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:

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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:

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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.

• 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.

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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

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.

We mentioned in the previous article that buying a large ETF offers the best balance between returns and time spent, especially for a beginner investor. Whether you’re just starting out or building a portfolio, it’s often a very good choice and the benchmark for any investment in individual stocks. We’ll explore a few questions about how they work, which indexes they track, how to distinguish between different ETFs, their alignment with ethical criteria, the difference between broad-market and thematic ETFs, and finally, a practical example of how I would select an S&P 500 ETF if I had to choose one from the list available in one of my investment wrappers.

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Here is the previous article in case you missed it:

1. How does an ETF actually work?

An ETF, which stands for Exchange-Traded Fund, is a basket of securities weighted according to a defined formula. It trades continuously on the stock exchange, just like a stock. It can be bought and sold through a brokerage account.

If a stock rises within the index, the ETF automatically purchases shares to maintain the new weighting. Similarly, if a stock falls, its weighting decreases. Purchases and sales are executed automatically via an algorithm.

Indexes are also periodically rebalanced and reconstituted—quarterly or annually, depending on the index. Companies that no longer meet the criteria (size, liquidity, sector) are excluded; new ones are added automatically. This allows the portfolio to be automatically updated for the best indexes and to stay current with trends.

There are generally two types of ETFs tracking the same index:

• Market-cap-weighted ETFs: winners automatically gain a larger weight simply because their price rises — no buying required — which drives concentration toward top performers over time.

• Equal-weight ETFs: By definition, they avoid concentration by selling when prices rise and buying when they fall.

They are created by issuers such as Amundi, Vanguard, or Blackrock (via iShares).

But what happens if the issuer goes bankrupt?

An ETF is a fund and is generally structured as a separate legal entity. Its underlying assets are not on the asset manager’s balance sheet.

Thus, the issuer’s bankruptcy does not result in a loss of value for the securities held by the fund.

In practice, the real risk scenario is the liquidation or closure of the fund (see the “assets under management” criterion below).

2. Two Categories of ETFs

ETFs can be divided into two categories, each with different objectives:

• Broad-market ETFs that track major indexes, such as the S&P 500, MSCI World, STOXX 600, and Nasdaq 100. We’ll discuss them in more detail in the next section.

• Thematic ETFs are tactical bets on a specific sector or technology: semiconductors, artificial intelligence, blockchain/cryptocurrencies, water, green energy, etc.

The arguments in favor of broad-market ETFs: built-in diversification, a track record of performance, and they also benefit from the rebalancing mechanism discussed in Section 1: new stocks are added, while underperforming ones are removed.

The limitation of thematic ETFs: they generally appear only after the trend is already well established. Issuers launch the product after observing growing enthusiasm, which structurally puts them behind the curve. An ETF focused on semiconductors or blockchain launched after the underlying asset has already experienced a sharp rise is a good example: the product arrives just as the news has already been priced in.

Broad-market ETFs are excellent for the core of a portfolio. It’s best to view thematic ETFs as a deliberate tactical play on the sidelines of a portfolio (and therefore with a smaller allocation), and focus on a broad-market ETF to start with.

3. The major indexes

Most ETFs track major stock market indexes. Buying them amounts to making a bet—often an implicit one—that we’ll try to explain here.

S&P 500: 500 large U.S. companies, weighted by free-float market capitalization. This means there are approximately 500 companies, but the ~10 largest account for a disproportionate share of the total weight. Average return: ~10% per year since 1957 (S&P Dow Jones Indices, via Fidelity). Annualized volatility: ~20.1% over 2007–2025 (Nasdaq, Nasdaq-100 vs. S&P 500 comparison, Q4 2025).

Nasdaq 100: The 100 largest non-financial companies listed on the Nasdaq. Heavily weighted toward tech and growth—not a general “U.S. large-cap” index. Average return: 14.25% per year since its launch in 1985 (Nasdaq, 40th-anniversary press release, January 31, 2025). Annualized volatility: ~22.9% over 2007–2025 (same source). Higher returns come with higher volatility—there’s no such thing as a free ride.

Investing in these indexes implicitly means placing the U.S. at the center of the global economic system and keeping it in first place. In other words, it means the continuation of the current Pax Americana. After all, this is not just about U.S. profits, but about the profits of American companies around the world. If U.S. companies lose global market share, the profits of S&P 500 / Nasdaq 100 companies decline, and this affects the index.

STOXX 600: 600 European companies of all sizes—large-, mid-, and small-cap. Offers intra-European geographic diversification, with sectors that are more cyclical and industrial than in the United States. Average return: 10.7% per year over 5 years. Annualized volatility: 14.2% over 5 years (official STOXX fact sheet, data as of July 31, 2026).

Investing in the European Union offers a means of sectoral and geographic diversification relative to the United States. The expected return depends on the role the Union will play in the coming years.

MSCI World: approximately 1,500 stocks in developed markets (~23 countries). In practice, the index is weighted at ~70% toward the United States, so it is less “global” than its name suggests. Average return: 13.29% per year over 10 years. Annualized volatility: 14.85% over 10 years (official MSCI fact sheet, data as of July 31, 2026).

This index, based on its name, seems like a consensus choice, but its 70% weighting in U.S. stocks makes it a bet that hinges primarily on the health of the U.S. economy.

A note on “world” indexes: The MSCI World excludes emerging markets—China, India, Brazil, among others. The MSCI ACWI (All Country World Index) includes them. The term “world index” therefore does not have a single meaning—check the composition before buying into the name.

Where to start with your first ETF: The S&P 500 is a good place to begin for educational purposes. It is the most widely discussed and best-documented index available—with a long history of data, consistent coverage by the financial press, and comparisons that are easy to find. Its composition is also relatively easy to understand: 500 major U.S. companies that most people are already familiar with.

4. Criteria for comparing ETFs based on the same index

Once an index has been selected, several competing ETFs track it—the factors that make a difference over the long term:

• TER (Total Expense Ratio): annual fees deducted from the portfolio’s value; even a difference of 0.1% to 0.2% per year, when compounded over the long term, will make a difference. Beginner investors tend to focus on fees. Don’t forget the rule: performance is shown net of fees and taxes. Fees are a minor issue. Spend two hours researching ETF and fund fees, but don’t make them your main concern.

• Assets Under Management (AUM): An ETF with low assets under management (<50–100 million euros) faces a risk of fund closure or liquidation (forced arbitrage, exit fees, tax mismatch)—assets under management are also a proxy for market confidence.

• Trading volume and bid-ask spread: market liquidity (different from outstanding shares) → an ETF with low trading volume can be expensive to buy or sell, even with a low expense ratio

• Replication:

  • Physical (actual purchase of the underlying securities) : the ETF owns real parts of businesses.

  • Synthetic: the ETF enters into a swap with a bank counterparty. The mechanics are technical, but the actual risk is generally limited.

  • Impact on tracking error (the difference between the ETF’s performance and that of the actual index)

• Distributing vs. accumulating: A distributing ETF pays dividends in cash (which you must reinvest yourself and which are taxed upon receipt, depending on the jurisdiction); an accumulating ETF automatically reinvests them in the fund (no dividend cash flow to manage, and taxation deferred until sale, depending on tax laws). Generally, an accumulating ETF is more advantageous from a tax management perspective. You can always sell a portion of your accumulating ETF’s shares yourself to recreate a dividend-like cash flow if you need one.

• Domicile: the country where the fund itself is registered (not the investor’s country of residence, nor the exchange where the ETF is listed)—an ETF domiciled in Ireland and an ETF domiciled in Luxembourg can both track the S&P 500, be listed on Euronext Paris, and be accessible to the same French or foreign investor; Why this still matters: Before receiving a dividend from a U.S. company, the fund is subject to a withholding tax levied by the U.S. tax authorities, and the rate of this withholding depends on the tax treaty between the United States and the fund’s country of domicile—not between the United States and the investor’s country; For example, the U.S.-Ireland tax treaty has historically been more favorable than others, which explains why the vast majority of U.S. equity ETFs available in Europe are domiciled in Ireland.

• Listing currency vs. underlying currency: An ETF listed in euros that tracks a U.S. index does not eliminate currency risk—you are still exposed to currency fluctuations, and a 10% decline in the dollar results in a 10% decline in the ETF.

• Currency hedging: a criterion distinct from the previous one—an “EUR Hedged” ETF actively offsets (using derivatives) the impact of EUR/USD fluctuations on performance, unlike an unhedged ETF, which is fully exposed to this currency risk in addition to the index’s performance; Hedging comes at a cost (included in the expense ratio or charged separately, depending on the fund) and is neither good nor bad in and of itself—it depends on whether the investor wants to isolate the index’s pure performance or accept exposure to the dollar as an additional form of diversification. For example, hedging an S&P 500 investment against your home currency amounts to choosing protection against a decline in the dollar as well as protection against an appreciation of your home currency.

• Ethics: This aspect is specific to each investor and involves selection or exclusion criteria that should be examined. You’ll often find ESG (Environment, Social, Governance) criteria and for France, ISR (Socially Responsible Investing)—which frequently exclude weapons, tobacco, and fossil fuels. Funds may also select the “best-in-class” investments in their category, which has led me to question the appropriateness of those choices. The best approach is to look up the ethical definition within the index the fund tracks to fully understand what you’re buying and to review the fund’s top holdings. It should be noted that, on the one hand, “ethical” ETFs often underperform their conventional counterparts, and, on the other hand, “ethics washing” is a fairly common occurrence in this category.

5. An example, please!

OK, so I asked you to find a first ETF, but now you are stuck in a list of ETFs in your investment wrapper with a headache. “Which one am I supposed to choose between the 10 suggestions I got?” Let me give you an example of how I would search.

I typed “SP500” into the search bar on my life insurance website and found the following 7 results, compiled in a table:

It’s worth noting right away that six of the seven are market-cap-weighted ETFs, as opposed to the seventh, which is an equal-weight ETF—representing a different investment strategy.

