Short Version

Netflix is a category definer down 40% after several quarters that pointed to a slowdown in growth. The streaming giant serves 330 million households, yet still holds only 7% of a $670 billion market. The company has a competitive advantage due to its size, which gives it a cost advantage in production and distribution, and due to its proprietary catalog. But the following question is, in my opinion, the key reason for choosing Netflix as an investment:

If you had to keep just one streaming service, which one would you choose?

Everyone I spoke with chose Netflix. The double-digit annual revenue growth over the past several years has resulted in earnings growth of more than 30% per year. The steady increase in revenue continues to improve operating leverage and, consequently, profitability potential. The company has growth drivers in advertising, video games, and live events, particularly in sports.

I’m convinced that Netflix could quickly double in value within a year, or grow by 30% annually for about three years. The Q3 results on October 20 will indicate whether I should buy the stock; I’ll keep an eye on whether the price stabilizes or if market concerns persist.

1. What Netflix does

History

Netflix was founded in 1997 by Reed Hastings and Marc Randolph in Scotts Valley, near Santa Cruz, California. It began as a mail-order DVD rental service. The company went public in 2002. Reed Hastings took sole control in 2004 and launched its streaming service in 2007, which would go on to bring the company spectacular success. It began producing original content with *House of Cards* in 2013, marking a turning point in its history.

The first season of *House of Cards*, a Netflix original series, marks a turning point in its story

The 2010s were a period of growth and international expansion. The company experienced its first-ever net subscriber loss in Q1 2022, which, combined with the ongoing bear market, led to a nearly 75% decline in its stock price. Starting in 2023, the company launched its ad-supported service.

What it sells

Netflix primarily sells subscriptions directly to viewers. It’s also possible to get Netflix through partners or service providers. Subscriptions are monthly and can be canceled at any time, with prices ranging from $1 to $37 per month depending on the country and the plan (ad-supported or ad-free, number of screens, video quality, etc.). The company reserves the right to change its prices and plans “based on perceived value rather than on a fixed schedule.” A small portion of its revenue comes from advertising.

Companies typically report on multiple product lines. Netflix, however, reports under a single operating segment: “Streaming Revenues.” The 2026 guidance is $51 billion, of which $3 billion comes from advertising, with the remainder coming from subscription revenue. Netflix is best known for its catalog of movies and TV shows, but other segments are expanding, including video games and podcasts. As management noted during the Q2 2026 earnings call:

Another big positive sign is that since last October, so 8 months ago, when we really sort of scaled up this cloud initiative, monthly active players for cloud games have increased 11x and adoption is significantly ahead of that curve that we had for mobile games with even higher retention value. So we’re definitely excited about that and focused on scaling up cloud games. We’re also seeing positive signals with kids games. So Netflix Playground, which is our app for kids games, no ads, no in-app purchases, curated set of games, very safe space. We’ve seen 3x growth in daily players since that launch. That’s driven more engagement in kids mobile games, which is up 600% year-over-year. So that’s super exciting to see as well.

Gregory K. Peters, Co-CEO, President & Director

Management also cites podcast distribution as showing encouraging signs. It remains to be seen whether this segment will develop into a growth driver in the future.

Netflix is also developing an offer on live events, as they “do a lot of lifting for us for acquisition: [...] 6 out of top 10 new member sign-up days over the past 5 years have come from live events”.

The company spends between $18 and $20 billion a year on content.

Customers

Typically, understanding a company’s customers (especially in the B2B sector) is particularly complex. In this case, Netflix has the undeniable advantage of catering to the general public and applying Peter Lynch’s key principle: “Invest in what you know.”

Its 330 million subscriber households, which initially were more prevalent among those under 45, now span all ages and family types, ranging from those who are more price-sensitive and opt for the ad-supported tier to those seeking a premium experience who are willing to pay more.

Here’s a little anecdote: I know quite a few families where the grown-up kids come back to visit their parents to get their Netflix account back, since access gets blocked after about two weeks without a Wi-Fi connection. It’s a sign of family bonds, and it’s touching.

Below is a geographic breakdown of revenue. This overview shows a disproportionate concentration in countries where subscriptions are most expensive.

One type of minority client is advertisers in the advertising sector.

According to Netflix, its Total Addressable Market (TAM) is estimated at $670 billion, and the company captures 7% of it, which represents 5% of the global TV audience share. This second metric measures time spent, while the first focuses on revenue.

Netflix still has enormous room for growth in its core segment, as the company states they serve 330 million households out of 800 million.

The market itself is growing, according to the company, from $600B+ in 2023 to $670B in 2026, but Netflix does not publish market share figures before 2024: the first historical figure is 6%, rising to 7% in 2026.

Regarding the video game segment, the company indicates a TAM of $140-150B excluding China/Russia, with revenue still nascent for now.

Suppliers

Netflix runs the vast majority of its computing on Amazon Web Services. Quite funny when you know it’s its closest competitor.

The Hollywood guilds govern collective bargaining agreements for writers, actors, performers, and directors. Contract renegotiations are potential moments of risk.

The company also purchases content rights, and has studios and rights holders as suppliers for its content licenses.

Netflix operates its own delivery network, and must interconnect with internet service providers and other telecom operators. This regularly leads to disputes and court summonses over net neutrality and fee calculations.

Competitors

The first area to consider is direct competition. The graph below shows major players’ market shares:

2025/2026 was in this sector a true stock market soap opera, full of rumors and dramatic twists: The industry was in negotiations to acquire Warner Bros. Discovery’s streaming and studio businesses, with Netflix having made an offer, then withdrawing in the face of a higher bid from Paramount-Skydance.

Every time a user wants to be entertained, they will choose their medium, and the real battle is for the user’s attention. That is why, in its talks, management prefers to talk about another metric called moment of truth, rather than viewing time. It describes the instant when the consumer chooses a brand or product over an alternative.

If the moment of truth is the battle for attention, the war is fought in the mind.

And in this arena, the competition is fierce: YouTube and its billions of videos, Meta and its endless feed, television, video games, and every form of entertainment under the sun. For example, YouTube accounts for 13.4% of U.S. TV viewing time, compared to 7.8% for Netflix.

A French television executive (TF1) made an infamous remark when he said he was selling “available brain time.” Behind this cynicism lies an incentive for an ad-supported network to maximize captive brain time at all costs (through addictive, superficial, and repetitive content) because that’s what sells to advertisers. Netflix, being subscription-based, is incentivized to maximize perceived value (and as metrics, quality and retention) so that the subscriber keeps paying every month.

Competitive advantage

From a consumer’s perspective, I invite you to ask the people around you: If you had to keep just one streaming service, which one would you choose?

I may be biased, but as far as I’m concerned, the unanimous answer is Netflix. Even for those with children, where you might expect competition from Disney+.

It is my deep conviction and it resonates whenever I hear that Netflix has won the streaming war, beyond just market share.

On subscription pricing:

• The US/Mexico/Spain price increases in H1 2026 were absorbed as expected

• The end of password sharing had already converted free users into paying ones.

• We can infer that a price increase in Europe would have the same effects.

A major point: users can cancel their subscriptions at any time. The switching costs are mainly psychological, but subscribers could potentially leave overnight. The assumption made above is that a multi-streaming user would cancel their subscription to another service in order to keep only one: Netflix.

The company also has an advantage of better use of catalog and greater predictability of success on pre-project (i.e. when you choose which shows you’ll produce) that comes primarily from behavioral data collected over more than a decade and engagement metrics that Netflix refuses to disclose:

Netflix produces most of its shows. It carries some advantages like the IP Ownership: In 2019–2021, WarnerMedia/NBCUniversal removed Friends and The Office from its catalog. When you have the ownership, you cannot be canceled. It also gives the ability to monetize the content, like with games, merchandise or spin-offs.

It also eliminates the middlemen, for a better cost basis of the content, and when Netflix produces real hits, it can distribute them across 330 million subscribers in ~190 countries. It is something a traditional studio cannot replicate.

Netflix has the largest engaged audience in the world: it gives the company a decisive cost advantage from economies of scale. In addition to this advantage, there is a network effect that attracts creators and studios, because the return on investment for content distributed at this scale is better than elsewhere. That improves Netflix’s bargaining power in future deals. And because it has such a scale, it was able to develop a proprietary delivery network (OpenConnect), with a cost advantage over a third party.

Here is the summary slide. Note that this image should be read against the alternatives. Netflix will face less competitive intensity than Hulu, because this is David against Goliath, so Netflix has an advantage over its competitors. It is not Apple, nor Coca-Cola, in terms of competitive advantage, but it is still a very good moat.

2. Financials

Key financial metrics

Watch out when interpreting the figures; these are for a half-year period in 2026. You must double the amounts and adjust for one-time items to compare the years.

Commentary

Revenue

The increase in revenue is generally linear. Note that the deferred revenue mechanism (subscription fees billed in advance but only recognized in earnings for the delivered part) can affect sales. The increase is due either to the growing number of subscribers or to pricing.

It’s worth noting that Netflix has immense growth potential in its core market. A shift from 7% to 14% of the company’s total addressable market (TAM), based solely on volume, would double annual revenue and generate between 100% and 200% profit growth, depending on assumptions regarding operating leverage.

Operating margin

Every increase in revenue leads to an increase in operating leverage, which in turn leads to higher margins.

Without going into too much detail, the company will record its content on its balance sheet (capitalize it) at the outset, and then amortize it over time. More than 90% of the cost of a title (license or production) is amortized within four years of its initial release, with movies amortized more quickly than TV series. Netflix does not amortize titles individually, but rather on an aggregate basis.

Production tax credits reduce the cost basis of the content, thereby reducing future depreciation over the title’s useful life.

The value of the catalog and intellectual property does not appear on the balance sheet; it is a cost that is amortized. This intellectual property can therefore be considered an unrecognized asset.

Net income and free cash flow

Net income for H1 26 must be restated because it includes $2.8 billion in termination fees related to the WBD contract negotiations, which are reported under “Interest and other income.” This accounts for almost the entire difference from FCF.

Differences in the amounts capitalized and amortized can account for discrepancies between net income and free cash flow:

• If Netflix capitalizes more than it amortizes, there is no impact on net income, but free cash flow decreases (because operating cash flow decreases).

• If Netflix amortizes more than it capitalizes, this reduces net income but has no effect on free cash flow, since the cash was already spent at the time of capitalization.

It’s kind of like working capital.

The annual growth in net income and free cash flow over the past five years has been impressive, especially given the company’s market capitalization, at approximately +31.8% per year and +37.4% per year, respectively.

Balance sheet

The balance sheet is dominated by content, with net content assets accounting for 59% of it. Netflix has $9 billion in cash and net debt (including cash on hand) of $5.24 billion. It would take the company nearly five months of operating income to pay off its debt. No problem there.

Netflix also has off-balance-sheet commitments related to contractual obligations: these are productions that Netflix has agreed to produce but that are not yet available in its catalog. The total amount is nearly $18 billion, after all.

3. Management

A Two-Headed Head

Historically, Reed Hastings was at the helm, but since 2020, the company has had two CEOs. Normally, this violates the principle of unity of command so dear to Fayol, which is why this model remains very rare.

Here, responsibilities are divided by area:

• Ted Sarandos: content, marketing, legal, communications, public relations. He has held this position since July 2020 and has been with Netflix since 2000.

• Greg Peters: Product and Technology, Advertising, Human Resources, Finance, Video Games. He has held this position since 2023, taking over from Reed Hastings. He joined Netflix in 2008.

The principle is specific to Netflix: for each significant decision, a single person is designated as responsible (the “captain”), chosen based on who has the most expertise and context on the subject. It is up to that person to consult widely before deciding, but the final decision rests with them, with no need for consensus. They call it “informed captaincy”.

When there is a disagreement between the two, Peters summed it up this way: “When there’s a space where we disagree, but then we ultimately defer to each other’s area of expertise, I think we get to better decision-making.”

A safety net exists as well: the two work with an executive coach (whose identity remains confidential at Netflix) to manage their relationship and coordinate with the board of directors, described as a “light touch” intervention.

Ted Sarandos and Greg Peters

Regarding their alignment (skin in the game),

• Ted Sarandos earned a total of $53.9 million in 2025, including $3 million in salary, $7 million in bonuses, stock awards worth $41.4 million (77% of his total compensation), and other compensation totaling $2.4 million. He owns 178,954 shares, worth approximately $13 million.

• Greg Peters received a total of $53.2 million in 2025, including $3 million in salary, $7 million in bonuses, and the vast majority of the remainder in stock. He owns 120,931 shares, worth approximately $8 million.

Surprisingly, Netflix lets each employee choose the cash-to-stock-option split of their compensation, a rather unusual form of shareholder alignment.

We’d need to know what portion of their wealth is in Netflix stock. I don’t have that information at this time. We note that, since their stock holdings are worth roughly one year of cash compensation, this does not point toward “skin in the game” on this point. Regarding stock-based compensation, it vests over three to four years.

We can also assume that the CEOs’ strong profile is linked to a career spent almost exclusively at Netflix. A mercenary would have already switched companies several times. Furthermore, the separation of powers at the top is a positive sign that helps avoid leaders obsessed with personal glory. Likewise, the sensible decision to refuse to pay an excessive price for WBD is also a step in the right direction.

Capital allocation

First, a company will seek to reinvest its profits in organic growth or, alternatively, through acquisitions; otherwise, it will return capital through dividends or share buybacks.

Here, Netflix generates enough profits to exceed its capacity for organic reinvestment and finances its share buybacks through positive cash flows.

As mentioned, the decision not to outbid Paramount-Skydance’s offer is a positive development, described as “nice to have at the right price, not a must-have at any cost.”

One thing I’m trying to avoid over time is a downward revision of guidance, which hasn’t occurred in recent years.

In previous fiscal years (2023–2026), the company has delivered on its guidance and addressed challenging issues during earnings calls. The company’s policy does not encourage sandbagging: “The guidance we provide is our actual internal forecast at the time we report, and we strive for accuracy.”

The only issue that needs to be addressed is that the company reduced the granularity of its non-financial data (subscribers, engagement) at the very moment when that data was showing signs of weakness.