The first two on the list, from Amundi, are virtually identical in terms of fees but differ in terms of assets under management and dividend policy. I think that, given assets of this size—over a billion—I don’t see a problem, so both pass the test. Personally, I have a long-term investment horizon, so I’d prefer the Acc. However, French life insurance policies automatically reinvest dividends, so they’re practically equal. Between the two, I’d therefore choose the cheaper one in theory, even though the result after several years will be virtually the same.

The third is a distribution-oriented, hedged fund, which is potentially a positive if you want to reduce your exposure to the dollar. I don’t have a strong opinion on this at the moment, and logic would suggest hedging at the top of the market. The EUR/USD chart below shows that the right time was from 2002 to 2008, and that the timing was poor between 2008 and 2015. This is very clear to see on a long-term retrospective chart, but it’s very difficult to answer this question for the years ahead. Especially since in 2008, conditions were not favorable for the stock market…

The fourth fund, “Amundi S&P 500 EUR Acc,” is identical to the first one, but has higher fees. It is therefore less attractive. This is an older version; Amundi has lowered its fees over time, and the first fund appears to be the new product line. We can therefore expect further fee reductions in the coming years for smaller ETFs.

The 5th option is eligible for a France-specific investment wrapper (a tax-deferred account with lower taxes). This is not relevant here, and it is less attractive in terms of fees than the first option.

The 6th Amundi PEA S&P 500 Screened is hedged, PEA-eligible, and has higher fees. So, aside from the ESG component, it’s a less competitive product than the first one. The assets under management are a bit low, but that’s often the case with ESG ETFs. It’s more of a risk than a red flag. To find out what the ESG component consists of, visit the issuer’s website and open the KID, which indicates that it tracks the “S&P 500 ESG+ Index.” The rest of the research takes place on the Standard & Poor’s website, as they are responsible for the index.

The starting point is the traditional S&P 500 universe, but limited to companies for which S&P has greenhouse gas emissions data (via Trucost) from within the last five years.

The following are also excluded: companies that derive a significant portion of their revenue from coal (≥1%), oil (≥10%), natural gas (≥50%), or fossil fuel-based electricity generation (≥50%); controversial weapons, small arms, military equipment in the broad sense, tobacco, alcohol, and gambling; as well as companies deemed non-compliant with the United Nations Global Compact or embroiled in serious ESG controversies.

The last one on the list is an equally weighted ETF: This is more the exception than the rule. It overweights small-cap stocks and undervalued stocks, and underweights growth stocks. It underperformed during the dot-com bubble (the pro-tech and growth phase), and has underperformed since 2015. It outperformed by nearly 1.5% per year from 2003 to 2022.

A cap-weighted portfolio is an implicit bet on the continued leadership of the largest growth stocks, while an equal-weight portfolio is a bet on diversification and a return to the mean.

It helps avoid sharp declines resulting from significant market concentration, while still benefiting from rising markets. Currently, ten stocks account for nearly 40% of the S&P 500, which means that this index is, in part, a bet on AI.

In conclusion, based on my preferences, I would choose either:

• Amundi Core S&P 500 Acc: The Most Cost-Efficient Option, and a Bet on Continued Market Gains

• Amundi S&P 500 EUR Hedged Dist: a bet on continued market gains and a weaker dollar / a stronger euro

• Amundi PEA S&P 500 Screened: Striving for a Balance Between Performance and Ethics

• iShares S&P 500 Equal Weight Acc: a bet on continued market gains with partial protection against downside risk (whereas in the first fund, the top ten stocks account for 40% of the index, here they account for only 10/500 = 2%).

However, these considerations apply to an established portfolio, with variations that reflect market conditions. In the hypothetical scenario of holding an ETF for one year to get used to market volatility—using about 1% of your target capital—the first choice, Amundi Core S&P 500 Acc, is the most appropriate solution; or, if you have specific ethical preferences, ETF No. 6 (Amundi PEA S&P 500 Screened).

Now that you’ve placed your purchase order, let’s consider some possible scenarios for the next year:

• The market will rise by 10% or more,

• The market will move sideways, with a range between -10% and 10%.

• The market will fall by 10% or more.

All of this is accompanied by significant volatility, driven by investor sentiment, macroeconomic news (inflation, war, or the risk of war), or expectations regarding AI, in particular.

• If the market is rising: great—you’ll have made a small profit, having learned to navigate volatility.

• If the market remains flat: you will have learned to familiarize yourself with the world of the stock market.

• If the market declines: since you have a long-term perspective, you benefit from having already invested a portion of your capital, having lived a market downturn, and securing a better purchase price for the rest of your allocation that you have yet to invest.

So what’s next?

We will see the basics of the other school of investment in publicly traded markets, namely the selection of individual stocks. This one is my favorite and where you will get the most content from my Substack.

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Note on AI use: There isn’t 41% AI in my text—it’s more like 25%, written on a content which I find satisfactory. The difference between our two figures is due to the DeepL translation combined with errors in Pangram, from an original text in French. Pangram penalizes authors for whom English is not their native language.

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

1. Performance

• Over the trailing twelve months, the portfolio is up +18% against 20% for the S&P 500 (total return).

• Year-to-date, +13.2% against roughly +12.4% for the index. At the end of May I was at 18,9%, and with an ATH of 24% in June

• Since inception (2nd of October 2023): +21.2% vs S&P 500 +22.3%

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

I don’t use options and I’m currently unlevered, I plan to write about this later.

My job here is to follow around 15 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

Patience is the key for investors: mistakes are made by entering the market too hastily, exiting too quickly, or trying to time the market—efforts that are unsuccessful most of the time.

Out of an abundance of caution, I’ve been tracking the S&P 500’s performance for several quarters now, and because my portfolio is divided into three parts:

• Stocks that are on the rise, such as Nebius, the star performer in my portfolio,

• New theses that need to be rolled out (Booking, HDS, THK, Microsoft)

• Theses that are taking longer than expected, or that are facing negative momentum (Atos, Novo Nordisk, Adobe).

I don’t see any issues in my portfolio right now that require me to make any decisions.

Valuations for AI stocks remain high and uncertain, and investor sentiment is splitting the market into two camps: the so-called AI winners and the AI losers. Getting into AI-related sectors like memory or photonics seems risky to me, and it’s important to track the momentum of stocks considered “losers” to improve your entry point. The discussion of Adobe’s stock price further on is a very good illustration of this.

Overall, the market is a bit expensive, but there are still plenty of opportunities available. In particular, I see stocks like Costco trading at a price that makes it highly likely they’ll be wiped out in the next market downturn—namely, a P/E ratio of 47, compared to annual growth of 15%...

3. Positions

Nebius Group - 22.83% of the portfolio

Status: On the quarterly results of August, 12 EPS beat estimates by a wide margin (-$0.12 vs -$0.69 expected), while revenue landed essentially in line ($582.3M vs $584.2M consensus). The stock rose more than 30% on the day the earnings were announced and quickly gave up those gains after a few days. The stock is up 9% over the past month.

Nebius is the largest holding in my portfolio, but I do not intend to reduce its weighting given its excellent results and outlook. I had mentioned that I might increase my position around $150, a price the stock briefly surpassed during the July 29 crisis related to Situational Awareness.

On August 24, Nebius completed a $5.75 billion convertible bond offering, including nearly $3.5 billion at 0.5% maturing in 2030, with the remainder at 4.5% maturing in 2034. In addition, $800 million in bonds were exchanged for nearly 16 million shares. This represents a potential dilution of 6%, which is minimal given the need to finance growth—especially growth at such a rapid pace.

Management always finds an opportune moment to announce bad news for shareholders—usually after a sharp rise in the stock price, a major contract, or an excellent quarterly report.

Atos Group - 13.05% of the portfolio

Status: No significant news since the H1 followup. Again, Management is delivering improvements, that the price didn’t catch up. According to my scenarios, Atos Group could be priced around €60-70. My portfolio stays in line with the SP500 performance since Atos price isn’t moving yet. Once it does, I should outperform the index.

Adobe - 10.8% of the portfolio

Status: Although there have been no major changes in the fundamentals, the stock has rebounded by 50% from its lows at the end of June. Its performance fluctuates based on investors’ projections for the software sector, which one day seems to have no future at all, only to become, the next day, an indispensable part of a company once again. The software sector is the perfect example of Mr. Market’s bipolar behavior in our time. The company is set to report on September 10, and this could lead to a re-rating given the lack of disruption anticipated in the deep dive, especially following the recent positive momentum. Keep in mind that the market is a bit slow to catch up, and may decide that the sell-off is over and that an uptrend lies ahead, attracting massive capital inflows to this sector, which is more predictable than the semiconductor sector.

Alphabet - 10.1% of the portfolio

Status: On August 6, Alphabet issued $31.5 billion in bonds, a record high for the company. Google’s parent company is no longer relying solely on its cash flows to finance its AI investments but is also turning to debt. In my view, a prudent use of debt is beneficial, assuming that the company, like its competitors, has visibility into the profitability of its investments. To support this, Google Cloud’s margins have been steadily increasing for several quarters. In addition, Berkshire Hathaway is increasing its stake in Alphabet at Warren Buffett’s express request—a sign that the Oracle of Omaha believes in the company’s competitive moat and its future over the coming decades.

Novo Nordisk - 8.6% of the portfolio

Status: The central point of this quarter is the guidance raise for 2026, with adjusted sales now expected to grow from flat to -6% at CER, vs. -4% to -12% previously. Management gave us two reasons to adjust sales: one good, a provision reversal, and one semi-good, with impairment of terminated drugs.

The main growth is made by the obesity segment, and inside it, by the Wegovy pill (almost none by the injectable Wegovy). I expect the worldwide launch of Wegovy HD to provide additional revenue and operating profit.

Verdict: The volume effect, which is positive, is now outweighing the price effect. In front of us, I see the upside; behind us is the downside.

Booking Holdings - 8,6% of the portfolio

Status: Thesis on track. Despite fears of AI disruption, tourists are still booking with Booking. Room nights grew 5% YoY, the operating margin improved from 33.1 to 34%. Free cash flow minus SBC is up 17%. A pretty solid quarter with beating on expectations on all metrics.

The price is up 24% since my deep dive on June, 5.

Strategy Inc. - 8.6% of the portfolio

Status: Bitcoin was sitting around its floor near the 200-week moving average, slightly below it and suddenly the market decided that the price was too low. As the market is more concerned than obsessed with AI, appetite for crypto came back, but I’m confident it comes back into focus eventually. Momentum is rising again.

An 8-K filed August 24 shows that 18.26M Class A shares were sold for $2.006B net. $136.4M went to buy back STRC preferred shares, $300M to the USD Reserve, and $1.59B seeded a new “USD Cash” pool earmarked for dividends, buybacks, or convertible redemptions. Michael Saylor’s strategy were to “never sell”; it changes to opportunistic buys and sells depending on market conditions, which I find quite sound. The price of Bitcoin appears to be stabilizing around 80k USD, up from 60-65k.

Microsoft - 7.2% of the portfolio

Status: I started a position on the 2nd of July. All the information is in the deep dive and I don’t see major updates to the deep dive from then.

Since my article, the stock is up 31%.

Interparfums - 3,6% of the portfolio

Status: I made a recent buy from Novo Nordisk and Adobe. No issues with both, but I wanted to show you skin in the game. The repricing is underway, with analysts raising price targets.

Everquote - 3,4% of the portfolio

Status: Thesis on track. A deep dive is coming, but the short version is the following: this is an asymmetric position which combines the strengths of a quality company with the discount inherent in small-cap stocks. The bet is that the profitability collapse of 2022 doesn’t repeat, while the market is still pricing in a level of uncertainty that no longer matches the business. I will certainly sell this one to add to AppLovin once the momentum is better.

Harmonic Drive Systems - 1,6% of the portfolio and THK - 1,2% of the portfolio

Status: I wrote an update on both on August 10: both companies raised their guidance and saw their stock prices fall amid concerns over intervention in the yen and the sell-off in semiconductors, but they did not exceed analysts’ expectations.

That’s a pity, because THK’s 364% increase in profits seemed very impressive. HDS will increase production capacity by 33% at its Beverly, Massachusetts, facility and is continuing to invest in Japan, allocating approximately 10 billion yen to the production of gearboxes for humanoid robots at its Ariake plant. THK will once again expand its ball screw factory in Dalian, with completion scheduled for December 2027. Neither Europe nor China is benefiting from capacity investments by either of these companies—which supports the “trusted supplier to the bloc” argument put forward in July.

4. Outlook

I have the following companies on the radar:

• Micron and SanDisk: both are good buys at these prices. I am looking for a continuation of the selloff considering the risk of cyclicity.

• Netflix: a good buy at current price.

• Super Micro Computer: a very attractive PE of 15, with risk of commoditization vs opportunity of bottleneck.

• Dino Polska: A genuinely beautiful Polish compounder, sitting on my watchlist. I’m waiting for signals that the Polish grocery price war is ending before entering. I need to watch it more closely, as the price war could be at the end. The momentum is good on this one.

• AppLovin: the PE ratio tends to compress over time. The growth stays amazing. I made a deep dive about this wonderful company, and expect to buy whenever the momentum gets better.

• DLocal: a good buy at current price. Very good long-term outlook

I write “good buy” meaning that the long-term outlooks are very good, but the stock could go in any direction within a year.

I follow companies on an “anti-radar”:

• Nvidia: The PE has been compressing quarter after quarter, which on the surface looks like the same setup as Adobe or Novo — a quality business getting cheaper. It isn’t. I suppose that as the AI supercycle progresses, the P/E ratio declines due to investors’ fears of the end of the cycle. In the absence of strong conviction, I prefer to sit on the sidelines and wait.

• Eli Lilly: I found no financial shenanigans despite investigation on this subject.

Final thoughts

To continue expanding the content available on my website and help new investors become self-sufficient, I’ve decided to write a series of articles on how to invest, with a particular focus on the basics. Part of what I hope to contribute is providing the information I wish I’d had as a new investor. As a priority, whenever I come across companies that seem like great buys with promising prospects, I’ll publish a deep dive. Otherwise, the focus will be on educational articles.

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

1. Why Invest?

One might already ask: Why take the time to invest? Because of inflation.

The 20th-century British economist John Maynard Keynes witnessed the shift toward an inflationary regime following World War I, which gave rise to two types of actors:

• The losers: Holders of currency and bonds, whose capital is eroded by inflation.

• The winners: Entrepreneurs and investors who have invested in real assets and inventories of goods, because the nominal value of their holdings automatically keeps pace with—or exceeds—rising prices, while the real cost of their past debts decreases with inflation.

2. Types of Investments

What exactly are these asset classes?

-Real estate: You buy a property for yourself or one that generates a return (rental income) known in advance and expected to rise in line with inflation.

-Credit: This refers to a loan with a defined term and terms and conditions established in advance. The gains and losses are known to all parties. This category generally includes bonds, fixed-income securities, savings accounts, and private debt.

-Equity: We are investing in a business whose profits are uncertain and more or less difficult to predict. This category typically includes companies, whether publicly traded or not. Due to the uncertainty of the business, the investor will demand a risk premium to justify the investment, which can be understood in terms of the following question: “Why invest in a company and take the risk of a loss when I can make a risk-free investment yielding 4%?” The maximum loss is 100%, and the maximum gain is potentially “unlimited”.

-Commodities: Prices depend on supply and demand within a production process and, therefore, on the global economic climate, as well as on the level of speculation in this area.

-Store of value: Gold, Bitcoin, etc.: Their value depends on the market’s assessment of their worth and is therefore also subject to significant fluctuations. Gold has generated a long-term return of approximately 8% per year since the 1970s.

3. Within the “Equity” category

Investing in one or more companies can take various forms:

• Public markets: A company goes public to raise capital and provide liquidity. This gives investors the undeniable advantage of being able to sell their shares at virtually any time.

• Private Equity: investment in unlisted companies—illiquid and with limited information available. The average return is generally higher than that of the public market, with capital typically locked up for 10 years.

• ETFs: Exchange-Traded Funds (ETFs) are portfolios of stocks grouped according to a common theme: the S&P 500, MSCI World, STOXX 600, Nasdaq 100, or a more specific theme (semiconductors, water, green energy, automotive, ethically-driven indices, etc.).

• Investment funds: A fund manager collects money from investors and invests it according to a defined strategy in listed or unlisted markets. The manager is compensated through management fees (often 1–2% per year).

Moving forward, we will focus on ETFs and the market for individual stocks. Due to liquidity concerns and a lack of transparency regarding positions, private equity is not an asset class in which I wish to invest. As for managed funds, the high management fees and lack of transparency also deter me from investing in them.

A portfolio made up of ETFs can contain anywhere from one to about ten holdings. Some investors will be comfortable holding just a single MSCI World or S&P 500 ETF. Some will want to focus on specific bets, requiring a portfolio with more lines. If you track an index, you naturally achieve its return, which generally ranges from 6% to 14% per year on the long-term. Monitoring ETFs is very time-efficient and will take you only a few hours a year. In my opinion, this offers the best time-to-return ratio and is even ideal if you have only a limited interest in investing. On the other hand, since ETFs operate at a fairly high level, calculating the impact of various risks is a much more difficult exercise than it is for individual stocks: for example, answering the following question is, in my opinion, beyond the reach of an individual investor: “In the event of an oil shock or a rate hike, what would be the impact on the S&P 500 index?”

A portfolio composed of individual stocks will generally contain between 10 and 25 holdings, and its performance will vary greatly depending on the investor’s luck and skill. It requires significantly more time—at least one hour per week, if not several hours each week. The most complex part occurs before the purchase, when selecting the portfolio’s holdings; once that’s done, monitoring the portfolio is much simpler. Stock picking requires curiosity and a keen interest in the subject; those who engage in it are often enthusiasts. Whereas ETFs operate at a high level of abstraction, stock picking is grounded in reality through the selection of companies based on an investment thesis. In my view, it’s easier to tailor your portfolio to your available time, investment style, and convictions.

The table below summarizes the differences between ETFs and individual stocks:

4. Building Your Target Asset Allocation

In the stock market, expected returns are not linear. Those who invested in the S&P 500 at the top of the Internet Bublle took 11 years to break even. Yes, you went in positive territory from 2006 to 2008, only to experience the Great Financial Crisis.

Similarly, those who invested in Japan in 1990 took 34 years to recover their losses.

Money invested in the stock market is tied up for the long term, generally for at least 5 or 10 years. That is why it is recommended to have funds available to meet short- and medium-term needs. This step, in particular, should be adapted to your specific needs.

1. The first step is to set aside 3–6 months’ worth of expenses for unexpected events, usually in a savings account.

2. Next, you should calculate your needs for various projects over a time horizon of less than 5–10 years:

• A real estate reserve (for a loan, a reserve for renovations, etc.)

• Special events (leisure, work, life milestones such as wedding or moving expenses)

• If you are 45 or older and have children, estate planning is an issue that deserves careful consideration and should be integrated into your investment strategy.

3. With the remaining part, define long-term capital allocation from among the following:

• Fixed income (calculated based on your needs as indicated above)

• Real Estate

• Equities (ETF, Individual stocks)

• Other Asset Classes

The longer the investment horizon, the more the portfolio can be invested in stocks.

If you are 20 years old, your time horizon is potentially 50–70 years. If you are 60 years old, your time horizon is potentially 10–30 years, and you may want greater capital protection in light of your estate planning or future needs.

This question is difficult to answer at this stage and may need to be refined over time. The idea here is to get started and explore this question in greater depth later on.

5. Choosing Your Investment Wrappers

Unless you’re an individual living in Switzerland or Luxembourg—or some other lucky person in a similar situation with a 0% tax rate—your investment decisions will need to be weighed against your tax situation. In financial theory, optimizing your tax rate is just one of many ways to maximize your return (despite all the implications this may have for our societies).

There are many online resources for finding investment wrappers in your country. Start by searching online, and also ask your banker what options he can offer you.