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4. The two theses

I believe the best way to decide whether an investment is sound is to pit the bullish and bearish theses against each other. That way, I know what could happen, and knowing your position well helps you endure downturns and protects you psychologically. Considering only the bear thesis is alarmism; considering only the bull thesis is wishful thinking.

Why did the stock fall?

Netflix has lost nearly 40% from its highs due to several factors:

• The decline started with Q2 ‘26 results that were in line with Netflix’s guidance but below analyst consensus, along with the simultaneous announcement of a cut to the “What We Watched” engagement report, moving from semi-annual to annual publication starting in 2027. It’s the second disclosure reduction in ~15 months, as Netflix hasn’t published subscriber details since 2024.

• Then, Q4 ‘25 to Q2 ‘26 marks the third consecutive quarter of slowing growth. Even though overall growth remains positive on an annual basis, the market is concerned about these consecutive declines.

• Additionally, on October 27, 2025, Netflix reported a one-time Brazilian tax charge of $619 million, which lowered analysts’ estimates and triggered a 12% drop in the stock price.

• Furthermore, the decline continued in connection with negotiations over the acquisition of Warner Bros. in December 2025, when the stock lost 12.9%. Shareholders and the market were wary of the deal’s terms. In February ‘26, a rebound occurred following the halt of discussions, which was a positive signal for capital allocation.

Bear thesis

Slowdown in Growth

Growth is slowing quarter after quarter, which ultimately hampers margin expansion and net income growth.

It is possible that increased competition from other streaming services, consolidation among existing players at Netflix’s expense, and indirect competition will ultimately prove too much for Netflix and for the entire industry.

In that case, even if the market expands, no player will turn a profit.

The U.S. and Canada market appears close to saturation, with growth of only +10% in Q2 ’26, compared to +21% in LATAM and +16% in APAC.

Furthermore, the loss of data resulting from the reduction in the “What We Watched” engagement metrics is detrimental and could be used to mask Netflix’s poor results.

We should also consider competition from all other forms of entertainment that could take over. Customers are always free to leave.

Disruption risk

Generative AI is a potential source of disruption: Netflix could benefit from it in the future or be harmed by it. Independent studios or other tech companies could leverage these new technologies to create better content, faster, and at a lower cost.

Legal risk

Given Netflix’s size, acquiring competitors would likely face regulatory opposition. It would have to settle for acquiring fledgling studios or platforms.

This last point is more hypothetical, but worth mentioning:

There is always a regulatory risk, particularly in the European Union (a region known for such regulations…) with quotas for high-cost European content or a requirement to disclose the algorithm data on which part of its competitive advantage is based.

Bull thesis

Netflix is the No. 1 streaming service

I’ll go back to the beginning of the section on competitive advantage, which, in my opinion, is the jewel in the crown:

I invite you to ask the people around you: If you had to keep just one streaming service, which one would you choose?

I may be biased, but for me, the unanimous answer is Netflix—even among those with children, where you might expect competition from Disney+.

This is my firm conviction on this matter, which resonates with the times I hear that Netflix has won the streaming war beyond just market share.

And I don’t know about you, but at the same price point as YouTube Premium and Netflix, I find Netflix to be of much higher quality. Netflix is the king of entertainment accessible from home, entertainment that’s shared much more readily than a video game.

Growth Drivers

The company still has significant opportunities to increase its revenue in its market by taking market share from television, where it currently holds only a 7% market share, in a global market that continues to grow at a single-digit rate.

In addition, the following segments can also contribute to continued growth:

• Advertising, projected to generate $3 billion in revenue

• Video games, which are growing rapidly, particularly among children, with nearly a 600% increase year-over-year, from a small base though.

• Live sports, currently held by national networks. One can imagine that Netflix’s clout allows it to secure these popular events. That said, this is no different from other streaming players. Rather, it’s a point in favor of these players over traditional TV.

While Netflix has grown in terms of subscriber numbers, it can also grow by expanding the depth of its offerings with more channels per user.

Capital Allocation Discipline

Netflix has demonstrated excellent discipline, particularly through its refusal to acquire Warner Bros. Discovery: most acquisitions result in a price that exceeds earnings, especially during periods of market optimism or euphoria. It’s reasonable to assume that this discipline can be put to good use in segments that serve as growth drivers.

Furthermore, Netflix possesses the essential assets (the brands of its internally produced hit series and its distribution network) and can acquire AI studios to address the growing threat of disruption without raising red flags with regulators, as long as these studios remain small. Generative AI is already being used in approximately 300 productions by 2026.

Amid the arguments for the bear case, there is a fine line that Netflix’s management can reasonably tread. They certainly have the cards to pull this off. It remains to be seen whether they’ll do so intelligently.

Before the bear case plays out, the bull case metrics would begin to stall:

The occurrence of a single trigger is not enough to invalidate the bull case. If the case is called into question, I will publish an update to assess the new situation.

The decline in ROIC between 2021 and 2022, combined with a slight decrease in the number of users, triggered a drop of nearly 75% between 2021 and 2022. The recovery was spectacular through 2025.

Blind spots

Some arguments aren’t getting clear enough. To give you an overview, I’d like to share them with you, as they’re worth mentioning:

A central thesis in my investment strategy is the fragmentation of the world into geopolitical blocs, which is a megatrend. In my view, Netflix fits well into a multipolar world, with its international studios, and relies less on American soft power than other players. On this point, I think it’s better than Amazon. But it’s hard to generalize beyond my personal opinion.

The argument about the advertising/live sports/AI narrative underpinning the bull case isn’t unique to Netflix, but rather applies to its sector; it’s difficult to distinguish between the players at this point.

I would also have liked to tell you that Netflix is more profitable due to the scale of its distribution. Backing up this claim with facts is more complicated than I thought. The best approximation comes from ROCE. As a reminder, this ratio is calculated as Net Operating Profit After Tax (NOPAT) divided by Capital Employed (equity + financial debt).

It should be noted that Prime Video is a division of Amazon, and that the ROCE figure is Amazon’s, which includes the Cloud segment (high margins) and the Retail segment (low margins), and is likely underestimated. Apple has a very high ROCE due to a very low capital base. Apple TV is not, a priori, intended to be a market leader.

Any observations regarding Alphabet or Meta would apply equally here.

Finally, information on Netflix’s content distribution is not publicly available. Management cites data as a competitive advantage, which leaves room for withholding information about any challenges encountered.

5. Price scorecard

The numbers only make sense if you’ve read the two theses section. As Aswath Damodaran puts it, “numbers without stories to back them up are exercises in financial modeling.”

The scorecard below requires an important assumption, being the continuity of a normal economic environment, i.e. without recession, major credit event, market crash.

I will someday write an article about how to deal with these conditions.

Any of these could push the stock below the bear case shown here, temporarily, independent of the company’s underlying performance. All figures in the scorecard are pre-tax and pre-fees. Run the numbers for your own situation before drawing conclusions.

The price scorecard map

The assumptions are the following:

• For the revenue, it goes from 6% per year in the bear case, to 10% per year in the central case, and 15% per year in the bull case. Quite conservative for the bull case.

• The margins may expand thanks to the operational leverage in the central and bull cases, but as conservative assumptions, they stay flat at 24.3% (the one from the FY2025).

• Share buybacks of 4% per year in the central and bull scenarios.

The selected P/E ratios range from the 2022 low to the July 2025 high.

My conviction sits at the $172.5 scenario or higher (bull case x PE 35). Also consider that the gap could close next year ; Netflix could double. In that case, I would probably sell and find another candidate.

The re-rating will mainly depend on the catalysts covered in the next section.

6. Momentum

Overall, crossing fundamentals (covered above) with momentum is an excellent way to improve your returns. You’re never right on your own, especially since a significant part of returns comes from the multiple, especially if your horizon is below 5 years.

Catalysts

Next quarter results: They are scheduled for October 20. We’ll see whether growth rebounds, stagnates, or continues to slow. Will the operating margin rebound in the second half of the year, as the seasonal pattern would suggest, or will it continue to decline on a year-over-year basis? Advertising revenue compared to the ~$3 billion 2026 target is also something to watch this quarter.

Completion of Paramount-Skydance's Acquisition of WBD: On September 21, 2026, Paramount settled the antitrust lawsuit filed by state attorneys general, the last major obstacle to the deal; David Ellison (CEO of Paramount-Skydance) says he expects the deal to close “in about two weeks”, so around early October 2026. The stock already seems priced in, but we’ll have to see if there are any potential surprises.

AI disruption: An Adobe-style scenario is not out of the question, with AI-generated competing movies or TV shows hitting the market, given the market’s perceived fears of disruption. This would push the PE ratio toward 10 or 15.

A rerating from superinvestors buying the stock is still possible, but as Bill Ackman already owns the stock, a part is already priced in. Berkshire Hathaway could buy and make the stock go up, but I think there are few that could do so.

When to enter the stock?

The market hates uncertainty and has already started a significant decline in the share price. So you need to track the price to see where it bottoms. I see three possible strategies:

Buy the dip:

• I would wait for analysts to stop cutting their outlooks.

• The likely target zone is a PE TTM of 20-25. It’s hard to give a PE ratio as a support level, since the company has broken through its last support (200-day moving average) on the way down.

• This works if Netflix surprises to the upside next quarter, and fails if Netflix disappoints or worries the market for a second quarter.

Capitulation:

• It’s possible we head toward a bearish scenario if the company reports well below expectations. In that case, you have to wait for capitulation, which shows up through several signals, such as above-average volume, or RSI <20.

• So far, Netflix hasn’t shown signs of capitulation.

DCA: the way to reduce risk (the non-choice) is to run a DCA every month, if that’s your approach. I personally prefer to enter in one or two tranches.

As for me, I plan to open a position once the price stabilizes, and I’ll let my subscribers know when I do. I’m prepared to add to the position on further weakness or capitulation. There’s no rush: the thesis will probably take 2-3 years to play out.

Final Thoughts

Netflix has won the streaming war, but the battle for user attention is a war of the mind where every form of entertainment fights for its place.

I’m fairly bullish on this stock because I believe the forces at work in the market structure and its competitive advantage are working in its favor, and that the average user prefers Netflix. But only time will tell if management can implement the right strategies to sustain its impressive growth. Here, memory is the key to our hope: Netflix has impressed us in the past and may well continue to do so for longer than we think.

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Disclaimer: This content is for educational purposes only and does not constitute investment advice. See our full disclaimer.

This piece is also available in 3 parts, with a link for the first one.

This article will follow the format I use in my deep dives. It will consider a business review covering the products and services sold by the company, followed by an examination of the market structure and competitive advantage, followed by an assessment of the company’s life cycle and a review of market segments (such as quality, value, etc.). Then in the second part, the financial aspects, a management analysis, and capital allocation, and in the third and last part, an outlook based on bullish and bearish arguments and the company’s expected returns.

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Here are the two first articles in case you missed it:

Part One - The business

1. Introduction

The first question to ask is: “What does the company sell? What products and services does the company offer?”

This is the core of the study, around which all other responses will revolve. It is therefore necessary for you to review the various products and services and the markets in which they are sold. This requires you to know what market shares they hold.

Obviously, a company does not operate in a vacuum; it is necessary to identify its environment—that is, its customers, suppliers, and competitors.

• What are the company’s customers looking for in this product? How many are there? Do they purchase the product directly from the company or through a distributor? Does the company have a major customer that poses a risk?

• As for suppliers, who are they? Is there a critical dependency on any of them, or does any of them have pricing power?

• For competitors, we will seek to determine their market shares and their products.

Finally, at this stage, we can ask ourselves what ethical issues or risks the company faces. This is something I consider early enough in my research to rule out candidates who wouldn’t be a good fit for me.

Once you’ve taken this initial look at the big picture, the question to ask yourself comes back to the products: “Am I able to determine whether the company’s products or services are superior to those of the competition?”

That’s Peter Lynch’s famous “Invest in what you know.” If you can answer that question, great—you’re probably onto something. For example, in my own circle, I’ve noticed that the people I meet place a higher value on iPhones. That my kids, like everyone else, always prefer Coca-Cola to any other drink on earth. That if people had to keep just one streaming service, the majority would choose Netflix.

There are many excellent investment opportunities available to us as individual investors, and they do not require any special skills.

Conversely, if you are unable to determine whether the company outperforms its competitors based on anything other than the numbers, you will always have a hard time keeping your cool during a market downturn and forming a clear opinion about your investment.

A 2018 study by Hendrik Bessembinder titled “Do Stocks Outperform Treasury Bills?” indicates that, among stocks listed in the United States between 1926 and 2016 (approximately 25,300 securities), only about 4% of the securities accounted for all of the stock market’s net wealth creation over that period. The remaining 96% did no better than one-month Treasury bills (i.e., short-term U.S. bonds).

A follow-up study, expanded to include 62 countries over the period 1990–2020, found an even more concentrated result: 2.4% of the world’s publicly traded companies accounted for all $75.7 trillion in net stock market wealth creation during that period.

The takeaway from this point is that the stock market’s performance is driven by a very small number of winners and a myriad of losers. And it is these few companies that will be the gems of your portfolio.

These are companies that I refer to as “category definers,” because they have helped create a product category in which they dominate the competition—or better yet, have no competition at all.

This superiority stems in particular from the market structure and the differentiation these companies have succeeded in achieving in their market.

2. Market Structure

2.1 The Model of Pure and Perfect Competition

One of the first topics I studied as an undergraduate economics major was the model of pure and perfect competition, because it provides the framework within which many companies operate.

We’ll see why this model is the bane of shareholders. It has several characteristics:

The implication of these four points is that, in this model, firms’ long-run profits tend toward zero, because any profit will attract competitors. Increased competition will drive prices down until producers go out of business, thereby restoring the equilibrium price. The price is therefore equal to the marginal cost (the cost of producing one additional unit), and the return on invested capital (ROIC) is equal to the WACC (the cost of capital).

Agricultural commodities such as bulk coffee, corn, wheat, and soybeans come close to this model: there are thousands of producers selling the same product in a market where anyone in the right climate can start growing that crop, and where price information is available on international markets. The foreign exchange (forex) market is also similar.

Every company will obviously seek to break free from this model, with varying degrees of success depending on the “imperfections” present in its market—which are referred to by the academic term “competitive advantage.” The most famous investor of all, Warren Buffett, coined the term moat to describe this concept, and it is now commonly used in the financial world. It is precisely because it is possible to break away from this model that individual investing makes sense.

Before examining the specific mechanism that enables this escape (the “moat,” discussed in more detail below), it is helpful to first determine where the company falls on the spectrum of market structures.

2.2 Market Structure: From Monopoly to Niche

On one end of the spectrum is the model of pure and perfect competition, and on the other end is the monopoly, which poses societal challenges. In between, there are several gradients worth exploring:

• Monopoly : A single firm serves the market. Since users cannot find alternatives to the firm’s products and services, the firm’s bargaining power is disproportionate. The regulator typically seeks to regulate or break up this monopoly, or to turn it into a public utility. Monopolies often exist in the form of public utilities (Con Edison in New York, PG&E in California, and airports when there is only one at the local level, such as in Zurich or Florence). Often, this type of market is maintained when there is no practical reason to allow competition to enter.

• Duopoly : Two dominant players share most of the market—for example, Visa and Mastercard in payment networks, or Airbus and Boeing in long-haul aircraft. They manage to coexist because neither has any interest in triggering a price war that would hurt both of them equally. This type of market is often very profitable for shareholders, and it is easy to track the market by following the two leading companies.

• Oligopoly: A handful of players (usually 3 to 5) share a market with high barriers to entry—competition may be divided into market segments allocated to each player. The goal is always to avoid a price war, which would be costly for all players. It is also possible for all players to agree on a market price; this is known as a cartel. Such an agreement tends to draw the ire of regulators.

• Niche market: a market that is too small, too specialized, or not glamorous enough to attract serious competitors—there’s no need for a legal monopoly or a patent; the market’s size or specialization itself acts as a barrier (no one bothers to enter a market whose potential is considered too limited)

• Pure and perfect competition: no firm makes a profit.

The general rule to remember is that the best competition is no competition at all, or as little as possible.

This classification provides a useful overview of the market and its existing players. We must now examine the reasons why new players cannot enter this market—that is, the company’s competitive advantage.

2.3 Competitive Advantage (Moat)

This article is not intended to be exhaustive on every point, so I will outline the main moats you should know about:

• Switching costs: switching costs — it’s expensive or a hassle to leave,

• Network effects: The product becomes more useful as more people use it

• Brand: Customers pay more for the same product because of the name

• Economies of scale: The largest product is structurally less expensive than the others because fixed costs are spread out

• The difficulty of replicating a product

• Regulatory or intangible assets: licenses, patents, rare permits.

Often, the best companies have multiple competitive advantages that grow stronger over time

On the other hand, keep in mind that what can reshuffle the deck within the market is technological change, which is a double-edged sword: it can help established companies solidify their position—or work against them.

Let’s take Coca-Cola as an example. Consumers place a higher value on Coca-Cola by choosing it over a cheaper alternative. Decades of advertising and history have linked it, in the minds of consumers, to sporting events, sharing, and a polar bear. Behind this beverage lies the entire world of American soft power.

Yes, the product can be replicated by any chemist, but the name and visual identity remain protected by a trademark.

In terms of the costs of change, Coca-Cola has locked out the competition with distribution contracts that are unbeatable due to the volumes sold. At the local takeout restaurant, there’s often a Coca-Cola fridge. Doing without it would mean replacing the fridge (which is certainly sold at a competitive price), and doing without Coca-Cola products would mean cutting back on one of its easy sources of high-margin revenue. If you leave Western countries, your choices for non-alcoholic beverages will often be limited to water, local sodas, or products from the Coca-Cola lineup. The latter are therefore, by nature, much more competitive.

Competitors’ products can threaten the company through e-commerce, reaching consumers directly without going through a century-old distribution network. However, Coca-Cola can still try to acquire the most promising startups early in their development, before regulators block the merger to maintain competition in the market.

Warren Buffet a eu la phrase célèbre: “If you gave me $100 billion and said take away the soft drink leadership of Coca-Cola in the world, I’d give it back to you and say it can’t be done.”

It is important to note that a moat is built over time and that, by its very nature, a new company will not have one. Everything rests on the pillars of superior products and services and high-quality management.

3. Life Cycle and Framework for Analyzing the Initiative

3.1 The Life Cycle of a Business

A company can be viewed in an organic way, as having a life cycle: it starts small with a product or service, then grows and develops a business model that becomes increasingly efficient, enabling sustained growth over time. The business, which initially operates at a loss, eventually manages to turn a profit and sustain that profit over the long term. Growth is strong at first because the company is starting from a small base, then slows over time until it stabilizes. Finally, the decline phase begins, which can occur more or less rapidly depending on the nature of the business.

Aswath Damodaran, professor of corporate finance and valuation at New York University’s Stern School of Business, offers excellent resources, particularly on the corporate life cycle. The images below are taken from one of his articles:

Musings on Markets

The Corporate Life Cycle: Managing, Valuation and Investing Implications

As I reveal my ignorance about TikTok trends, social media celebrities and Gen Z slang, my children are quick to point out my age, and I accept that reality, for the most part. I understand that I am too old to exercise without stretching first or eat a heaping plate of cheese fries and not suffer heartburn, but that does not stop me from trying occasio…

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2 years ago · 159 likes · 4 comments · Aswath Damodaran

Depending on your experience and investor profile, you will likely develop preferences for certain investment life cycles, styles, or factors.

3.2 Investment Styles

We often hear about Quality, Value, and Growth stocks, and we can explain what these terms mean based on the framework outlined above.

• Growth: targets the Young Growth and High Growth stages—the investment is based on the company’s future trajectory, expected revenue, and profits.

• Quality: Targets companies in the High Growth or Mature Growth stages. The company is well-established, as are its competitors; it has one or more moats and is poised for significant future growth.

• Dividend: This strategy targets the Mature, Stable, and Decline stages, where the company generates cash but lacks opportunities for reinvestment. It chooses to return this cash to shareholders in the form of dividends or share buybacks. This category notably includes so-called “cannibal” companies, as their stock price is driven upward primarily by share buybacks.

• Value: Does not target a specific stage but rather a discrepancy between price and value, regardless of the stage. A company can be classified as a “value” stock at any stage of its life cycle. Generally, there is an underlying issue, or the market perceives it that way.

This is a simplified explanation: when you look at the details, a company may share characteristics of several different investment styles. Similarly, there are several investment styles, and they can coexist within the same market.

Beginner investors tend to turn to dividend-paying stocks for their safety and the almost magical appeal of receiving regular dividends. However, the lack of business growth and opportunities for reinvestment often leads to low returns that underperform the benchmark index.

They will also tend to gravitate toward value stocks, thinking they’re getting a good deal (“Company X has a P/E ratio of 5, while its competitors have a P/E ratio of 15—I’m getting a great deal”). In most cases, the reason is valid and stems primarily from issues related to the company’s business or future prospects.

Growth stocks are also very popular because, even though most of them will underperform the index and carry risk, a handful of winners offer the prospect of multiplying your investment in just a few years.

Ultimately, quality stocks will offer the best risk-return ratio due to their competitive moat and long-term growth prospects. As a result, they often command higher prices than other stocks. As with value stocks, the right time to invest is when the company appears (the word “appears” is important) to be facing temporary difficulties.

For educational purposes, I believe the best choice of three stocks to start with is “quality” stocks, given their long-term potential, financial stability, and competitive advantage.

Due to data quality limitations, I can provide a performance breakdown covering the past 15 years, but not beyond that. We have been in a nearly continuous bull market since then, with the exception of dips in 2018, 2020, and 2022.

3.3 Investment Factors

Investment styles can be cross-referenced with factors, which incorporate this classification and add several points:

• Size (small-cap stocks have historically outperformed large-cap stocks over the long term). Stocks are classified as small-cap when their market capitalization is between $300 million and $2 billion, mid-cap between 2 and 10 billion, and large-cap above that.

• Momentum (stocks that have performed well over the past 3 to 12 months tend to continue doing so in the short term). This reflects a well-known investor bias: investors tend to buy what’s rising and sell what’s falling.

• Low volatility (the least volatile stocks offer a surprisingly good risk-return profile, contrary to intuition),

Aswath Damodaran wrote, “A good valuation is a bridge between stories and numbers.” We will therefore move back and forth between the qualitative aspect—part of which we have already presented—and the quantitative aspect, more prominent in the “Financials” section. By cross-referencing the data from the first and second parts, we will provide an overview of the company’s current situation, before exploring its future in a third part.

Part 2 - Financials and Management

Analyzing financial statements is, on the one hand, very straightforward, as one can focus on a few key indicators and obtain initial results that are both robust and compelling. This is also the area where finance professionals have the most data readily available and the greatest ability to interpret it using relevant analytical frameworks.

Gaining an advantage over them in this area is very complex and requires in-depth work. In a future article, I’ll discuss how, despite the excellent candidates who choose a career in finance, individual investors have undeniable advantages. Stay tuned.

One of the key advantages of investing in the stock market is the equal access to information shared with all market participants—namely, public information. To form your own opinion about a company, you have access to the same documents at virtually the same time, and insiders who possess an informational advantage are required to disclose their stock purchases and sales. You’re therefore on a level playing field with other investors and can buy and sell shares in some of the world’s best companies, often for less than $1,000, with trading available nearly 40 hours a week.

So the battle is being fought in the financial documents, which we’ll look at right now.

The three financial statements

Any company listed on an index must follow a number of disclosure rules specific to its listing. In the United States, companies typically publish an annual report called a 10-K and quarterly reports called 10-Qs, which are available on the SEC’s website (the U.S. securities regulator) or on the companies’ own websites (under the “Investor Relations” section). In addition, companies hold earnings calls—presentations of their results that include a question-and-answer session with analysts—and transcripts of these calls are typically made available afterward.

For the rest of the world, the principle is generally the same. Keep in mind that some companies publish their results only in their own language, which makes them difficult for international investors to understand, or they publish their results on a semi-annual basis. This means that any bad news arrives several months later, which amplifies the market reaction, especially given the long-term outlook.

The three financial statements are the income statement, the balance sheet, and the cash flow statement. Accounting standards exist; the main ones are Generally Accepted Accounting Principles (GAAP) in the U.S. and International Financial Reporting Standards (IFRS) in the rest of the world. IFRS is based on GAAP, with some differences between the two.

I’m keeping this brief on purpose; there’s a lot to say about these topics—enough to fill years of study.

The Income Statement

The income statement is a report that shows how the company generated profit from its operations over a given period. It all starts with revenue, from which costs are subtracted to arrive at operating income—a numerical measure that indicates the extent to which the company is generating profit from its operations. After deducting financial and extraordinary items, we arrive at net income, which measures the amount of money available to shareholders.

The key items to look at are:

• Revenue

• Gross Margin and Operating Margin

• Net margin (if I have $1 in revenue, how much profit do I make?)

• Financial and Non-Recurring Items

• Net income

Here is an example from Booking’s 10-Q for the period ending June 30, 2026.

Depending on the business, some companies handle very high volumes with very low margins (e.g., retailers like Walmart or Aldi), while others handle low volumes with high margins (e.g., service or luxury companies). It all depends on the industry and the company’s competitive advantage. It doesn’t make sense to compare different industries directly.

Generally speaking, investors view an increase in margins as a sign of a stronger competitive advantage—and therefore as excellent news. This remains a general rule; the specifics should be examined on a case-by-case basis, depending on the context.

The Balance sheet

If the income statement is a movie, the balance sheet is a snapshot. It shows the company’s assets (and net worth) and how they are financed. The sharpest minds will have noticed that the balance sheet is… balanced: assets always equal liabilities.

A distinction is made between assets (items to be financed) and liabilities, which represent the source of financing.

These assets and liabilities can also be either current—with a useful life of less than one year—or noncurrent—with a useful life of more than one year.

This leaves us with four line items on the balance sheet, as shown in the image below:

The key components are primarily found in the fixed assets. Peter Lynch, the famous investor, has said that he considers current assets to balance each other out, so that only the fixed assets need be considered—whether purists like it or not.

Here is an example from Booking’s 10-Q for the period ending June 30, 2026.

The key items to look at are:

• Inventory levels

• Cash and cash equivalents

• The ratio of long-term debt to equity

• The number of shares

But if I had to choose just one, it would be the debt-to-equity ratio (= (long-term debt - cash and cash equivalents) / shareholders’ equity).

Peter Lynch also noted that a healthy debt-to-equity ratio could be as high as 50 percent. Beyond that, in the event of an economic downturn, the company would be exposed to a spiral of debt that could lead to bankruptcy or the dilution of existing shareholders.

You’ll notice that in the example, Booking has negative equity. This is the result of share buybacks carried out year after year. It’s not a problem—neither from an accounting nor a business perspective—and sometimes occurs among large-cap companies that have conducted a significant number of share buybacks.

Another key factor is the change in the number of shares. Most Quality companies will buy back shares, either to reduce the number of shares outstanding or to pay a dividend. Share buybacks offer several advantages:

• It is a sign of confidence in the future of management

• Fewer shares can cause the price to rise more easily (or fall). In 2021, Xavier Gabaix (Harvard) and Ralph Koijen (University of Chicago) published “In Search of the Origins of Financial Fluctuations : The Inelastic Markets Hypothesis” — one of the most consequential papers in modern finance. Their central finding : financial markets are far less elastic than classical theory assumes. In equity markets, $1 of net inflow moves total market capitalisation by approximately $5.

• The tax treatment of share buybacks (capital gains) is generally more favorable than that of dividends. And as long as you don’t sell, there is no tax.

Growth companies have much greater capital needs and typically issue new shares, a process known as dilution. If you’re diluted by 4%, that amounts to a 4% loss on your investment. However, these new funds will enable the company to grow—presumably by more than the amount of that dilution. This is a very strong implicit assumption in growth investing. It isn’t necessarily a bad calculation for the best companies, but dilution raises the bar that your investment must clear to achieve the expected return.