To give you an example and to illustrate my point, I have three investment wrappers available for a French individual:

-A Plan d’Epargne en Action (PEA = Stock Savings Plan) that allows you to hold French and European Union stocks, with a tax rate of 18.6%.You need to wait for 5 years before unlocking the capital, but it is possible to switch investments within the account (e.g., sell Novo Nordisk to buy Interparfums) without incurring taxes, paying only the applicable buy and sell fees.

-A French “assurance-vie” (life insurance account) that allows me to hold approximately 1,000 individual stocks and which I use to hold shares in companies such as Microsoft, Booking, etc. The management fee is 0.5% per year, and when I want to sell shares to take profits, the insurer processes the transaction within 2 to 3 business days and takes a fee of 0.1%. Withdrawals from the wrapper are taxed at 24.7% after 8 years, 31.4% before.

A Compte Titres Ordinaire (standard securities account) with Interactive Brokers that lets you hold everything, with no custody fees and a 31.4% capital gains tax rate when you sell. Less useful for compounding, but it gives you access to some excellent investments.

Having multiple investment accounts sometimes creates a problem when I want to switch from one account to another, because withdrawing funds from my PEA or life insurance policy results in tax implications that I’d rather avoid.

6. Calculate Your Net Return

Let’s look at an example of how to calculate net return based on my three investment vehicles and their applicable fees and taxes, using the purchase and resale of a stock. Suppose that in two years, I’ve doubled my investment, for a return of 100%.

I can invest in this stock using all three of my investment wrappers, but the results will vary depending on my choice.

There is a significant difference between the CTO and the other investment wrappers due to the capital gains tax on the CTO upon resale.

Here is a general rule: Performance is shown net of fees and net of taxes.

On my Substack, all the calculations provided are shown before fees and taxes so that you can adjust them to fit your specific situation.

7. Conduct a pilot test

Investing is a major time and emotional commitment. I started investing in 2023 by transferring a six-figure sum directly. Even though it ultimately turned out well, mentally, it was a nightmare, and I wouldn’t wish it on anyone. Looking back, I think it’s a practice that needs to be tested, and for which I suggest three phases:

1. Learning Phase and First Practice Session

2. Transition phase toward a target portfolio

3. Maturity phase for its target portfolio

1. Learning Phase and First Practice Session

When you first start investing, that’s when you’re most likely to make mistakes that can cost you a lot of money and take a long time to recover from. There’s no “rookie discount” if you lose 50% on a stock just because it’s your first investment.

The goal of this phase is to reduce the risk of capital loss and to understand how markets and companies operate. It is primarily a training exercise.

This will also help you determine whether the subject interests you enough to move toward stock picking and whether you have the stomach to handle the volatility inherent in the stock market. At any moment, you might open your portfolio and see a 30% or 50% loss on one or more positions. Furthermore, watching a stock’s slow decline from its highs to its lows is a real emotional challenge.

The idea is to spend the first year with a portion of your investment capital in the stock market—in an ETF and a few stocks—say, three, if I had to give a number. Some people use “paper trading” (that is, they pretend to invest in a mock portfolio), but in my opinion, nothing beats the emotional involvement that comes from seeing gains and losses in your own money.

This year, you’ll have plenty of reading and studying to do to better understand the world you’re entering.

2. Transition phase toward a target portfolio

Naturally, you’ll want to keep going and try out several investment strategies to see which ones you feel comfortable with. You’ll do a lot of research and evaluate different companies and investment styles, and inevitably, along with your successes, you’ll make a few mistakes.

This is also where you’ll start allocating a portion of your invested capital toward your target amount. This phase is quite time-consuming because it lays the foundation for your life as an investor.

We move away from the purely theoretical approach of the first stage and toward a more practical focus.

3. Maturity phase for its target portfolio

The portfolio is built up to its allocated amount and involves periodic monitoring of the portfolio. The investor now has sufficient autonomy to navigate the stock market.

So what’s next ?

Following this article, the goal is to start investing in an ETF and a few individual stocks. The next articles will focus on choosing this ETF and then selecting individual stocks.

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Here is the link for the next article:

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

The best investment category

AppLovin 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.

I’m sure you already have a few names in mind, and here are some examples.

Investing in such companies offers one of the best risk-reward ratios you can find in the market. Because if a company crushes the competition, is loved by its customers, does more volume, and keeps improving relentlessly — who’s going to threaten it?

Generally, these companies are recognized by the market as very good investments and trade at a premium. The most financially interesting moments to invest in them come during a passing scare.

The tricky part is telling apart a company in decline from a giant going through a moment of doubt.

And sure enough, on August 5th 2026, AppLovin disappointed. Its Q2 revenue landed slightly below guidance, and the stock fell 19.66%. The stock has kept sliding since its all-time high of $745.61 in November 2025. Yet performance remains remarkable, with 53% annual revenue growth and net income up 78% on a trailing-twelve-month basis.

AppLovin is a great example of the virtue of patience, where waiting a year before investing would have paid off. As for me, I hesitated to enter the position back in February near its lows in case it kept falling, but the market decided to hand back part of its loss.

A few words on method and plan

I’m a former project manager with 7 years of experience (PMP certified), and I formalize my fundamental analyses like a project trajectory, from point A (starting point) to point B (destination).

Point A, in our case, is what the company does, together with its environment (competitors, suppliers) and its competitive advantage, then the financial and management side. This is a static study, and if you already know the company, you can skim through it quickly.

Point B is a forward-looking study. I don’t claim to know the future, nor what the company is worth. So instead I look for the different scenarios that could play out for the company, the way you’d run a qualitative and quantitative risk analysis on a project.

This takes the shape of weighing opposing theses — why the stock fell, the arguments for the bear thesis, and the arguments for the bull thesis. I try to make both sides as objective as possible using quantifiable criteria.

I then lay out a map of possible prices at a given target date, without a discount rate, crossing fundamental trajectories with valuation levels — stating my starting assumptions each time. Knowing which valuation multiple to apply at a given date comes down to knowing what the risks, opportunities, and therefore the narrative of the company will be. For convenience and by convention, this section is called “Valuation” even though that’s not really the right word for it.

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 — here it is, without further ado.

The Short Version

After falling more than 50% from its highs, notably due to a quarterly print below expectations, one can reasonably think this is an air pocket, and that growth — spectacular so far (Q3 guidance still sits at +46-48% YoY) — will trend toward 30% a year according to management. The market is punishing this result all the more because AppLovin had never posted below its own expectations since its 2021 IPO.

This looks like a classic buy-the-dip setup on a quality company momentarily tormented by the market. The results due November 11th should confirm this for us. The company could be disrupted, but that seems fairly unlikely in the near term and isn’t showing up in the numbers.

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1. What AppLovin does

Business model

When a company wants to find customers (gamers who’ll buy inside its game, buyers on its e-commerce site), it goes to AppLovin and states its goal (“I want X users who spend at least Y”), and AppLovin’s AI places its ads wherever that’s most profitable.

This model doesn’t require an intermediary ad agency: the company itself is in the driver’s seat, and AppLovin supplies the tool and the algorithm. AppLovin gets paid by taking a commission on what the company spends.

This business model is built on four pillars:

AppLovin Ads — the core of the business. I would have liked to give you a number, but AppLovin sticks to “substantially all of our revenue” in its 10-Q and 10-K filings. The company (the advertiser) sets its campaign goal, and the AI optimizes the placement. AppLovin pays the publisher of the app where the ad was shown and keeps the rest as margin. Pricing is dynamic (as opposed to fixed, like “10 cents a click”): the algorithm adjusts in real time how much to charge based on the advertiser’s goal. Nearly all of revenue comes from mobile apps, and mostly from mobile games.

Since Q2 2026, AppLovin Ads has been available in self-service. Before that, you had to go through an ad rep.

MAX — used by app publishers to auction off their ad inventory. AppLovin takes its commission on the winning bid before passing the rest to the publisher. As with the previous product, nearly all of revenue comes from mobile apps, and mostly from mobile games.

Adjust — a measurement tool for advertisers (how many installs, fraud detection). The only product billed as an annual subscription, unlike the others which run on commission.

Wurl — distribution of video programming across streaming/connected-TV platforms, with ad sales on top. Billed on usage and/or CPM (cost per mille: the price the advertiser pays for 1,000 impressions of its ad, regardless of whether anyone clicks or buys afterward).

Suppliers

AppLovin is hosted on Google Cloud and uses its associated services. Beyond that, AppLovin is structurally dependent on the Apple App Store and Google Play for distributing its content, collecting payments, and targeting rules — and both of these players hold significant market power.

Clients

AppLovin has three customer groups, ranging from the largest companies to small independent operators:

• Advertisers who use the platform to find users.

• Advertising networks who use AppLovin’s mediation solution to buy inventory.

• The community of mobile app publishers who use the mediation tool to monetize their ad inventory.

Having a broad customer base is an advantage from a risk standpoint. Worth noting: the advertising sector is cyclical, and all customers tend to cut spending at the same time during a downturn.

Competitors

The 10-K explicitly names Meta, Google, Amazon, and Unity Software, while making an important point: some of these “competitors” are also partners and clients of AppLovin (“several of which are also our partners and clients”) — the line between competitor and customer isn’t clean. The company also states: “We operate in a fragmented advertising ecosystem composed of divisions of large, well-established companies as well as privately-held companies.”

Here’s an illustration of the three preceding sections:

Competitive advantage

The main competitive advantage lies in the quality of the company’s products and the quality of its management.

The presence of network effects and switching costs helps reinforce the company’s lead and insulate it from competition.

On the network effect, the 10-K describes it this way:

“As more advertisers use our advertising solutions to market and monetize their content, we gain access to more data regarding users and user engagement, further strengthening our scaled distribution. As our distribution grows, we gain better insights for Axon AI, which then further enhances the efficiency and effectiveness of the Axon Ads Manager.”

This is primarily a data-scale barrier. Anyone with the same level of data would erase the competitive advantage — which isn’t currently the case.

I lack information on the company’s switching costs, and therefore on how easy it is to change advertising provider. It doesn’t strike me as especially complicated, especially since it seems possible to bring on a second provider, run comparisons based on a pilot, then progressively migrate ad campaigns over. We’re not in a Microsoft-style situation where entire teams’ workflows are so embedded that they can’t switch overnight. All the more so since the company’s contracts include clauses allowing cancellation at any time.

2. Financials

Key financial metrics

Commentary

The numbers are staggering. Decelerating, sure, but staggering nonetheless — especially for a TTM PE of 26. No sign of inflation from financial shenanigans after reviewing AppLovin.

Revenue

Growth has decelerated continuously and steadily over the last five periods, going from 75% (FY ’24) to 55% (H1 ’26 YoY). AppLovin states that the composition of growth has changed in nature, and breaks its own revenue down into two factors — install volume and net revenue per install (MD&A):

• FY2024: installs +50%, net revenue per install +22% → growth driven by volume.

• FY2025: installs +3%, net revenue per install +72% → shift toward price/monetization.

• H1 2026: installs -10%, net revenue per install +75% → volume is declining, and all growth now comes from monetization per install.

• Q2 2026 alone: installs -2%, net revenue per install +58% → same read, slightly softer.

Net revenue per install is the net amount of money earned over a period divided by the total number of installs generated. The number of installs tends to mechanically shrink (you only install once), and on that shrinking base, net revenue per install climbs (which can happen repeatedly, by nature).

Worth remembering, still: continuing to grow like this at these revenue levels isn’t sustainable over time. A cumulative growth rate of 50% a year gives you roughly 57x the initial amount after 10 years. So what to make of a doubling, or 75% a year?

Operating margin

With revenue growth outpacing cost growth, AppLovin’s business is scalable and shows significant operating leverage. The rise in GAAP operating margin from 42% (FY ’23) to 78% (Q2 ’26) is spectacular. Unfortunately, since the ceiling is 100%, there isn’t much more improvement to hope for on this front going forward. Holding at these levels remains impressive in itself.

Net income and free cash flow

AppLovin’s net margin is boosted by a low tax rate — 13.1% in 2025, well below the 21% federal rate. AppLovin benefits from an FDII (Foreign-Derived Intangible Income) tax break, a US tax provision created in 2017 (the Tax Cuts and Jobs Act).

I like comparing net income and free cash flow to spot variations that might reveal hidden issues. Here, they converge toward the same figure, around 65%, which is excellent. For net income, growth outpaces revenue growth in every period, driven by a scissor effect (opex shrinking as a percentage while revenue doubles).

For FCF, I usually strip out SBC, which is a non-cash charge. Growth in this metric looks larger since it starts from a smaller base.

Balance sheet

The company is financially very solid, with a debt-minus-cash to equity ratio of 0.15x. AppLovin is holding onto its long-term debt; the ratio is shrinking through the accumulation of cash and equity, which are growing faster than everything else.

3. Management

Adam Foroughi — CEO (co-founder, since 2011)

Foroughi holds only 9% of the economic capital but 61.6% of the voting power (Class B shares carry 20 votes each), 66.9% including the voting agreement tying him to Herald Chen. This makes AppLovin legally a “controlled company,” although it doesn’t make use of the governance exemptions that status allows.

According to Forbes and Bloomberg estimates, this would represent 66% to 85% of his net worth. In terms of incentives, his salary has been capped at $400k since the IPO, with no increase since.

The fact that the CEO is also the founder is a very good sign, one that typically generates outperformance.

More broadly across the leadership team, the variable portion of compensation plans is paid in equity, not cash — a notable point of alignment.

Capital allocation

No dividend is currently paid. There are share buybacks, but they primarily serve to offset dilution from SBC. Beyond that, the amount repurchased remains marginal — 0.5% over 2025, and 0.9% over H1 2026. The declining share price will mechanically push this share higher.

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 fall?

Starting in February 2025, a series of short-seller reports — Fuzzy Panda Research, Culper Research, then Muddy Waters Research in March 2025 — accused AppLovin’s AXON ad system of circumventing Apple’s App Tracking Transparency framework. These allegations fed an SEC investigation that weighed on the stock in early 2026, down to a low reached around February 12th 2026 — nearly 50% below the late-2025 peak.

Next, doubts about the durability of growth. As the market re-rated software names exposed to AI disruption risk, analysts considered the ~30% long-term growth assumption against a stock still priced for more and chose to lower their price targets.

Finally, and most recently: the August 5th 2026 earnings release. Q2 2026 revenue slightly missed consensus, and AppLovin issued guidance slightly below expectations. The stock then fell 19.66% intraday, wiping out roughly $40 billion in market cap — even as the SEC closed its AXON investigation that same day with no action taken. Several downgrades and price-target cuts followed (Wells Fargo, Piper Sandler, Goldman Sachs, BofA Securities).

Bear thesis

Growth is slowing

Revenue growth has declined over the last four periods (75% → 70% → 56% → 53% YoY), and Q2 2026 marks the first guidance miss since the 2021 IPO. The market can read the combination of the two as the signal of the beginning of the end of growth.

As Peter Lynch put it, “small company, big moves, big company, small moves.” Growth is bound to mechanically shrink over time.

As growth declines, it will inevitably revert to its natural, and more cyclical pace: the model depends on the ad budgets of mobile/gaming advertisers — a sector historically more discretionary, as AppLovin doesn’t require multiannual contracts.

In gaming, a significant share of revenue, the segment is mature: growth there already comes more from existing users. Nothing rules out this slowdown continuing into Q3.

Disruption risk

Analysts explicitly cite a risk that AI tools could erode AppLovin Ads’ competitive edge, wondering if 30%+ long-term growth can hold.

Indeed, the R&D headcount remains modest given the stakes. 380 R&D employees, or 42% of the workforce, are tiny compared to the AI resources of Meta, Google, or OpenAI. The current model is mainly based on a data flywheel. If a competitor with stronger AI R&D managed to replicate AppLovin Ads with less data (via more efficient techniques), the moat could give way faster than a simple data-volume catch-up would suggest. But I don’t think it will happen in the next quarter, and the competitors have shown before a propensity to fail outside of their core products.

This point matters even more given that AppLovin’s revenue depends on essentially a single line, AppLovin Ads. Disruption is all the more likely for a single-product company.

Capital allocation

$2.19 billion was repurchased in FY2025, a year that includes the all-time high (late 2025), without a quarterly breakdown of the average price paid to confirm whether the capital was deployed in a disciplined way. This should be put in perspective, though, since the question mainly matters near highs and doesn’t really apply here.

Ongoing lawsuit

Two US law firms (Schall Law Firm and Bragar Eagel & Squire) have announced they are investigating/soliciting shareholders for a possible class action against AppLovin, over allegedly false statements or omissions of information material to investors, regarding purchases between May 10, 2023 and March 26, 2025. This is a private civil action, separate from the SEC investigation, which has just been closed.

What if the bear case were true?

In that case, management would lower its guidance and report below its own internal forecasts and analyst expectations. The indicators to watch then are revenue and net margin. Moreover, products from competitors could emerge, and claim similar results.

Bull thesis

1. A strong growth with normal deceleration

The market seems to be forgetting that the company still posted 53% revenue growth. I personally estimate this is a simple air pocket. Though I say this, it is without certainty and the decline could continue over the coming quarters.

My confidence comes from the company’s track record and from its previous margin expansion, which remains impressive.

To hit these targets, the company has a growth relay in consumer/e-commerce : a self-service platform opened to the public in 2025. Revenue is seasonal, and Q2 is usually the slow quarter. Even so, advertiser spend rose 28% versus the Q4 2025 seasonal peak. The web/e-commerce vertical now runs at a record ~$1 billion annual run-rate, and management estimates this market at 5-10x the size of mobile gaming.

2. Management commentary

The miss came from an execution problem. The CEO states that the shortfall came from the timing of AI model improvements on the gaming side — “we know what happened, and it’s already been addressed.” Advertiser appetite remained healthy during the quarter.

Management maintained its long-term outlook on the August 5th call of ~30% combined annual growth for gaming + consumer.

3. A highly profitable business

The company generated $863.3 million in FCF in Q2 2026 alone, and 32% FCF growth after deducting SBC — still well above nearly the entire software/AdTech sector, with a balance sheet carrying almost no net debt. Incremental costs are minimal, since this is a scalable business.

One of my favorite indicators, the ROIC, indicates a steady growth in profitability, which remains impressive for a company of that size. Every invested dollar is producing almost a third in cash. A declining company would show a fall in this metric.

4. Only one shortfall so far

Even though the company had a miss, it’s a single occurrence since the IPO. They’re only human, after all. By nature, this kind of stumble remains a weak signal, especially when it’s being closely watched by management itself heading into next quarter.

What would invalidate the bull case

Would a new quarter below guidance do it? No — because it’s always possible that a simple air pocket produces a continued decline in install volumes without offsetting price gains.

The real signal would be a confirmed slowdown in consumer/e-commerce growth, since that’s the growth relay put forward to justify the thesis beyond mature gaming.

5. Valuation

The numbers only make sense if you’ve read the two theses section. A valuation without a thesis is just a spreadsheet.

The valuation requires an important assumption, being the continuity of a normal economic environment, i.e. without recession, major credit event, market crash. 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 assumptions are the following:

• For all the cases, the margin stays flat.

• For the revenue, it goes from 10% per year in the base case, to 30% per year in the central case, and 40% per year in the bull case.

The valuation scorecard map

My conviction sits on the $1,549 scenario or higher.

I’d imagine that if the gap closes next year, AppLovin could once again trade at a PE of 50, under the effect of irrational exuberance — but not by 2030, if the company holds at 30% annual revenue growth.

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 share of valuation comes from the multiple.

Catalysts

Q3 results (the major point):

• If AppLovin reports below expectations: this would break confidence in the guidance more durably than an isolated accident. E-commerce would slow if management’s “it takes time” turns into disappointment rather than acceleration.