The Cash Flow Statement

This last document is very interesting because it shows us where the cash is going. The table starts with net income and breaks down cash flow into three categories:

• Operational Workflows

• Investment Flows

• Funding Flows

Similarly, here is another example from Booking in its 10-Q for the period ending June 30, 2026.

The key items to look at are:

• What is the difference between free cash flow (FCF) and net income?

• How many years of operating income would it take to pay off the debt?

• How many share buybacks or dividends are made?

• What are the amounts of stock-based compensation?

Based on the data in the financial statements, we calculate an extremely useful metric: free cash flow (FCF). It is calculated by subtracting capital expenditures (CapEx) from operating cash flow (Cash Flow from Operations).

It answers the question: “How much cash is actually left in the coffers to pay off the debt or pay dividends?”

FCF is a more accurate measure of a company’s ability to create value, unlike net income, which can be manipulated more easily through accounting.

It is necessary to identify the differences between the two.

Just as in a police investigation, reading one of the documents provides information, but it is only by cross-referencing all three documents that one can form a comprehensive picture of the financial situation. This statement can, in fact, be extended to our entire study of quantitative and qualitative factors.

All three documents contain numerous footnotes explaining how the data is calculated in cases where questions about accounting treatment may arise. They often include all sorts of subtleties intended to make the situation appear more favorable. The devil is in the details—in this case, the accounting details.

We mentioned Aswath Damodaran in the previous episode. Here is an overview of the key financial items and expected behavior based on the company’s life cycle for the three types of cash flows.

Profitability Ratios

Growth indicators are fairly straightforward: simply compare growth with recent fiscal years, focusing primarily on revenue, margins, and profit (FCF and net income). Profitability indicators are a bit more complex and warrant your attention when cross-referencing the data. In fact, market concerns often center on these points. Therefore, the ability to interpret these figures is essential.

Investment

Here is a non-exhaustive list of profitability metrics, starting with my favorite, ROIC.

ROIC (return on invested capital) :

• Formula: NOPAT (operating income after taxes) / invested capital (debt + equity, excluding excess cash)

• Purpose: It measures the return generated on the capital actually invested in the business—including debt and equity—but not cash.

• Meaning: If a company invests $1 through debt or equity, with a ROIC of 20%, its investment generates $0.20 in operating income after taxes (as long as the ROIC remains at that level). A ROIC higher than the WACC (weighted average cost of capital) is profitable.

• Comments: ROIC can be misleading for companies that engage in aggressive asset write-downs or share buybacks.

There is also a variant called ROCE.

ROCE (return on capital employed)

• Formula: EBIT (operating income before tax) / capital employed (equity + total debt). This includes any excess cash.

• Purpose: It measures the return generated for each euro of capital used.

• Meaning: If a company invests $1 in capital (debt + equity), with a ROCE of 20%, it generates $0.20 in operating income before taxes (as long as the ROCE remains at that level).

• Comments: Does not take into account non-operating cash flows (such as inventory value, which is important for oil and mining companies). Asset impairments automatically push ROCE higher. Misleading for companies with large amounts of cash.

ROE (return on equity) :

• Formula: net income / shareholders’ equity

• Purpose: Measures the return generated for the shareholder on the capital they have contributed,

• Meaning: If a shareholder invests $1, with a ROE of 20%, this generates €0.2 in profit for the company.

• Comments: It may be artificially inflated by high leverage or by low equity (aggressive—or even negative—share buybacks).

These three indicators should be analyzed in conjunction to assess the quality of the business and its management. It is helpful to compare these three metrics for the company with those of its competitors. Note that this is more difficult for companies with several completely different business lines, such as Amazon, which combines retail operations with data center operations.

There’s also ROA, which I don’t use very often:

ROA (Return on Assets) :

• Formula: net income / total assets

• Purpose: Partially corrects the bias in ROE by including debt in the denominator—less sensitive to leverage, more appropriate for comparing companies with different capital structures

• Meaning: If the company generates $0.20 in net income for every $1 of total assets, its ROA is 20%.

• Comments: This metric is less precise than ROIC/ROCE when measuring pure operational efficiency, since total assets also include non-operating assets (cash, equity investments) that ROIC specifically excludes. Furthermore, net income needs to be examined to determine whether it provides an accurate picture of reality.

Here is a summary of the four indicators:

Also note that it is necessary to evaluate investment opportunities and weigh them against profitability: To generate $1 million (in NOPAT), for example, one could:

• Invest $10 million at 10%,

• Invest $5 million at 20%,

• Invest $3 million at a 33% rate.

A company will be able to continue investing as long as its resources allow, depending on its market and the creativity of its management.

Net Margins

There are two key indicators for margins.

Net margin:

• Formula: net income / revenue

• Profit: what actually remains for shareholders from every dollar of revenue, after all expenses have been deducted,

• Meaning: If the company generates $1 in revenue with a net margin of 20%, $0.20 in net income remains for shareholders (as long as the net margin remains at that level),

• Notes: Distortion may occur if the company has subsidiaries in which it owns between 50% and 100% of the shares—in which case, minority interest must be adjusted.

FCF margin :

• Formula: free cash flow / revenue

• Usefulness: How much of every dollar in revenue actually remains as cash after capex is deducted,

• Meaning: If the company generates $1 in revenue with a 20% FCF margin, it converts $0.2 of that revenue into actual available cash (as long as the FCF margin remains at that level),

• Notes: There may be some distortions, particularly if a company sells subscription-based services: only the portion that has already been completed and billed is recognized, not the entire plan.

It is important to compare and analyze the differences between net income and free cash flow—and thus between their margins. This is a useful exercise to perform during your analysis to gain a thorough understanding of specific accounting practices.

A few other metrics that I don’t use:

EBITDA: Earnings Before Interest, Taxes, Depreciation, and Amortization. This metric omits too many important factors to provide an accurate picture of the business’s profitability. Charlie Munger had a famous remark on this subject:

Worse still, some companies prefer to report adjusted EBITDA.

A word of advice: Use the figures reported in accordance with accounting standards as your point of reference. Generally, those who present you with adjusted or non-GAAP figures do so to paint a rosier picture of reality—in other words, to make a sales pitch—rather than to tell the truth.

Every rule has its exception: I recently saw a presentation of results from Novo Nordisk that showed sales figures adjusted for two factors: one was a reversal of an accounting provision (a valid reason), and the other was due to an impairment charge related to discontinued drugs (a debatable reason). I’ll leave you with the image below, which pretty much sums up my opinion on the matter:

Here is a summary of the key profitability metrics:

3. Management

There is a fundamental problem between shareholders and managers: the manager might seek to line his own pockets with shareholders’ money instead of acting as a good steward. This has been theorized by several well-known authors.

The renowned Adam Smith had already pointed out in *The Wealth of Nations*:

The directors of such companies, being the managers rather of other people’s money than of their own, it cannot well be expected that they should watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own.

In 1976, a seminal article by Michael Jensen and William Meckling (“Theory of the Firm: Managerial Behavior, Agency Costs, and Ownership Structure,” Journal of Financial Economics) defined agency theory, a famous milestone in the history of management.

They define the agency relationship as a contract under which the principal (the shareholder) delegates decision-making authority to an agent (the manager), and argue that if both parties seek to maximize their own utility, there are good reasons to believe that the agent will not always act in the principal’s best interest. It was this article that gave rise to the term “agency costs”—the cost of this conflict of interest.

The goal of this entire section will therefore be to answer the following questions:

• Who are these managers?

• Are they effective?

• Can I trust them with my money?

The order of the questions is designed for educational purposes. When analyzing actions, you will inevitably ask yourself all three questions at the same time.

To assess the management team, simply asking your favorite AI a question, reviewing the financial documents, and taking a look at LinkedIn should provide you with all the information you need.

Management Effectiveness

Based on my studies in management and my experience as a project management professional, the theoretical definition of a good manager is based on performance indicators and their ability to meet them. It is very difficult to distinguish a good manager from a favorable situation. This point is essential: a good manager is often considered as such because they are successful.

The challenge here will be to distinguish between economic conditions and the manager’s performance.

One way to do this is to examine the track record—that is, actual performance versus promises—and thus compare the set goals with the actual results using the financial statements from recent fiscal years.

The renowned Warren Buffett wrote in his 1979 letter to shareholders:

You’ll notice the characteristic AI style of “it’s A, not B”—nearly 50 years ahead of its time. A pioneer.

In practical terms, this quote means that you can significantly increase your profits by investing heavily, even with a low rate of return. It’s like saying that to double your savings, you can either double your existing capital through your investments or contribute the same amount from your savings.

True management competence is measured by the return on capital already invested.

Ideally, then, you’ll want: excellent management capable of generating very strong returns on invested capital, along with the reinvestment opportunities inherent in the business. Ideally, you’ll want plenty of both if you’re taking a long-term view.

Its management ability is measured by capital allocation, which varies depending on the stage of the life cycle:

• First and foremost, a company will finance its organic growth through items such as capital expenditures, R&D, and working capital needs. This is the best use of capital as long as the return on that reinvestment exceeds the cost of capital. As the company grows, these opportunities diminish over time. In economics, this is known as the law of diminishing returns.

• If there is capital remaining beyond what organic growth can absorb at a good rate of return, three options are available: external growth (M&A), dividends, or share buybacks. Be careful, though: external growth is generally a bad bet for shareholders. Personally, I prefer to avoid share buybacks, which are often based on overly optimistic assumptions and coincide with market highs.

• Management is expected to return to shareholders any funds that cannot be invested with a sufficient rate of return.

• If you invest in dividend-paying companies, check their ability to pay dividends during difficult times (COVID-19 in 2020, the Global Financial Crisis in 2008, etc.).

Also keep in mind that, in a young company, good management is the source of competitive advantage, and that advantage will grow over time. Poor management—or management grappling with structural challenges in its business—will see its competitive moat erode and, consequently, its profitability decline.

Trust

The best way to earn management’s trust is to make sure your interests are aligned with theirs.

Nassim Nicholas Taleb in his 2018 book, Skin in the Game: Hidden Asymmetries in Daily Life, describes a concept that has since been widely cited: “Skin in the Game.”

If the manager holds a significant—or even a majority—stake in the company where you’ve invested, your interests are aligned because he shares your goal: to drive up the stock price and thereby maximize your wealth.

We will therefore prioritize seeking out founding executives, who have the advantage of holding a significant stake in the company and possessing a long-term vision. The superior performance of owner-operators has been proven over the long term, due to the natural selection that occurs over time between founders who are excellent managers and those who stagnate or go bankrupt.

When it comes to CEOs who are not founders, it is important to review their compensation plan in particular: Is it in cash? In stock? What performance goals is it tied to?

By choosing a founder who runs the company, you stack the odds in your favor, but it doesn’t guarantee success. I experienced this firsthand as a counterexample when I invested in a promising Italian consulting firm. For several reasons, I sold my position two years ago, one month before the bombshell in September 2024: The press reported that the founder and CEO of Digital Value, Massimo Rossi—founder, CEO, and largest shareholder of Digital Value (an Italian IT company listed on the Milan Stock Exchange)—was arrested on October 16, 2024, for corruption and rigging public bids in the Sogei case (the IT company of the Italian Ministry of Economy). He resigned that same day, and the stock price plummeted during the trading session. In less than a month, the stock plummeted by 80%. It was delisted a few months ago.

The executive had previously been praised for his management skills and vision. This is just one example among many of the risks associated with portfolio concentration and what is known as company-specific risk.

Furthermore, a good place to assess management’s integrity is in the financial statements. I’ve previously discussed metrics that are adjusted to paint a rosier picture than usual, but management under pressure to deliver good numbers may be tempted to shift their perspective. To name a few examples, I’m thinking of recurring non-GAAP restatements from one quarter to the next, changes in accounting estimates (depreciation periods, provisions), aggressive revenue recognition, and “exceptional” expenses that occur too frequently to be truly exceptional.

The devil is in the details—in this case, accounting details.

This section concludes the static analysis of the company and helps address some initial questions regarding the quality of the business and your desire to keep it in your portfolio. The next step will be to look ahead, considering both bullish and bearish scenarios, and to estimate an expected return based on the company’s possible futures.

Part Three - The Outlooks

1. The Two Theses

The goal of this section is to present the facts on both the upside and downside possibilities. This is meant to guard against two well-known pitfalls:

• Only considering the upside is wishful thinking, which can cost you dearly in monetary terms.

• Only considering the downside is catastrophizing, which can cost you dearly in terms of regret.

Having solid projections about the future will make it much easier to hold positions psychologically, because you’ll always have a rational anchor with arguments to support you or guide your decisions. Doing nothing is also a decision.

Note that if you don’t have the facts to answer the questions below, your investment thesis isn’t solid, and you’re better off moving on and investing in another company or another sector.

The same works for a stock that has risen sharply — in that case, it’s the reverse:

• Results above expectations

• Guidance raised

• Macroeconomic factors

• Company-specific catalysts: an influential investor taking a stake, a major contract signing, a technological breakthrough

Next, we look at the bear thesis. It generally builds on the “why did the stock drop” elements, going one level deeper:

• Loss of market share to competitors.

• Operating margins under pressure (rising costs, falling selling prices).

• Excessive debt levels or insufficient cash (cash burn).

• An outdated or disrupted business model.

• Management changed strategy, and products no longer sell because they no longer address the right needs.

• Is this a structural problem or a conjunctural one?

In light of this, we must ask ourselves what evidence supports these fears, and whether they are substantiated:

• Analysis of financial statements (balance sheet, income statement),

• sector reports,

• Comparison with peers.

• Supplier and Customer Analysis

To take this line of thinking all the way through, ask yourself the following questions: What if the bear thesis is really true? What does that mean?

The idea is to quantify the impacts described above.

At the end of your argument, you should be able to identify clear criteria that allow you to conclude that the bearish thesis is valid. For example:

• Revenue growth of X% or less

• Margins under Y%

• Competitors’ market share exceeds Z%

Generally speaking, some of the arguments raised are true, but the company will be able to address them easily. Then put yourself in management’s shoes and ask yourself what options they have to remedy the situation. That is the whole point of the bullish thesis.

What specific actions could management take? They can generally:

• Launching new products or changing strategy,

• Start a price war (very bad in the short term),

• Take over a troublesome competitor,

• Focus on its core business by selling or divesting segments,

• Reduce costs.

Next, check management’s actions and communication

• Is management transparent about the difficulties and credible in its solutions? Does management hit its targets from one report to the next? Are they too optimistic?

• What actions has management planned to take? Every action in the plan should improve the fundamentals and restore investor confidence.

As with the bear thesis, you should be able to identify indicators that confirm the bull thesis. For example:

• Revenue growth above X%

• Margins above Y%

• The company’s market share above Z%

These actions need to produce concrete results that address the difficulties. So we look for catalysts, which are specific events that trigger a significant movement in a stock’s price, or in the market as a whole.

They come in several types:

1. Performance catalysts: the company beats expectations.

2. Market catalysts:
   -Index inclusion: which forces thousands of ETFs to now buy the stock.
   -Coverage initiation: when an analyst revises their target price
   -Short squeeze: an upward market move, or a move above a certain threshold, can force short sellers to urgently buy back their position.

3. Strategic catalysts:

• Buyout or merger: an acquisition offer from a major player.

• Spin-off: separating a business division to reveal the hidden value of a subsidiary, which then gets sold by funds and ETFs whose underlying holding, however interesting, no longer fits their mandate.

• Exclusive partnership: becoming the “preferred” supplier of a market leader.

4. Macroeconomic / regulatory catalysts:

• Interest rate pivot: any change in interest rates, particularly US Treasury yields, changes the yardstick against which all investments are compared.

• Changes in commodity prices.

• The end of a recession, or a price change affecting customers’ budgets.

• Regulatory framework changes.

The event happening is one thing, but remember that the market thinks in probabilities. The price adjusts toward the news as the catalyst becomes clearer and clearer — not at the moment it actually occurs.

I also note the blind spots in my research, so I can keep track of unresolved points that may have slipped through the analysis. It’s not possible to answer all of these questions exhaustively — otherwise investing would just be a matter of computing power. Investing requires acting on imperfect information: that means making a decision without knowing everything, but with enough information to act with a good level of confidence.

2. How much?

This section addresses the question of profitability, approached through two methods:

• Valuation, which consists of determining the company’s intrinsic value from its own future cash flows, independently of what the market thinks.

• Pricing, which consists of determining how much the market is willing to pay for those same flows, through a multiple.

I’m not a finance professor. So I’ll leave it up to you to decide if you’re interested in what Aswath Damodaran—who is one—has to say on the subject. He has plenty of free resources on his Substack, YouTube videos, and books that are excellent reads, particularly his book *The Little Book of Valuation*.

When it comes to valuation, the gold standard is the DCF method, which involves calculating a company’s future cash flows and discounting all of its future cash flows to the present to derive its intrinsic value. This value is independent of the market’s assessment of the company. It is, therefore, an intrinsic valuation method.

Personally, I believe that the information needed to accurately perform a DCF analysis (5- to 10-year growth rate, terminal value, discount rate) cannot be estimated with sufficient reliability for most companies. Having built plenty of projections as a project manager, most initial estimates turn out to be completely wrong — even more so the further out the date, or depending on the quality of your starting assumptions. And having made and seen estimates made, there’s a tendency to land on the number you wanted in the first place. The DCF creates an illusion of expertise based on mathematical and logical reasoning whose foundations are often uncertain.

For this model to be relevant, a suitable company must be predictable, which narrows the range of possibilities.

Pricing, on the other hand, involves valuing the company based on comparables. In this case, you believe that the market is generally reasonable but has misjudged a specific value. It is therefore a relative method, divided into equity multiples and firm multiples.

Equity multiples

PE ratio (price/earnings):

• Formula: stock price divided by earnings per share —

• Meaning: how much the market pays for one euro of annual profit. If a stock trades at 20 times earnings (a P/E of 20), you get back your money with the current earnings in 20 years.

• Comments: depends heavily on the company’s growth and risk: you cannot say based on this unique metric that it is cheap or expensive. PE ratio Sensitive to the same accounting distortions as net income covered in the previous article (one-off items, minority interests). Best cross-checked against P/FCFE below, and the PEG ratio.

PEG ratio (PE to growth):

• Formula: P/E divided by the expected earnings growth rate — corrects the raw P/E to compare different growth profiles.

• Meaning: A P/E of 30 with 30% growth gives a PEG of 1; the same P/E of 30 with only 10% growth gives a PEG of 3. Peter Lynch said that a good PEG ratio is when the growth is equal to the PE (ex: 30% growth EPS with a PE of 30).

• Comments: In the case of a cyclical company, the opposite is true. A company’s P/E ratio will drop at the end of a peak (due to investors’ expectations of a decline in the stock price) and will be extremely high at the trough of the cycle,

P/FCFE (price to free cash flow to equity):

• Formula: share price divided by free cash flow to equity per share.

• Meaning: how much the market pays for one euro of cash actually available to the shareholder.

• Comments: In theory, FCF provides a clearer picture of the company. However, significant changes in investment or credit policies will skew the measurement. It should be compared with the P/E ratio.

PBV (price to book value):

• Formula: share price divided by book value (equity) per share.

• Meaning: how much the market pays relative to what shareholders have contributed or left in the company, on the balance sheet.

• Comments: this was the signature formula of the famous investor Benjamin Graham. Since companies now have significant intangible assets (goodwill, brand, software), this key indicator of value investing is used much less frequently.

PS (price to sales):

• Formula: share price divided by revenue per share.

• Meaning: how much the market pays for one euro of sales —

• Comments: the only one of the five ratios that still works even when the company isn’t yet profitable (young, fast-growing companies). Be careful to compare companies in the same sector, as the same revenue multiple can hide very different margins.

Firm multiples

These take into account not just equity, but the full set of long-term resources available, namely equity and debt, minus net cash, to arrive at enterprise value. The advantage is being able to compare companies with different debt ratios by leveling this base.

EV/FCFF (value to free cash flow to firm)

• Formula: enterprise value divided by the cash available to all capital providers (debt and equity), before any debt service.

• Meaning: how much the market pays for one euro of cash generated by the company and available to all of its capital providers (shareholders and creditors), before any debt service.

• Comments: In theory, FCF provides a clearer picture of the company. However, significant changes in investment or credit policies will skew the measurement. It should be compared with the P/E ratio.

EV/EBIT

• Formula: enterprise value divided by operating income before interest and taxes

• Meaning: measures operating profitability independently of the financing structure (debt vs. equity) and of each country’s tax treatment.

• Comments: allows comparison of companies with very different debt levels without distorting the reading, unlike the PE ratio.

VS (value to sales)

• Formula: enterprise value divided by revenue: it is the firm-side equivalent of PS.

• Meaning: how much the market pays for €1 of sales.

• Comments: it still works even when the company isn’t yet profitable (young, fast-growing companies). Be careful to compare companies in the same sector, as the same revenue multiple can hide very different margins.

We look for a gap between what the company is worth (as described in the two theses section) and the price we pay for it, with the multiples shown above.

In practice, my method does not involve directly comparing a company to a basket of publicly traded competitors. I prefer to build a matrix of scenarios: estimating the company’s future earnings under various assumptions (bear/base/bull), then cross-referencing them with possible multiples. To make this simple and easy to understand for my readers, I use the P/E ratio after adjusting for non-recurring items.

The idea is to identify a range of possibilities using a pricing scorecard in this format. Then, based on the factors in the bull vs. bear analysis, to determine where my conviction lies.

The goal will be to monitor the company over time and verify that it is on track with my profitability assumptions.

Here’s an example I wrote in one of my articles as part of a deep dive into AppLovin.

So we’ll be looking for the valuation target a few years down the road, but in the short term, the stock price could react in an irrational way. I’ll break this down into two parts: fundamentals and investor sentiment.

The short-term volatility will prompt further reflection on investor sentiment, which will be the subject of another series of articles. For now, we are in the process of identifying three stocks as part of a pilot phase, as mentioned in the first article of the series.

That’s how I do my deep dives.

Ultimately, this is serious research that can take hours—or even days—of work. It’s the price you pay for an investment that you’ll be able to stick with over time, and that will help you avoid many mistakes and sleepless nights of doubt.

Final thoughts

In these three articles, we’ve seen the framework I use—and that I’m sharing with you—for selecting individual stocks. I develop investment cases whenever a stock seems like a great buy to me, based on a classification I outlined in another article. This method involves a detailed analysis, but this investment framework does not apply in every case. The next article will focus on how to identify companies on your own and how to screen them using an investment checklist to narrow down the field.

In addition, I invite you to check out the list of educational resources at the link below:

Subscribe now

Disclaimer: This content is for educational purposes only and does not constitute investment advice — see our full disclaimer.

But when building a portfolio, you’re not going to scrutinize every publicly traded company in such detail to determine the optimal mix. No one can seriously analyze the entire public market. World Bank data indicated a total of nearly 53,000 companies in 2025.

You’ll see that day-to-day investing can be broken down into two parts:

• Monitoring its portfolio companies,

• Monitoring everything else, including potential investments.

To make investing actionable, we’ll need to make some choices and simplify things for ourselves. In this article, we’ll discuss the concepts of the investment universe, information gathering, checklist, and watchlist.

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1.Investment Universe

The investment universe describes what you limit yourself to seeing and studying.

Some investors prefer emerging markets, others favor U.S. turnarounds, while still others prefer blue-chip quality stocks or European small-caps. Anything is possible, but as Michael Porter, a professor at Harvard Business School, once said, “the essence of strategy is choosing what not to do.”

This reduction can be achieved in several ways:

-Warren Buffett coined the term “circle of competence”: Which industries and companies do you understand? Better yet, which ones do you understand better than others?

You’ll have a much deeper understanding of your industry than a financial professional who simply waits for the numbers.

-You may be eligible for tax incentives or disincentives in certain markets. For my part, as a French tax resident, I have access to a typically French investment vehicle, the PEA, which is a tax-deferred account that allows me to reduce my tax liability on stocks within the EU. As a result, given equal returns, I would prefer this economic zone.

-Another possible limitation is of an ethical nature, which is a strictly personal matter. For example, no weapons, no tobacco, etc.

-Some investors will choose to limit risk by excluding micro-caps and small-caps (with market capitalizations under $150 million and $1 billion, respectively). Others will seek them out as market segments rife with inefficiencies.

-You can also filter by investment style, including a few well-known categories:

• Quality

• Value

• Momentum

• Dividend

-Another economically relevant criterion is to target sectors based on their intrinsic profitability. The image below provides a sector-by-sector overview of the past 10 years in the U.S.

As you can see, there is a wide range of returns and volatility across sectors. The IT sector leads the pack due to its scalability (adding an additional user incurs almost no additional cost and is essentially pure profit).

The table below lists the sectors to favor and those to avoid when starting out. As a general rule, avoid cyclical sectors when starting out because it is difficult to assess where the cycle stands, the fundamentals vary in quality, and valuations can be high.

2. Where to Find Information

There are many websites where you can find the financial information you need. Among them, here are a few useful resources specifically geared toward publicly traded companies:

• Marketscreener.com, which provides information on both the economy and publicly traded companies

• https://www.alphaspread.com/ to find figures and ratios about a company and its competitors

https://finance.yahoo.com/, as free general-interest media outlets that serve as alternatives to the major (paid) business newspapers.

• Your broker. I started by shortlisting a lot of companies through my first broker, deGiro, whose company profiles are well-done—and, in my opinion, better than Interactive Brokers’.

There are several ways to find stocks:

• The list of major indices (S&P 500, Stoxx 600 in Europe, Nasdaq 100)

• Screeners, including TradingView, which lets you customize just about every possible setting. WARNING! Using this method to find good companies is a great way to get taken advantage of: often, if a company is undervalued, it’s because there’s a problem.

3. The checklist

The idea in the previous section was to come up with names. Let’s say you come across a new company. My suggested approach is to spend a few minutes checking whether it meets your initial criteria:

• Sector

• Geographic Area

• Ethical criterion

• Level of Indebtedness

• Investment Style

• Market Capitalization

If that’s OK, you can move on to a more in-depth screening process. The simplest approach is to use an investment checklist and eliminate any stocks that don’t meet your criteria. You’ll find a suggested checklist at the link below, which you can adapt to your own criteria.

1. Download the latest annual report and quarterly results from the Investor Relations section of the company’s website.

2. Run the checklist below through your favorite AI, first instructing it: “Answer the following questions using the attached documents, indicating which parts come from your own knowledge and which parts come from the documents.”

You can find the checklist at the following link : https://docs.google.com/document/d/1jZ8-08bBfUore1amb94KmYsr_LVF3dBc4WzYb18p9ds/edit?usp=sharing

If you like it, the idea is to keep an eye on it—often because the price is too high—until you’re ready to conduct a detailed analysis. That’s the whole point of the “Watchlist” section below.

4. The Watchlist

Just because a company checks all the boxes doesn’t necessarily mean it’s a company you should buy right away. The most common issue is price. An excellent company bought at too high a price is still a bad investment. That’s exactly what the watchlist is for: keeping a top-tier company under surveillance, before engaging any capital.

A useful watchlist includes the following for each name:

• The ticker and a checklist, for an overview

• Price tracking, to identify when a buying zone appears to be forming.

• Monitoring momentum to avoid entering the market at the wrong time—after a sharp rally to a temporary valuation peak or during a falling knife.

Here’s a link to the watchlist template I use every day:

https://jbpeter.substack.com/p/portfolio

Before concluding that a company you wish to acquire meets a price criterion, you must first conduct the detailed analysis described in Part 3 to define your investment thesis and verify whether the expected return justifies the risks involved.

Final thoughts

This article concludes the Investing 101 series. You now have the basic items: why invest, how to choose an ETF, how to analyze an individual stock, and finally, how to organize your daily routine so you don’t get overwhelmed by the 53,000 publicly traded companies.

Let’s return to the goal set in Part 1: to find one ETF and three stocks. You now have everything you need to get started on this pilot phase.

The next step in this progression will be to broaden your range of knowledge and delve deeper into each of the topics already mentioned in other modules.