• It’s possible the air pocket continues into next quarter, or even across a run of quarters with a focus on long-term indicators — producing a scenario similar to MercadoLibre (falling share price alongside renewed long-term prospects).

• If AppLovin reports in line with expectations: the market will likely want a quarter or two of confirmation, and will gently begin a re-rating.

• If AppLovin reports above expectations: the market will forget its fear, and the stock could gain 20% in a single session and keep re-pricing higher over the following weeks.

• Analyst revisions will follow the Q3 results and amplify the move up or down in the share price. The sell-side consensus remains heavily bullish despite the miss: 29 buy / 0 sell / 3 hold across 30 analysts (S&P Global), with an average price target of $575 — roughly 66% above the current price ($347). The market has punished the stock more harshly than the analysts who follow the story closely. That’s generally a good signal for a buy-the-dip.

On the shareholder lawsuit: its dismissal could trigger a modest bounce in the share price, while its continuation would weigh on it.

A re-rating could also come if a superinvestor (Pat Dorsey or Steve Mandel) builds a stake, or if buybacks continue. The company could also decide to increase its allocated buyback amount as a signal of confidence.

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 of 20-25.

• It’s hard to give a PE ratio as a support level, since the company has broken through its last support on the way down.

• This works if AppLovin surprises to the upside next quarter, and fails if AppLovin disappoints or worries the market for a second quarter.

Capitulation:

• It’s possible we head toward a very bearish scenario if the company reports 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, AppLovin 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. As for me, I 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 playing out will probably take 2-3 years. In Fortinet’s case, which shows some similarities, it took a year between the August ’25 decline and the re-rating over April-July ’26.

Final Thoughts

I think that starting at a PE of 22, AppLovin becomes a great buy, and starting at a PE of 16, a screaming buy. Who knows where the share price will end up falling? It depends heavily on investor sentiment. I plan to enter soon, because I’m convinced the company has only hit an air pocket. It’s possible, but in my view unlikely, that next quarter comes in below expectations. It should legitimately either be in line or beat expectations. As mentioned earlier, buying the dip can be either the best or the worst investment decision there is. I published this deep dive ahead of my investment decision, unlike with Booking and Microsoft, to give you time — and to give myself time — to properly weigh every element before making a call.

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Disclaimer

All content published by JB Peter on this platform is strictly for educational and informational purposes. It does not constitute investment, financial, legal, or tax advice, nor does it represent a personal recommendation or solicitation to buy or sell securities. This research is operated by ORIACON (SASU) and reflects independent corporate analysis. Every reader must conduct their own independent research (Due Diligence) or consult a licensed professional before making any financial decision, as financial markets involve a high risk of capital loss. At the time of writing, ORIACON or the author DO NOT HOLD shares in the company analyzed in this article. Following this publication, ORIACON and the author reserve the right to buy, sell, or modify positions in any security mentioned at any time, without prior notice to readers or subscribers.

As you can deduce from the name, the central thesis is that harmonic reducers (HDS) and planetary roller screws (THK) are in short supply, with demand exceeding supply. It gives us every aspect we want as investors: prices increases, production and guidance increases, and multiple expansion (PE ratio, Price to Sales, etc.).

I wanted to make an update since both companies beat expectations, both raised guidance and both fell after their results. This article will provide you an update on:

1. Why they fell

2. The bull vs bear part I made in the previous article

3. The valuation scorecard

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1. Why HDS and THK fell

Sector rotation and macro

The market feared an intervention on the yen, as the currency was weakening. The government would sell dollars and buy yen: a stronger currency would weaken the industrials such as THK and HDS.

Moreover, there was a broad AI/semiconductor selloff on August 6-7. Other names in the sector, such as Kioxia, Taiyo Yuden, Murata and Tokyo Electron, were all down on the same days. THK and HDS got dragged along with the rest of the sector.

Pre-earnings rally

THK was up roughly 23% in the week before its own results, and roughly doubled over the past year. HDS was sitting near its 52-week high, already a 3-bagger YoY.

Results were below expectations

Here is a quick update on the results:

As the market rallied before the results, the expectations were obviously stronger.

THK’s net income is up 805% YoY. It was mostly a one-off gain from the divestiture of its automotive unit. The truth lies in a normalized net income closer to +364%.

There was no explicit mention of take-off in humanoid robotics, so the market feared the AI thesis wasn’t there: HDS’s guidance hike came with just “industrial robots and semiconductor manufacturing equipment”, and THK’s growth is also concentrated in “electronics and semiconductor” demand.

2. Bull vs bear update

I made a bull vs bear in the previous article, some points may have changed. It’s worth noting THK’s cost-to-sales ratio improved 4.6 points year over year. HDS’s operating margin for a single quarter already exceeds its full-year FY2027 guidance. It goes into the good direction.

Bear argument #1: China competition

Goldman Sachs conducted a field survey of 9 suppliers in China in November 2025. They planned an increase in capacity, from 100,000 to 1M units. Moreover, the direct competitor of HDS, LeaderDrive, mentioned booked capacity through 2027, with production expected to reach 1M units in 2026.

Bear argument #2: Price rally and cyclicality instead of robotics

As said before, both stocks went up significantly. The market is still cautious about evidence of bottleneck pricing, regarding the first bear point. Neither company has mentioned humanoid-specific segments. What is sure for the moment is the capex and the increase of competition on the supply side. If there is a bottleneck, nobody knows when it can stop.

Bull argument #1: Demographic tailwind / labor shortage

This point is unchanged from the previous article and certainly won’t be any different throughout the investment period. Demographics aren’t in quarters, but in decades.

Bull argument #2: Operational execution

Both companies raised the guidance, a good signal for the continuation of the thesis. The sustained execution is a necessary condition for the whole bull thesis to materialize.

Bull argument #3: Real barriers to entry

This point is unchanged from the previous article and certainly won’t be any different throughout the investment period. The qualification cycle for a new supplier is usually several quarters: by that time, the thesis will be played out.

Bull argument #4: The fragmentation of the world into blocs

I said in the previous article “each bloc (Western, and within the West, the EU, the US and Japan taken separately) will want to keep strategic suppliers tied to its own bloc rather than depend entirely on an outside supplier. This isn’t just a price or volume argument: it’s a supply-security logic that structurally leaves room for a “trusted” bloc supplier — even at a higher price, even with less volume than the cheapest Chinese option. Both HDS and THK benefit from this mechanism, independent of their pure price competitiveness. “

This argument has another confirmation in other compartments of semiconductors:

• On rare earth elements, China restricted access to Japan for dual use and permanent magnets over Taiwan tensions

• On chipmaking equipment, U.S. export controls target American toolmakers themselves, while Japan’s Tokyo Electron and the Netherlands’ ASML negotiated carve-outs letting them keep selling into China.

The logic is the following: if possible and for strategic sectors, the US companies would get a Tier 1 group of US companies, then a Tier 2 group of western companies (EU, Japan, Korea, etc.) and then a Tier 3 group of companies (China, rest of the world) with a focus on price.

New: Bull argument #5: The main competitor of HDS, LeaderDrive, is full until 2027

The other side of the first bear argument is that if LeaderDrive is in a supply shortage and there is room for western companies, then HDS should also be in a supply shortage for the coming quarters.

New: Bull argument #6: Despite growing capacities, the Total Addressable Market is growing significantly

HDS is adding 33% more capacity at its Beverly, Massachusetts plant by December 2026, on top of 13% already added in December 2025. In Japan, roughly ¥10bn is going specifically into humanoid-reducer production at the Ariake plant, targeting ¥10-20bn of revenue from that line in FY2027.

Goldman Sachs has also revised its humanoid market-size estimate upward since the original article: from roughly $3-5bn today to $15-19bn by 2030, and $38bn by 2035. The insight I want from this is that the runway until market saturation is longer than expected, allowing HDS and THK to compound for longer.

3. Valuation scorecard

Despite revenue growth running below the +50% YoY assumption from the previous article, the net margin of THK is already running above the scorecard’s Bull case. HDS’s Q1 margin is climbing faster than expected toward the Central case. I updated the valuation scorecard to reflect the shorter horizon now that we're getting closer to 2030. I expect the price to increase several times based on sentiment in the coming quarters, then I would sell the news before the price drop. The tricky part is to know when to sell cyclical stocks: you’ll never get the perfect tops and bottoms.

Conclusion

There’s still no clean evidence of a bottleneck, but both companies are tracking their bullish-scenario margins already — what the coming quarters should settle is how much of that holds up. The low weighting of stocks in the portfolio reflects this lack of predictability, although the balance between upside and downside potential remains positive. I would consider increasing my position in both if I had additional capital to deploy, given that the fundamentals have improved faster than the price.

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Disclaimer

All content published by JB Peter on this platform is strictly for educational and informational purposes. It does not constitute investment, financial, legal, or tax advice, nor does it represent a personal recommendation or solicitation to buy or sell securities. This research is operated by ORIACON (SASU) and reflects independent corporate analysis. Every reader must conduct their own independent research (Due Diligence) or consult a licensed professional before making any financial decision, as financial markets involve a high risk of capital loss. At the time of writing, ORIACON or the author HOLD shares in the companies analyzed in this article. Following this publication, ORIACON and the author reserve the right to buy, sell, or modify positions in any security mentioned at any time, without prior notice to readers or subscribers.

I got the business right, but got the momentum wrong. I was happy with the good buy result, so that’s all I had. I had to come back and add to the position later to “catch up” for entering too early.

This is the lesson behind three categories of stock you’ll experience as a buyer.

Good buy. Often called “a no brainer”, as you pay a reasonable price for a great business. That’s exactly what Adobe and Novo were last year. But the stock could go anywhere within a year. Your money can be stuck with no progress: not the best for psychology. After a few years, if you are patient enough, you can get easily 20% per year on those.

Great buy. The ratio between potential loss and potential upside turns clearly in your favor. You’re paying an attractive price for an excellent business at a moment when sentiment is depressed.. This is the zone where discipline is enough. It’s Alphabet on April 25, at 17x earnings in the middle of the AI-disruption scare on Search.