The best is yet to come.

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Disclaimer: This content is for educational purposes only and does not constitute investment advice — see our full disclaimer.

This article was originally a single piece, but given its length, I decided to split it into three parts to make it easier to read and more educational.

The three articles will follow the format I use in my deep dives.

• This first one considered a business review.

• The second article covered the financial aspects, management analysis, and capital allocation

• Followed in the third part by an outlook based on bullish and bearish arguments and the company’s valuation.

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Here are the two first articles in case you missed it:

Investing 101 - Getting started before you buy anything

Investing 101 Part 2 — Choosing Your First ETF

1. The Two Theses

The goal of this section is to present the facts on both the upside and downside possibilities. This is meant to guard against two well-known pitfalls:

• Only considering the upside is wishful thinking, which can cost you dearly in monetary terms.

• Only considering the downside is catastrophizing, which can cost you dearly in terms of regret.

Having solid projections about the future will make it much easier to hold positions psychologically, because you’ll always have a rational anchor with arguments to support you or guide your decisions. Doing nothing is also a decision.

Note that if you don’t have the facts to answer the questions below, your investment thesis isn’t solid, and you’re better off moving on and investing in another company or another sector.

The same works for a stock that has risen sharply — in that case, it’s the reverse:

• Results above expectations

• Guidance raised

• Macroeconomic factors

• Company-specific catalysts: an influential investor taking a stake, a major contract signing, a technological breakthrough

Next, we look at the bear thesis. It generally builds on the “why did the stock drop” elements, going one level deeper:

• Loss of market share to competitors.

• Operating margins under pressure (rising costs, falling selling prices).

• Excessive debt levels or insufficient cash (cash burn).

• An outdated or disrupted business model.

• Management changed strategy, and products no longer sell because they no longer address the right needs.

• Is this a structural problem or a conjunctural one?

In light of this, we must ask ourselves what evidence supports these fears, and whether they are substantiated:

• Analysis of financial statements (balance sheet, income statement),

• sector reports,

• Comparison with peers.

• Supplier and Customer Analysis

To take this line of thinking all the way through, ask yourself the following questions: What if the bear thesis is really true? What does that mean?

The idea is to quantify the impacts described above.

At the end of your argument, you should be able to identify clear criteria that allow you to conclude that the bearish thesis is valid. For example:

• Revenue growth of X% or less

• Margins under Y%

• Competitors’ market share exceeds Z%

Generally speaking, some of the arguments raised are true, but the company will be able to address them easily. Then put yourself in management’s shoes and ask yourself what options they have to remedy the situation. That is the whole point of the bullish thesis.

What specific actions could management take? They can generally:

• Launching new products or changing strategy,

• Start a price war (very bad in the short term),

• Take over a troublesome competitor,

• Focus on its core business by selling or divesting segments,

• Reduce costs.

Next, check management’s actions and communication

• Is management transparent about the difficulties and credible in its solutions? Does management hit its targets from one report to the next? Are they too optimistic?

• What actions has management planned to take? Every action in the plan should improve the fundamentals and restore investor confidence.

As with the bear thesis, you should be able to identify indicators that confirm the bull thesis. For example:

• Revenue growth above X%

• Margins above Y%

• The company’s market share above Z%

These actions need to produce concrete results that address the difficulties. So we look for catalysts, which are specific events that trigger a significant movement in a stock’s price, or in the market as a whole.

They come in several types:

1. Performance catalysts: the company beats expectations.

2. Market catalysts:

   -Index inclusion: which forces thousands of ETFs to now buy the stock.

   -Coverage initiation: when an analyst revises their target price

   -Short squeeze: an upward market move, or a move above a certain threshold, can force short sellers to urgently buy back their position.

3. Strategic catalysts:

• Buyout or merger: an acquisition offer from a major player.

• Spin-off: separating a business division to reveal the hidden value of a subsidiary, which then gets sold by funds and ETFs whose underlying holding, however interesting, no longer fits their mandate.

• Exclusive partnership: becoming the “preferred” supplier of a market leader.

4. Macroeconomic / regulatory catalysts:

• Interest rate pivot: any change in interest rates, particularly US Treasury yields, changes the yardstick against which all investments are compared.

• Changes in commodity prices.

• The end of a recession, or a price change affecting customers’ budgets.

• Regulatory framework changes.

The event happening is one thing, but remember that the market thinks in probabilities. The price adjusts toward the news as the catalyst becomes clearer and clearer — not at the moment it actually occurs.

I also note the blind spots in my research, so I can keep track of unresolved points that may have slipped through the analysis. It’s not possible to answer all of these questions exhaustively — otherwise investing would just be a matter of computing power. Investing requires acting on imperfect information: that means making a decision without knowing everything, but with enough information to act with a good level of confidence.

2. How much?

This section addresses the question of profitability, approached through two methods:

• Valuation, which consists of determining the company’s intrinsic value from its own future cash flows, independently of what the market thinks.

• Pricing, which consists of determining how much the market is willing to pay for those same flows, through a multiple.

I’m not a finance professor. So I’ll leave it up to you to decide if you’re interested in what Aswath Damodaran—who is one—has to say on the subject. He has plenty of free resources on his Substack, YouTube videos, and books that are excellent reads, particularly his book *The Little Book of Valuation*.

When it comes to valuation, the gold standard is the DCF method, which involves calculating a company’s future cash flows and discounting all of its future cash flows to the present to derive its intrinsic value. This value is independent of the market’s assessment of the company. It is, therefore, an intrinsic valuation method.

Personally, I believe that the information needed to accurately perform a DCF analysis (5- to 10-year growth rate, terminal value, discount rate) cannot be estimated with sufficient reliability for most companies. Having built plenty of projections as a project manager, most initial estimates turn out to be completely wrong — even more so the further out the date, or depending on the quality of your starting assumptions. And having made and seen estimates made, there’s a tendency to land on the number you wanted in the first place. The DCF creates an illusion of expertise based on mathematical and logical reasoning whose foundations are often uncertain.

For this model to be relevant, a suitable company must be predictable, which narrows the range of possibilities.

Pricing, on the other hand, involves valuing the company based on comparables. In this case, you believe that the market is generally reasonable but has misjudged a specific value. It is therefore a relative method, divided into equity multiples and firm multiples.

Equity multiples

PE ratio (price/earnings):

• Formula: stock price divided by earnings per share —

• Meaning: how much the market pays for one euro of annual profit. If a stock trades at 20 times earnings (a P/E of 20), you get back your money with the current earnings in 20 years.

• Comments: depends heavily on the company’s growth and risk: you cannot say based on this unique metric that it is cheap or expensive. PE ratio Sensitive to the same accounting distortions as net income covered in the previous article (one-off items, minority interests). Best cross-checked against P/FCFE below, and the PEG ratio.

PEG ratio (PE to growth):

• Formula: P/E divided by the expected earnings growth rate — corrects the raw P/E to compare different growth profiles.

• Meaning: A P/E of 30 with 30% growth gives a PEG of 1; the same P/E of 30 with only 10% growth gives a PEG of 3. Peter Lynch said that a good PEG ratio is when the growth is equal to the PE (ex: 30% growth EPS with a PE of 30).

• Comments: In the case of a cyclical company, the opposite is true. A company’s P/E ratio will drop at the end of a peak (due to investors’ expectations of a decline in the stock price) and will be extremely high at the trough of the cycle,

P/FCFE (price to free cash flow to equity):

• Formula: share price divided by free cash flow to equity per share.

• Meaning: how much the market pays for one euro of cash actually available to the shareholder.

• Comments: In theory, FCF provides a clearer picture of the company. However, significant changes in investment or credit policies will skew the measurement. It should be compared with the P/E ratio.

PBV (price to book value):

• Formula: share price divided by book value (equity) per share.

• Meaning: how much the market pays relative to what shareholders have contributed or left in the company, on the balance sheet.

• Comments: this was the signature formula of the famous investor Benjamin Graham. Since companies now have significant intangible assets (goodwill, brand, software), this key indicator of value investing is used much less frequently.

PS (price to sales):

• Formula: share price divided by revenue per share.

• Meaning: how much the market pays for one euro of sales —

• Comments: the only one of the five ratios that still works even when the company isn’t yet profitable (young, fast-growing companies). Be careful to compare companies in the same sector, as the same revenue multiple can hide very different margins.

Firm multiples

These take into account not just equity, but the full set of long-term resources available, namely equity and debt, minus net cash, to arrive at enterprise value. The advantage is being able to compare companies with different debt ratios by leveling this base.

EV/FCFF (value to free cash flow to firm)

• Formula: enterprise value divided by the cash available to all capital providers (debt and equity), before any debt service.

• Meaning: how much the market pays for one euro of cash generated by the company and available to all of its capital providers (shareholders and creditors), before any debt service.

• Comments: In theory, FCF provides a clearer picture of the company. However, significant changes in investment or credit policies will skew the measurement. It should be compared with the P/E ratio.

EV/EBIT

• Formula: enterprise value divided by operating income before interest and taxes

• Meaning: measures operating profitability independently of the financing structure (debt vs. equity) and of each country’s tax treatment.

• Comments: allows comparison of companies with very different debt levels without distorting the reading, unlike the PE ratio.

VS (value to sales)

• Formula: enterprise value divided by revenue: it is the firm-side equivalent of PS.

• Meaning: how much the market pays for €1 of sales.

• Comments: it still works even when the company isn’t yet profitable (young, fast-growing companies). Be careful to compare companies in the same sector, as the same revenue multiple can hide very different margins.

We look for a gap between what the company is worth (as described in the two theses section) and the price we pay for it, with the multiples shown above.

In practice, my method does not involve directly comparing a company to a basket of publicly traded competitors. I prefer to build a matrix of scenarios: estimating the company’s future earnings under various assumptions (bear/base/bull), then cross-referencing them with possible multiples. To make this simple and easy to understand for my readers, I use the P/E ratio after adjusting for non-recurring items.

The idea is to identify a range of possibilities using a pricing scorecard in this format. Then, based on the factors in the bull vs. bear analysis, to determine where my conviction lies.

The goal will be to monitor the company over time and verify that it is on track with my profitability assumptions.

Here’s an example I wrote in one of my articles as part of a deep dive into AppLovin.

So we’ll be looking for the valuation target a few years down the road, but in the short term, the stock price could react in an irrational way. I’ll break this down into two parts: fundamentals and investor sentiment.

The short-term volatility will prompt further reflection on investor sentiment, which will be the subject of another series of articles. For now, we are in the process of identifying three stocks as part of a pilot phase, as mentioned in the first article of the series.

That’s how I do my deep dives.

Ultimately, this is serious research that can take hours—or even days—of work. It’s the price you pay for an investment that you’ll be able to stick with over time, and that will help you avoid many mistakes and sleepless nights of doubt.

Final thoughts

In these three articles, we’ve seen the framework I use—and that I’m sharing with you—for selecting individual stocks. I develop investment cases whenever a stock seems like a great buy to me, based on a classification I outlined in another article. This method involves a detailed analysis, but this investment framework does not apply in every case. The next article will focus on how to identify companies on your own and how to screen them using an investment checklist to narrow down the field.

In addition, I invite you to check out the list of educational resources at the link below:

Subscribe now

Disclaimer: This content is for educational purposes only and does not constitute investment advice — see our full disclaimer.

This article was originally a single piece, but given its length, I decided to split it into three parts to make it easier to read and more educational.

The three articles will follow the format I use in my deep dives.

• This first one considered a business review.

• This article will cover the financial aspects, management analysis, and capital allocation

• Followed in the third part by an outlook based on bullish and bearish arguments and the company’s valuation.

Subscribe now

Here are the two first articles in case you missed it:

So we’ll wrap up our overview of the company—as a starting point—before moving on to the outlook in the next article.

Analyzing financial statements is, on the one hand, very straightforward, as one can focus on a few key indicators and obtain initial results that are both robust and compelling. This is also the area where finance professionals have the most data readily available and the greatest ability to interpret it using relevant analytical frameworks.

Gaining an advantage over them in this area is very complex and requires in-depth work.

In a future article, I’ll discuss how, despite the excellent candidates who choose a career in finance, individual investors have undeniable advantages. Stay tuned.

One of the key advantages of investing in the stock market is the equal access to information shared with all market participants—namely, public information. To form your own opinion about a company, you have access to the same documents at virtually the same time, and insiders who possess an informational advantage are required to disclose their stock purchases and sales. You’re therefore on a level playing field with other investors and can buy and sell shares in some of the world’s best companies, often for less than $1,000, with trading available nearly 40 hours a week.

So the battle is being fought in the financial documents, which we’ll look at right now.

The three financial statements

Any company listed on an index must follow a number of disclosure rules specific to its listing. In the United States, companies typically publish an annual report called a 10-K and quarterly reports called 10-Qs, which are available on the SEC’s website (the U.S. securities regulator) or on the companies’ own websites (under the “Investor Relations” section). In addition, companies hold earnings calls—presentations of their results that include a question-and-answer session with analysts—and transcripts of these calls are typically made available afterward.

For the rest of the world, the principle is generally the same. Keep in mind that some companies publish their results only in their own language, which makes them difficult for international investors to understand, or they publish their results on a semi-annual basis. This means that any bad news arrives several months later, which amplifies the market reaction, especially given the long-term outlook.

The three financial statements are the income statement, the balance sheet, and the cash flow statement. Accounting standards exist; the main ones are Generally Accepted Accounting Principles (GAAP) in the U.S. and International Financial Reporting Standards (IFRS) in the rest of the world. IFRS is based on GAAP, with some differences between the two.

I’m keeping this brief on purpose; there’s a lot to say about these topics—enough to fill years of study.

The Income Statement

The income statement is a report that shows how the company generated profit from its operations over a given period. It all starts with revenue, from which costs are subtracted to arrive at operating income—a numerical measure that indicates the extent to which the company is generating profit from its operations. After deducting financial and extraordinary items, we arrive at net income, which measures the amount of money available to shareholders.

The key items to look at are:

• Revenue

• Gross Margin and Operating Margin

• Net margin (if I have $1 in revenue, how much profit do I make?)

• Financial and Non-Recurring Items

• Net income

Here is an example from Booking’s 10-Q for the period ending June 30, 2026.

Depending on the business, some companies handle very high volumes with very low margins (e.g., retailers like Walmart or Aldi), while others handle low volumes with high margins (e.g., service or luxury companies). It all depends on the industry and the company’s competitive advantage. It doesn’t make sense to compare different industries directly.

Generally speaking, investors view an increase in margins as a sign of a stronger competitive advantage—and therefore as excellent news. This remains a general rule; the specifics should be examined on a case-by-case basis, depending on the context.

The Balance sheet

If the income statement is a movie, the balance sheet is a snapshot. It shows the company’s assets (and net worth) and how they are financed. The sharpest minds will have noticed that the balance sheet is… balanced: assets always equal liabilities.

A distinction is made between assets (items to be financed) and liabilities, which represent the source of financing.

These assets and liabilities can also be either current—with a useful life of less than one year—or noncurrent—with a useful life of more than one year.

This leaves us with four line items on the balance sheet, as shown in the image below:

The key components are primarily found in the fixed assets. Peter Lynch, the famous investor, has said that he considers current assets to balance each other out, so that only the fixed assets need be considered—whether purists like it or not.

Here is an example from Booking’s 10-Q for the period ending June 30, 2026.

The key items to look at are:

• Inventory levels

• Cash and cash equivalents

• The ratio of long-term debt to equity

• The number of shares

But if I had to choose just one, it would be the debt-to-equity ratio (= (long-term debt - cash and cash equivalents) / shareholders’ equity).

Peter Lynch also noted that a healthy debt-to-equity ratio could be as high as 50 percent. Beyond that, in the event of an economic downturn, the company would be exposed to a spiral of debt that could lead to bankruptcy or the dilution of existing shareholders.

You’ll notice that in the example, Booking has negative equity. This is the result of share buybacks carried out year after year. It’s not a problem—neither from an accounting nor a business perspective—and sometimes occurs among large-cap companies that have conducted a significant number of share buybacks.

Another key factor is the change in the number of shares. Most Quality companies will buy back shares, either to reduce the number of shares outstanding or to pay a dividend. Share buybacks offer several advantages:

• It is a sign of confidence in the future of management

• Fewer shares can cause the price to rise more easily (or fall). In 2021, Xavier Gabaix (Harvard) and Ralph Koijen (University of Chicago) published “In Search of the Origins of Financial Fluctuations : The Inelastic Markets Hypothesis” — one of the most consequential papers in modern finance. Their central finding : financial markets are far less elastic than classical theory assumes. In equity markets, $1 of net inflow moves total market capitalisation by approximately $5.

• The tax treatment of share buybacks (capital gains) is generally more favorable than that of dividends. And as long as you don’t sell, there is no tax.

Growth companies have much greater capital needs and typically issue new shares, a process known as dilution. If you’re diluted by 4%, that amounts to a 4% loss on your investment. However, these new funds will enable the company to grow—presumably by more than the amount of that dilution. This is a very strong implicit assumption in growth investing. It isn’t necessarily a bad calculation for the best companies, but dilution raises the bar that your investment must clear to achieve the expected return.

The Cash Flow Statement

This last document is very interesting because it shows us where the cash is going. The table starts with net income and breaks down cash flow into three categories:

• Operational Workflows

• Investment Flows

• Funding Flows

Similarly, here is another example from Booking in its 10-Q for the period ending June 30, 2026.

The key items to look at are:

• What is the difference between free cash flow (FCF) and net income?

• How many years of operating income would it take to pay off the debt?

• How many share buybacks or dividends are made?

• What are the amounts of stock-based compensation?

Based on the data in the financial statements, we calculate an extremely useful metric: free cash flow (FCF). It is calculated by subtracting capital expenditures (CapEx) from operating cash flow (Cash Flow from Operations).

It answers the question: “How much cash is actually left in the coffers to pay off the debt or pay dividends?”

FCF is a more accurate measure of a company’s ability to create value, unlike net income, which can be manipulated more easily through accounting.

It is necessary to identify the differences between the two.

Just as in a police investigation, reading one of the documents provides information, but it is only by cross-referencing all three documents that one can form a comprehensive picture of the financial situation. This statement can, in fact, be extended to our entire study of quantitative and qualitative factors.

All three documents contain numerous footnotes explaining how the data is calculated in cases where questions about accounting treatment may arise. They often include all sorts of subtleties intended to make the situation appear more favorable. The devil is in the details—in this case, the accounting details.

We mentioned Aswath Damodaran in the previous episode. Here is an overview of the key financial items and expected behavior based on the company’s life cycle for the three types of cash flows.

Profitability Ratios

Growth indicators are fairly straightforward: simply compare growth with recent fiscal years, focusing primarily on revenue, margins, and profit (FCF and net income). Profitability indicators are a bit more complex and warrant your attention when cross-referencing the data. In fact, market concerns often center on these points. Therefore, the ability to interpret these figures is essential.

Investment

Here is a non-exhaustive list of profitability metrics, starting with my favorite, ROIC.

ROIC (return on invested capital) :

• Formula: NOPAT (operating income after taxes) / invested capital (debt + equity, excluding excess cash)

• Purpose: It measures the return generated on the capital actually invested in the business—including debt and equity—but not cash.

• Meaning: If a company invests $1 through debt or equity, with a ROIC of 20%, its investment generates $0.20 in operating income after taxes (as long as the ROIC remains at that level). A ROIC higher than the WACC (weighted average cost of capital) is profitable.

• Comments: ROIC can be misleading for companies that engage in aggressive asset write-downs or share buybacks.

There is also a variant called ROCE.

ROCE (return on capital employed)

• Formula: EBIT (operating income before tax) / capital employed (equity + total debt). This includes any excess cash.

• Purpose: It measures the return generated for each euro of capital used.

• Meaning: If a company invests $1 in capital (debt + equity), with a ROCE of 20%, it generates $0.20 in operating income before taxes (as long as the ROCE remains at that level).

• Comments: Does not take into account non-operating cash flows (such as inventory value, which is important for oil and mining companies). Asset impairments automatically push ROCE higher. Misleading for companies with large amounts of cash.

ROE (return on equity) :

• Formula: net income / shareholders’ equity

• Purpose: Measures the return generated for the shareholder on the capital they have contributed,

• Meaning: If a shareholder invests $1, with a ROE of 20%, this generates €0.2 in profit for the company.

• Comments: It may be artificially inflated by high leverage or by low equity (aggressive—or even negative—share buybacks).

These three indicators should be analyzed in conjunction to assess the quality of the business and its management. It is helpful to compare these three metrics for the company with those of its competitors. Note that this is more difficult for companies with several completely different business lines, such as Amazon, which combines retail operations with data center operations.

There’s also ROA, which I don’t use very often:

ROA (Return on Assets) :

• Formula: net income / total assets

• Purpose: Partially corrects the bias in ROE by including debt in the denominator—less sensitive to leverage, more appropriate for comparing companies with different capital structures

• Meaning: If the company generates $0.20 in net income for every $1 of total assets, its ROA is 20%.

• Comments: This metric is less precise than ROIC/ROCE when measuring pure operational efficiency, since total assets also include non-operating assets (cash, equity investments) that ROIC specifically excludes. Furthermore, net income needs to be examined to determine whether it provides an accurate picture of reality.

Here is a summary of the four indicators:

Also note that it is necessary to evaluate investment opportunities and weigh them against profitability: To generate $1 million (in NOPAT), for example, one could:

• Invest $10 million at 10%,

• Invest $5 million at 20%,

• Invest $3 million at a 33% rate.

A company will be able to continue investing as long as its resources allow, depending on its market and the creativity of its management.

Net Margins

There are two key indicators for margins.

Net margin:

• Formula: net income / revenue

• Profit: what actually remains for shareholders from every dollar of revenue, after all expenses have been deducted,

• Meaning: If the company generates $1 in revenue with a net margin of 20%, $0.20 in net income remains for shareholders (as long as the net margin remains at that level),

• Notes: Distortion may occur if the company has subsidiaries in which it owns between 50% and 100% of the shares—in which case, minority interest must be adjusted.

FCF margin :

• Formula: free cash flow / revenue

• Usefulness: How much of every dollar in revenue actually remains as cash after capex is deducted,

• Meaning: If the company generates $1 in revenue with a 20% FCF margin, it converts $0.2 of that revenue into actual available cash (as long as the FCF margin remains at that level),

• Notes: There may be some distortions, particularly if a company sells subscription-based services: only the portion that has already been completed and billed is recognized, not the entire plan.

It is important to compare and analyze the differences between net income and free cash flow—and thus between their margins. This is a useful exercise to perform during your analysis to gain a thorough understanding of specific accounting practices.

A few other metrics that I don’t use:

EBITDA: Earnings Before Interest, Taxes, Depreciation, and Amortization. This metric omits too many important factors to provide an accurate picture of the business’s profitability. Charlie Munger had a famous remark on this subject:

Worse still, some companies prefer to report adjusted EBITDA.

A word of advice: Use the figures reported in accordance with accounting standards as your point of reference. Generally, those who present you with adjusted or non-GAAP figures do so to paint a rosier picture of reality—in other words, to make a sales pitch—rather than to tell the truth.

Every rule has its exception: I recently saw a presentation of results from Novo Nordisk that showed sales figures adjusted for two factors: one was a reversal of an accounting provision (a valid reason), and the other was due to an impairment charge related to discontinued drugs (a debatable reason). I’ll leave you with the image below, which pretty much sums up my opinion on the matter:

Here is a summary of the key profitability metrics:

3. Management

There is a fundamental problem between shareholders and managers: the manager seeks to line his own pockets with shareholders’ money instead of acting as a good steward. This has been theorized by several well-known authors.

The renowned Adam Smith had already pointed out in *The Wealth of Nations*:

The directors of such companies, being the managers rather of other people’s money than of their own, it cannot well be expected that they should watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own.

In 1976, a seminal article by Michael Jensen and William Meckling (“Theory of the Firm: Managerial Behavior, Agency Costs, and Ownership Structure,” Journal of Financial Economics) defined agency theory, a famous milestone in the history of management.

They define the agency relationship as a contract under which the principal (the shareholder) delegates decision-making authority to an agent (the manager), and argue that if both parties seek to maximize their own utility, there are good reasons to believe that the agent will not always act in the principal’s best interest. It was this article that gave rise to the term “agency costs”—the cost of this conflict of interest.

The goal of this entire section will therefore be to answer the following questions:

• Who are these managers?

• Are they effective?

• Can I trust them with my money?

The order of the questions is designed for educational purposes. When analyzing actions, you will inevitably ask yourself all three questions at the same time.

To assess the management team, simply asking your favorite AI a question, reviewing the financial documents, and taking a look at LinkedIn should provide you with all the information you need.

Management Effectiveness

Based on my studies in management and my experience as a project management professional, the theoretical definition of a good manager is based on performance indicators and their ability to meet them. It is very difficult to distinguish a good manager from a favorable situation. This point is essential: a good manager is often considered as such because they are successful.

The challenge here will be to distinguish between economic conditions and the manager’s performance.

One way to do this is to examine the track record—that is, actual performance versus promises—and thus compare the set goals with the actual results using the financial statements from recent fiscal years.

The renowned Warren Buffett wrote in his 1979 letter to shareholders:

You’ll notice the characteristic AI style of “it’s A, not B”—nearly 50 years ahead of its time. A pioneer.

In practical terms, this quote means that you can significantly increase your profits by investing heavily, even with a low rate of return. It’s like saying that to double your savings, you can either double your existing capital through your investments or contribute the same amount from your savings.

True management competence is measured by the return on capital already invested.

Ideally, then, you’ll want: excellent management capable of generating very strong returns on invested capital, along with the reinvestment opportunities inherent in the business. Ideally, you’ll want plenty of both if you’re taking a long-term view.

Its management ability is measured by capital allocation, which varies depending on the stage of the life cycle:

• First and foremost, a company will finance its organic growth through items such as capital expenditures, R&D, and working capital needs. This is the best use of capital as long as the return on that reinvestment exceeds the cost of capital. As the company grows, these opportunities diminish over time. In economics, this is known as the law of diminishing returns.

• If there is capital remaining beyond what organic growth can absorb at a good rate of return, three options are available: external growth (M&A), dividends, or share buybacks. Be careful, though: external growth is generally a bad bet for shareholders. Personally, I prefer to avoid share buybacks, which are often based on overly optimistic assumptions and coincide with market highs.

• Management is expected to return to shareholders any funds that cannot be invested with a sufficient rate of return.

• If you invest in dividend-paying companies, check their ability to pay dividends during difficult times (COVID-19 in 2020, the Global Financial Crisis in 2008, etc.).

Also keep in mind that, in a young company, good management is the source of competitive advantage, and that advantage will grow over time. Poor management—or management grappling with structural challenges in its business—will see its competitive moat erode and, consequently, its profitability decline.

Trust

The best way to earn management’s trust is to make sure your interests are aligned with theirs.

Nassim Nicholas Taleb in his 2018 book, Skin in the Game: Hidden Asymmetries in Daily Life, describes a concept that has since been widely cited: “Skin in the Game.”

If the manager holds a significant—or even a majority—stake in the company where you’ve invested, your interests are aligned because he shares your goal: to drive up the stock price and thereby maximize your wealth.

We will therefore prioritize seeking out founding executives, who have the advantage of holding a significant stake in the company and possessing a long-term vision. The superior performance of owner-operators has been proven over the long term, due to the natural selection that occurs over time between founders who are excellent managers and those who stagnate or go bankrupt.

When it comes to CEOs who are not founders, it is important to review their compensation plan in particular: Is it in cash? In stock? What performance goals is it tied to?

By choosing a founder who runs the company, you stack the odds in your favor, but it doesn’t guarantee success. I experienced this firsthand as a counterexample when I invested in a promising Italian consulting firm. For several reasons, I sold my position two years ago, one month before the bombshell in September 2024: The press reported that the founder and CEO of Digital Value, Massimo Rossi—founder, CEO, and largest shareholder of Digital Value (an Italian IT company listed on the Milan Stock Exchange)—was arrested on October 16, 2024, for corruption and rigging public bids in the Sogei case (the IT company of the Italian Ministry of Economy). He resigned that same day, and the stock price plummeted during the trading session. In less than a month, the stock plummeted by 80%. It was delisted a few months ago.