Screaming buy. A market anomaly, like Meta and Netflix in 2022 — both crushed in the same bear market, both recovering into some of the best returns of the decade (Netflix is almost a 7-bagger in 3 years). This is the dream every investor chases — and it’s rare, and brutally hard to catch, because it shows up in the middle of panic, exactly when most people have no cash left and no stomach to act.

Example with Netflix in 2022

• With a buy in the good buy zone ($60), and a sell in may 2025 ($120), you made 25% CAGR.

• With a great buy ($40), you made 43% CAGR

• With the screaming buy zone (20$), you made 80% CAGR.

If you just buy and hold, your performance tends to the long term rentability of the stock, with probably no more than 25% CAGR (which is already excellent on the long term).

The general guide: For an exceptional business with intact fundamentals, a PE in the 15-19x range is usually a reasonable marker for great buy territory; below that, you’re approaching the screaming buy bar. Take a step back before clicking the button. I bought Microsoft with a PE of 22 at the end of June, I think it’s a great buy. Adobe would be there with a PE of 14. A scream buy is a market anomaly — rare, and confirmed only after the fact.

What I take from this: I’ve raised my own bar. I used to settle for good buys. Not anymore. The Adobe experience — being satisfied too early, then having to come back and add to the position to correct for it — taught me that patience has a cost when you skip it, even when the thesis holds. My new standard for any new position: great buy, minimum. As long as the opportunity of a great buy, I will stay with my portfolio and continue to investigate. I won’t add positions for the sake of diversification.

Compounders

Do you remember the first rule of investing? Don’t lose.

The goal of this category is to secure your capital and let it appreciate over a long-term horizon. It’s the Quality phase of Warren Buffett (after his cigar-butt phase).

The objective is to maximize risk-adjusted return by holding exceptional companies you buy at a good price. Peter Lynch called it Growth at a Reasonable Price (GARP).

The rationale behind this is simple: roughly 4% of stocks generate 100% of long-term market returns.

The longer you hold them, the more important the growth of free cash flow becomes, and the less important the entry PE ratio becomes.

You can invest actively, holding individual stocks, or in a passive way with ETFs.

You may ask: which ones?

Since the best long-term risk-adjusted returns are in quality stocks and large ETFs, you would rather hold the Mag-7 or the MSCI World / Nasdaq-100 than no-growth dividend stocks. You could expect 15-25% per year of growth just on the FCF, plus a rerating of the PE.

Investors who got beaten down on a quality stock may say ‘I’m here for the long-term’. It is a good sentence because in this category, time is your friend, and you’d probably recover if you are patient enough.

Multibaggers

The goal of this category is to get massive gains in a short period of time. Why wouldn’t everybody do that ? Because it’s damn difficult ! You may find:

• Growth stock: finding it before everyone else

• Turnaround stocks: distinguish which company will recover

• Cyclical stocks: correctly anticipate the direction before the actual move

• Cryptoassets or commodities: correctly anticipate the direction before the actual move

You can also invest here in an active way, with the holding of individual stocks, or in a passive way with ETFs.

The way you deal with it is with the intrinsic asymmetry of the stock market: what you can lose is limited (max 100%), and what you can win is potentially unlimited. When you are leveraged, you break this asymmetry (generally, don’t be leveraged, especially in multibaggers). The ideal setup is a stock where ‘either I gain a significant amount, or I don’t lose much’. Don’t forget these are riskier stocks.

Some market spots are ideal for this category: small-caps, as they are under-covered, and inaccessible to big money because of illiquidity — meaning they can rapidly become a major shareholder.

Most 10-baggers come from small-caps, and some of them have the advantages of compounder as they have quality stocks, and of a multibagger with the re-rating.

I said you could expect 15-25% per year for the compounders, plus the rerating. For the multibaggers, almost everything is possible here, plus the rerating. It is a reason why I don’t like small-caps indexes. Moreover, the best ones will leave the intermediate indexes to be in the top indexes (nasdaq100, SP500, etc.)

Some stocks compound for so long that you end with a 10-bagger just by sitting on them: if you hold a stock for 10 years with a 25% CAGR, you have a 10-bagger. They are multibaggers in disguise - I still categorize them as compounders.

In this bucket, time may bless you or punish you. And the volatility is quite high (30-70% in a year is normal), you need a stronger stomach than in compounders. And if you’re leveraged, volatility is your enemy.

How to deal with both

• In a bull market, multibaggers may capture a significant part of the upside. When a multibagger pays off, it usually compensates for all the losers left along the way. As the portfolio grows, part of the gain stays safe in compounders, and part gets reallocated into other multibaggers. I call this a ratchet effect. It matters because a portfolio has a natural tendency to concentrate, especially toward its multibaggers, giving them a disproportionate size.

• In a bear market, capital can be reallocated from compounders to multibaggers to regain exposure to the upside and get strong entry points on beaten-down multibaggers.

• Tax matters from the moment you enter a position, not just at exit — always think in after-tax terms.

• As the portfolio grows, the natural tendency is to shrink the multibagger percentage and grow the compounder percentage. Above $1M, being 100% in multibaggers feels like madness: why risk losing everything you have for money you don’t need?

My personal portfolio of six figures is designed to run 50% compounders, and 50% multibaggers, though I frequently need to reallocate toward compounders (the ratchet effect).

Questions

This probably raises a few questions worth asking yourself:

• Categorize your own positions: which bucket does each one actually belong to?

• Are you satisfied with your current allocation between the two?

• Is there redundancy in your portfolio — multiple positions doing the same job?

• Is there real diversification, or does it just look diversified on paper? Are the underlying theses and key factors correlated?

• Do you understand what you hold and why you hold it?

• Is each stock you hold actually better than its category ETF?

Despite fears of AI disruption, tourists are still booking with Booking. Room nights grew 5% YoY, the operating margin improved from 33.1 to 34%. Free cash flow minus SBC is up 17%. A pretty solid quarter, beating expectations across the board.

Verdict: I would love to add content on it, but nothing to see here, folks. Everything is fine.

My reaction

Booking is up today because such a juggernaut with a PE less than 25 times makes no sense. The numbers in the valuation section are lower to Novo Nordisk, but Booking has more love from the market, and the fears are easier to dissipate.

I think I will make a 100% return in the coming quarters and sell it for another GARP in a downturn.

As a client, I like Booking, and I really like it as a shareholder with its impressive net margin and no clear competition. Airbnb’s prices increased, so I perceive less value from it.

Booking is a clear example of “Invest in what you know” and an easy business to understand. Investing feels sometimes like an intellectual race, but the reward lies mostly in the simplest businesses.

2. The Numbers

2.1 At a glance

This table summarizes the key metrics from Booking’s Q2 FY2026 earnings release: https://ir.bookingholdings.com/overview/default.aspx

2.2 Commentary

Revenue :

Total revenue grew 8% YoY to $7.35B (7% FX neutral):

• Merchant revenues (Booking directly bills the final client, and afterwards pays the merchant) grew 15%.

• Agency revenues (Booking takes a commission on the reservation) fell 7%.

• Ads : +8%

The opposite direction between merchant and agency is following the Booking business model transition. So it is going as expected, and room nights are in line with the global increase.

Margins:

Net income margin grew to 26.5% from 13.2%. The number is overrated, since a non-cash FX gain on euro-denominated debt of $195M (vs a loss of $962M a year ago) occurred this quarter. The best metric to follow is the GAAP operating margin at 34.0% (vs. 33.1%, +0.9pt) driven by fixed-cost leverage (total operating expenses +7% vs revenue’s +8%) and cost reduction.

The Transformation Program expects an annual run-rate savings raised from $550M to ~$650M, targeted by end of 2027 — confirms the deep dive’s “more capacity to invest” thesis.

Net income and free cash-flow

As mentioned above, the FX gain on the debt is distorting the net income: 118% YoY. I prefer to track the free cash-flow (with subtraction of SBC), which grew 17% YoY.

The company bought back $3.7B in shares (vs. $3.6B in Q1 2026) and paid a $0.42/share dividend.

3. Key Takeaways from the Earnings Call

AI dominated the Q&A — 5 of 9 analyst questions were AI-related. Still a concern for most.

AI disintermediation: management put a number on it. Asked directly about AI’s impact on the top line, CFO Ewout Steenbergen volunteered the most concrete data point of the call: traffic arriving from large language models — paid and unpaid combined — is “still significantly below 1% of our room nights,” and “that hasn’t moved so much recently... no material change over the last few months or quarters.”

This is the first time management has quantified the AI-referral contribution, and it lands squarely in favor of the deep dive’s bull case: the disintermediation threat remains a future risk only.

A new crack worth watching: SEO pressure, mentioned for the first time. Management acknowledged declining organic search traffic: “I do believe that some of the changes that were made in the display at Google definitely put some pressure on SEO. Putting in that AI overview probably has done it. Now, here’s an important thing to keep in mind. So, our direct, our direct mid-60s, hasn’t gone down at all.”

Management is citing Q3 as the key quarter to watch: peak European summer, the first full quarter of Transformation Program savings, and the point where Middle East headwinds finally lap their own anniversary, normalizing the base effect.

4. Theses Update

4.1 Bear Thesis Signals

Room nights declining in absolute terms on core Booking.com. Not triggered. 325M, up 5% YoY, a record.

Direct booking rate below 60% and falling. Not triggered, though the sources disagree on the number. The 10-Q says mid-fifties, flat versus last year. Fogel said mid-60s on the call, also flat versus last year. Pick whichever number you trust more, but none of them is falling.

Customer acquisition cost rising specifically on accommodation. Inconclusive. No segment-level disclosure exists. Marketing spend as a share of gross bookings ticked up 10 basis points, to 4.7%. But is going from 4.6% to 4.7% significant?

An AI agent completing hotel bookings at scale outside an OTA. Not triggered. Management put a number on it this quarter for the first time: LLM referral traffic is below 1% of room nights, and that share hasn’t moved in months.

4.2 Bull Case

FCF minus SBC growing. Confirmed. $3.50B this quarter, up 17%. Pretty solid.