The executive had previously been praised for his management skills and vision. This is just one example among many of the risks associated with portfolio concentration and what is known as company-specific risk.

Furthermore, a good place to assess management’s integrity is in the financial statements. I’ve previously discussed metrics that are adjusted to paint a rosier picture than usual, but management under pressure to deliver good numbers may be tempted to shift their perspective. To name a few examples, I’m thinking of recurring non-GAAP restatements from one quarter to the next, changes in accounting estimates (depreciation periods, provisions), aggressive revenue recognition, and “exceptional” expenses that occur too frequently to be truly exceptional.

The devil is in the details—in this case, accounting details.

Final thoughts

This section concludes the static analysis of the company and helps address some initial questions regarding the quality of the business and your desire to keep it in your portfolio.

The “Financials” section should allow you to cross-reference the information from the “Business” section, particularly with regard to competitive advantage. Management will indicate the quality of management: good management will strengthen its competitive advantage whenever possible. It is therefore an essential prerequisite for investment and the source of numerous risks.

The next step will be to look ahead, considering both bullish and bearish scenarios, and to estimate a target price based on the company’s possible futures.

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Disclaimer: This content is for educational purposes only and does not constitute investment advice — see our full disclaimer.

• Getting started

• Choosing your first ETF

• Stock Analysis

  • 1. The Business

  • 2. Financials and Management

  • 3. Outlooks

• How to find and track stocks to invest in

Portfolio: (in progress)

• Compounder vs Multibagger: The Ratchet Effect

• Good buy, great buy, screaming buy

• You can own 30 stocks without diversification

• How Much of Your Portfolio Should Be in Stocks?

This article was originally a single piece, but given its length, I decided to split it into three parts to make it easier to read and more educational.

The three articles will follow the format I use in my deep dives. This first one will consider a business review covering the products and services sold by the company, followed by an examination of the market structure and competitive advantage. This article will conclude with an assessment of the company’s life cycle and a review of market segments (such as quality, value, etc.).

The following articles will cover:

-In the second part: financial aspects, management analysis, and capital allocation

-Followed in the third part by an outlook based on bullish and bearish arguments and the company’s valuation.

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Here are the two first articles in case you missed it:

1. Introduction

The first question to ask is: “What does the company sell? What products and services does the company offer?”

This is the core of the study, around which all other responses will revolve. It is therefore necessary for you to review the various products and services and the markets in which they are sold. This requires you to know what market shares they hold.

Obviously, a company does not operate in a vacuum; it is necessary to identify its environment—that is, its customers, suppliers, and competitors.

• What are the company’s customers looking for in this product? How many are there? Do they purchase the product directly from the company or through a distributor? Does the company have a major customer that poses a risk?

• As for suppliers, who are they? Is there a critical dependency on any of them, or does any of them have pricing power?

• For competitors, we will seek to determine their market shares and their products.

Finally, at this stage, we can ask ourselves what ethical issues or risks the company faces. This is something I consider early enough in my research to rule out candidates who wouldn’t be a good fit for me.

Once you’ve taken this initial look at the big picture, the question to ask yourself comes back to the products: “Am I able to determine whether the company’s products or services are superior to those of the competition?”

That’s Peter Lynch’s famous “Invest in what you know.” If you can answer that question, great—you’re probably onto something. For example, in my own circle, I’ve noticed that the people I meet place a higher value on iPhones. That my kids, like everyone else, always prefer Coca-Cola to any other drink on earth. That if people had to keep just one streaming service, the majority would choose Netflix.

There are many excellent investment opportunities available to us as individual investors, and they do not require any special skills.

Conversely, if you are unable to determine whether the company outperforms its competitors based on anything other than the numbers, you will always have a hard time keeping your cool during a market downturn and forming a clear opinion about your investment.

A 2018 study by Hendrik Bessembinder titled “Do Stocks Outperform Treasury Bills?” indicates that, among stocks listed in the United States between 1926 and 2016 (approximately 25,300 securities), only about 4% of the securities accounted for all of the stock market’s net wealth creation over that period. The remaining 96% did no better than one-month Treasury bills (i.e., short-term U.S. bonds).

A follow-up study, expanded to include 62 countries over the period 1990–2020, found an even more concentrated result: 2.4% of the world’s publicly traded companies accounted for all $75.7 trillion in net stock market wealth creation during that period.

The takeaway from this point is that the stock market’s performance is driven by a very small number of winners and a myriad of losers. And it is these few companies that will be the gems of your portfolio.

These are companies that I refer to as “category definers,” because they have helped create a product category in which they dominate the competition—or better yet, have no competition at all.

This superiority stems in particular from the market structure and the differentiation these companies have succeeded in achieving in their market.

2. Market Structure

2.1 The Model of Pure and Perfect Competition

One of the first topics I studied as an undergraduate economics major was the model of pure and perfect competition, because it provides the framework within which many companies operate.

We’ll see why this model is the bane of shareholders. It has several characteristics:

The implication of these four points is that, in this model, firms’ long-run profits tend toward zero, because any profit will attract competitors. Increased competition will drive prices down until producers go out of business, thereby restoring the equilibrium price. The price is therefore equal to the marginal cost (the cost of producing one additional unit), and the return on invested capital (ROIC) is equal to the WACC (the cost of capital).

Agricultural commodities such as bulk coffee, corn, wheat, and soybeans come close to this model: there are thousands of producers selling the same product in a market where anyone in the right climate can start growing that crop, and where price information is available on international markets. The foreign exchange (forex) market is also similar.

Every company will obviously seek to break free from this model, with varying degrees of success depending on the “imperfections” present in its market—which are referred to by the academic term “competitive advantage.” The most famous investor of all, Warren Buffett, coined the term moat to describe this concept, and it is now commonly used in the financial world. It is precisely because it is possible to break away from this model that individual investing makes sense.

Before examining the specific mechanism that enables this escape (the “moat,” discussed in more detail below), it is helpful to first determine where the company falls on the spectrum of market structures.

2.2 Market Structure: From Monopoly to Niche

On one end of the spectrum is the model of pure and perfect competition, and on the other end is the monopoly, which poses societal challenges. In between, there are several gradients worth exploring:

• Monopoly : A single firm serves the market. Since users cannot find alternatives to the firm’s products and services, the firm’s bargaining power is disproportionate. The regulator typically seeks to regulate or break up this monopoly, or to turn it into a public utility. Monopolies often exist in the form of public utilities (Con Edison in New York, PG&E in California, and airports when there is only one at the local level, such as in Zurich or Florence). Often, this type of market is maintained when there is no practical reason to allow competition to enter.

• Duopoly : Two dominant players share most of the market—for example, Visa and Mastercard in payment networks, or Airbus and Boeing in long-haul aircraft. They manage to coexist because neither has any interest in triggering a price war that would hurt both of them equally. This type of market is often very profitable for shareholders, and it is easy to track the market by following the two leading companies.

• Oligopoly: A handful of players (usually 3 to 5) share a market with high barriers to entry—competition may be divided into market segments allocated to each player. The goal is always to avoid a price war, which would be costly for all players. It is also possible for all players to agree on a market price; this is known as a cartel. Such an agreement tends to draw the ire of regulators.

• Niche market: a market that is too small, too specialized, or not glamorous enough to attract serious competitors—there’s no need for a legal monopoly or a patent; the market’s size or specialization itself acts as a barrier (no one bothers to enter a market whose potential is considered too limited)

• Pure and perfect competition: no firm makes a profit.

The general rule to remember is that the best competition is no competition at all, or as little as possible.

This classification provides a useful overview of the market and its existing players. We must now examine the reasons why new players cannot enter this market—that is, the company’s competitive advantage.

2.3 Competitive Advantage (Moat)

This article is not intended to be exhaustive on every point, so I will outline the main moats you should know about:

• Switching costs: switching costs — it’s expensive or a hassle to leave,

• Network effects: The product becomes more useful as more people use it

• Brand: Customers pay more for the same product because of the name

• Economies of scale: The largest product is structurally less expensive than the others because fixed costs are spread out

• The difficulty of replicating a product

• Regulatory or intangible assets: licenses, patents, rare permits.

Often, the best companies have multiple competitive advantages that grow stronger over time

On the other hand, keep in mind that what can reshuffle the deck within the market is technological change, which is a double-edged sword: it can help established companies solidify their position—or work against them.

Let’s take Coca-Cola as an example. Consumers place a higher value on Coca-Cola by choosing it over a cheaper alternative. Decades of advertising and history have linked it, in the minds of consumers, to sporting events, sharing, and a polar bear. Behind this beverage lies the entire world of American soft power.

Yes, the product can be replicated by any chemist, but the name and visual identity remain protected by a trademark.

In terms of the costs of change, Coca-Cola has locked out the competition with distribution contracts that are unbeatable due to the volumes sold. At the local takeout restaurant, there’s often a Coca-Cola fridge. Doing without it would mean replacing the fridge (which is certainly sold at a competitive price), and doing without Coca-Cola products would mean cutting back on one of its easy sources of high-margin revenue. If you leave Western countries, your choices for non-alcoholic beverages will often be limited to water, local sodas, or products from the Coca-Cola lineup. The latter are therefore, by nature, much more competitive.

Competitors’ products can threaten the company through e-commerce, reaching consumers directly without going through a century-old distribution network. However, Coca-Cola can still try to acquire the most promising startups early in their development, before regulators block the merger to maintain competition in the market.

Warren Buffet a eu la phrase célèbre: “If you gave me $100 billion and said take away the soft drink leadership of Coca-Cola in the world, I’d give it back to you and say it can’t be done.”

It is important to note that a moat is built over time and that, by its very nature, a new company will not have one. Everything rests on the pillars of superior products and services and high-quality management.

3. Life Cycle and Framework for Analyzing the Initiative

3.1 The Life Cycle of a Business

A company can be viewed in an organic way, as having a life cycle: it starts small with a product or service, then grows and develops a business model that becomes increasingly efficient, enabling sustained growth over time. The business, which initially operates at a loss, eventually manages to turn a profit and sustain that profit over the long term. Growth is strong at first because the company is starting from a small base, then slows over time until it stabilizes. Finally, the decline phase begins, which can occur more or less rapidly depending on the nature of the business.

Aswath Damodaran, professor of corporate finance and valuation at New York University’s Stern School of Business, offers excellent resources, particularly on the corporate life cycle. The images below are taken from one of his articles:

Depending on your experience and investor profile, you will likely develop preferences for certain investment life cycles, styles, or factors.

3.2 Investment Styles

We often hear about Quality, Value, and Growth stocks, and we can explain what these terms mean based on the framework outlined above.

• Growth: targets the Young Growth and High Growth stages—the investment is based on the company’s future trajectory, expected revenue, and profits.

• Quality: Targets companies in the High Growth or Mature Growth stages. The company is well-established, as are its competitors; it has one or more moats and is poised for significant future growth.

• Dividend: This strategy targets the Mature, Stable, and Decline stages, where the company generates cash but lacks opportunities for reinvestment. It chooses to return this cash to shareholders in the form of dividends or share buybacks. This category notably includes so-called “cannibal” companies, as their stock price is driven upward primarily by share buybacks.

• Value: Does not target a specific stage but rather a discrepancy between price and value, regardless of the stage. A company can be classified as a “value” stock at any stage of its life cycle. Generally, there is an underlying issue, or the market perceives it that way.

This is a simplified explanation: when you look at the details, a company may share characteristics of several different investment styles. Similarly, there are several investment styles, and they can coexist within the same market.

Beginner investors tend to turn to dividend-paying stocks for their safety and the almost magical appeal of receiving regular dividends. However, the lack of business growth and opportunities for reinvestment often leads to low returns that underperform the benchmark index.

They will also tend to gravitate toward value stocks, thinking they’re getting a good deal (“Company X has a P/E ratio of 5, while its competitors have a P/E ratio of 15—I’m getting a great deal”). In most cases, the reason is valid and stems primarily from issues related to the company’s business or future prospects.

Growth stocks are also very popular because, even though most of them will underperform the index and carry risk, a handful of winners offer the prospect of multiplying your investment in just a few years.

Ultimately, quality stocks will offer the best risk-return ratio due to their competitive moat and long-term growth prospects. As a result, they often command higher prices than other stocks. As with value stocks, the right time to invest is when the company appears (the word “appears” is important) to be facing temporary difficulties.

For educational purposes, I believe the best choice of three stocks to start with is “quality” stocks, given their long-term potential, financial stability, and competitive advantage.

Due to data quality limitations, I can provide a performance breakdown covering the past 15 years, but not beyond that. We have been in a nearly continuous bull market since then, with the exception of dips in 2018, 2020, and 2022.

3.3 Investment Factors

Investment styles can be cross-referenced with factors, which incorporate this classification and add several points:

• Size (small-cap stocks have historically outperformed large-cap stocks over the long term). Stocks are classified as small-cap when their market capitalization is between $300 million and $2 billion, mid-cap between 2 and 10 billion, and large-cap above that.

• Momentum (stocks that have performed well over the past 3 to 12 months tend to continue doing so in the short term). This reflects a well-known investor bias: investors tend to buy what’s rising and sell what’s falling.

• Low volatility (the least volatile stocks offer a surprisingly good risk-return profile, contrary to intuition),

Final thoughts

We have seen the forces at work that underpin a company’s growth and profits: products and services, market structure, competitive advantage, life cycle, and investment styles and factors. As you have learned, the best competition is to have no competition—or as little as possible.

Aswath Damodaran wrote, “A good valuation is a bridge between stories and numbers.” We will therefore move back and forth between the qualitative aspect—part of which we have already presented—and the quantitative aspect.

The following article will cover the company’s financials and management. By cross-referencing the data from the first and second articles, we will provide an overview of the company’s current situation, before exploring its future in a third article.

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Disclaimer: This content is for educational purposes only and does not constitute investment advice — see our full disclaimer.