Operating margin expansion. Confirmed with the GAAP Operating margin at 34.0%, up 90 basis points.

Transformation Program flowing to the bottom line. Confirmed, and moving faster than expected. The savings target rose from $550M to roughly $650M this quarter. Another $100M got identified on top of that, from B2B consolidation.

Genius as an anti-disintermediation moat. Confirmed, strengthening. Level 2 and 3 members now account for a high-50s share of room nights and more than 30% of the active customer base. Both figures are up year over year.

Aggressive buybacks at depressed prices. Confirmed, unchanged pace. $3.7B this quarter. $14.5B of authorization still on the table.

Direct channel above 60% and rising. The exact level is disputed between the 10-Q and the call. It is the same argument as bear signal #2.

5. Valuation

I’m sticking with the original deep dive assumptions. I updated the current date and the EPS. The end date stays fixed, which mechanically inflates the annualized figures, since the same target price is now spread over a shorter time horizon.

The normalized P/E is 21.6x, based on normalized earnings of $7.11B, driven by 1) adding back the $457M KAYAK impairment recognized in Q3 2025, 2) removing the $581M non-cash FX gain on euro-denominated debt that artificially inflates TTM GAAP earnings, and 3) the $25M tax benefit associated with these two adjustments.

CAGR calculated from $204.1 to June 5, 2028 (1.83 years), dividends included.

How to read this table: in the central scenario at PE 30x, the price target reaches 358$ by December 31, 2028, a total return of +75% from current price, or a CAGR of 36.0% including dividends. It is the floor of my conviction, since 30 is still a quite conservative PE ratio for a business of this quality.

I’d consider selling above 35x.

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Disclaimer

All content published by JB Peter on this platform is strictly for educational and informational purposes. It does not constitute investment, financial, legal, or tax advice, nor does it represent a personal recommendation or solicitation to buy or sell securities. This research is operated by ORIACON (SASU) and reflects independent corporate analysis. Every reader must conduct their own independent research (Due Diligence) or consult a licensed professional before making any financial decision, as financial markets involve a high risk of capital loss. At the time of writing, ORIACON or the author HOLD shares in the company analyzed in this article. Following this publication, ORIACON and the author reserve the right to buy, sell, or modify positions in any security mentioned at any time, without prior notice to readers or subscribers.

The central point of this quarter is the guidance raise for 2026, with adjusted sales now expected to grow from flat to -6% at CER, vs. -4% to -12% previously. Management gave us two reasons to adjust sales: one good, a provision reversal, and one semi-good, with impairment of terminated drugs.

The main growth is made by the obesity segment, and inside it, by the Wegovy pill (almost none by the injectable Wegovy). I expect the worldwide launch of Wegovy HD to provide additional revenue and operating profit.

Verdict: The volume effect, which is positive, is now outweighing the price effect. In front of us, I see the upside; behind us is the downside.

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My reaction

I published a note yesterday about how much I dislike the word adjusted. Here I don’t see any partial presentation of the truth. The ‘adjusted’ framing asks readers to do extra work to assess the current situation. That’s part of what I do here, and it’s normal for me to provide it to you. Management is right to give us this presentation, as it delivers the most precise picture of the business health.

With Novo Nordisk, being contrarian feels like a long path of patience, and any bottom-sell could cost you a lot, just as being too early could. It was a market darling, and then a fallen angel.

The only things that could resolve its situation are time and work (from the company). They are on track: the downside is certainly behind us, and the upside is coming.

The numbers, the bear thesis status, and the bull thesis are here to validate these points.

As a personal view, somebody from my family is taking a GLP-1 drug. It turns out she was prescribed Zepbound, presented to her as ‘more effective.’ I have to admit I didn’t take that news particularly well, as a Novo shareholder. I’m fairly convinced that going forward, Novo’s prescriptions will pick up again with Wegovy HD.

2. The Numbers

2.1 At a glance

This table summarizes the key metrics from Novo Nordisk’s Q2 FY2026 earnings release: https://www.novonordisk.com/content/nncorp/global/en/news-and-media/news-and-ir-materials/news-details.html?id=916590.

2.2 Commentary

Adjustments

Management provided adjusted numbers relative to 2 one-time events.

• Impairment of DKK 6B, with DKK 4B to the sole monlunabant drug. Even though it is a non-cash expense, it carries a real cost. Additional impairment could occur in the coming quarters, depending on the results (and terminations) of the pipeline. I see it as something you should be prepared for as a pharmaceutical company shareholder.

• Rebate provision reversal: Under the U.S. 340B Drug Pricing Program, manufacturers must give discounts on drugs sold to hospitals and clinics serving low-income patients. Novo booked a provision in ‘25, which turned out, this quarter, to have been too conservative. The release of this provision gives a one-time boost to reported sales and profit. The underlying performance of the company is best read without this adjustment.

In my opinion, the best number for profit analysis is without rebate provision reversal and with impairment, as it is a “recurring” expense in the life of such a pharmaceutical company.

Revenue

Q2 2026 reported sales increased by 3% at CER (Constant Exchange Rate), and adjusted sales increased by 7% at CER. The volume effect, which is positive, is now outweighing the price effect, which had been reduced due to U.S. government decisions.

As expected, Obesity care accelerated, with +16% CER YoY, vs 3% for the diabetes segment. I wrote in the deep dive that this second segment is mature and commoditized, so there is no surprise here.

Inside Obesity:

• The injectable Wegovy is only growing 1% CER.

• The heavy lifting is done by the Wegovy pill.

• With the worldwide launch of Wegovy HD, I expect clear traction to return for the injectable (for Q3 in the EU). As said previously, the drug efficacy gap with Zepbound resolved with Wegovy HD.

• International Operations (unadjusted) sales grew 10% CER, whereas US Operations (unadjusted) sales shrank 2% CER.

Margins

The adjusted gross margin is shrinking from 82.7% in Q2 2025 to 78.2% in Q2 2026, due to “lower realised prices, one-time costs of around DKK 3 billion related to right-sizing of manufacturing capacity agreements, as well as a negative currency impact. This was partly countered by productivity gains and a positive product mix.“ (information from Novo Nordisk).

The adjusted operating margin is improving from 41.8% to 42.5% YoY, as Novo reduced its workforce and made efforts on cost to maintain its profitability.

Any additional price drop could lower the margin. As shareholders, we hope that the US government will move to another topic.

Without any change on this subject, we can expect the margin to be near its bottom with volume increase, price stability and additional variable cost reductions.

Net income and free cash-flow

Financial charges increased from DKK 1.95bn to DKK 2,76bn, with a higher interest rate on the debt. Worth mentioning, but nothing alarming here.

Net income fell 21% due to the adjustments, and free cash-flow increased by 57% YoY since the capex fell 14% CER YoY due to a higher base effect in 25. Investments are still strong as the future needs way more GLP1 drugs.

3. Key Takeaways from the Earnings Call

Novo’s management stays conservative in its assertions, as Novo Holdings Foundation controls 77% of the voting rights, so management has no structural incentive to overpromise to put the stock price higher. It is reinforced by a danish corporate culture of humility and trust. That’s my opinion and I’m not Danish, but I come from Central Europe and people tend to behave like that.What is a good point for trust is a bad point for rerating.

As the thesis is focused on obesity, I won’t elaborate on the pipeline.

Guidance. Framed as “a better than expected start to the year.” Management confirmed the outlook stays conservative on the Medicare Bridge program, even after a direct push from an analyst noting a competitor has been more bullish on volume inflection. This is consistent with the “guidance was sandbagged” read.

Access. “From an access perspective, quality of access for obesity GLP-1s remains poor and is a key focus area. While we see uptake for the pill in the reimbursed commercial channel, the majority of total prescriptions are self-pay.”

Manufacturing capacity. On the new API facilities: “validated the first product in the first facility... very low utilization from these facilities... bullish in terms of being able to supply significant volumes in the years to come.” Early innings on the capacity ramp. The moat is intact. It’s not yet monetized.

Cost savings, ahead of plan. The Q3 2025 restructuring is tracking ahead of its DKK 8 billion savings target. Headcount down to 66,700. That’s a cut of roughly 12,000 people, 15%, over the past year. Harder than the 9,000 figure originally announced.

Wegovy pill, international. UK: 300,000 patients in the first three weeks, versus 48,000 in the US over a comparable window. UAE: Novo’s obesity market share jumped from 30% to 45% after the pill launch. The pill already holds roughly 50% of the oral segment there, despite a competitor’s oral drug launching about a month earlier (surely Eli Lilly…). Germany launches in September. Around 80% of pill patients are GLP-1-treatment-naive. Limited cannibalization of injectable Wegovy.

What’s next. Capital Markets Day, September 2026. Formal 2027 guidance waits until February. The CFO already flagged two swing factors: the CagriSema US regulatory decision, expected by year-end, and the “mim8” decision, in H2 2026.

4. Theses Update

Anchored to the deep dive published 26/05/2026 (”Novo Nordisk: A GLP-1 Banger”).

4.1 Bear Thesis Signals

• No guidance beyond 2026. Nothing in this report addresses 2027 and beyond. The raise only narrows the 2026 range, from -4% to -12% CER down to 0% to -6% CER.

• Lilly winning the GLP-1 market (57% share). Lilly reports Q2 2026 the same day as Novo. One data point does stand out: Wegovy remains the U.S. market leader by new patient starts among branded obesity drugs, even as Zepbound leads on total prescriptions. I will provide content about Lilly vs Novo later.

• Structural margin compression (MFN). Confirmed, but smaller than the headline number suggests. Adjusted gross margin fell, indeed, but Novo discloses that roughly DKK 3 billion of that hit is a one-time cost tied to right-sizing manufacturing capacity agreements, layered on top of lower realised prices and a negative FX effect. Strip out the one-off and the clean MFN-driven compression is well under the headline -4.5pp.

• New this quarter: pipeline disappointment. Monlunabant’s development was terminated, “due to portfolio considerations,” triggering a DKK 4.0 billion impairment. ZEUS (ziltivekimab, cardiovascular) missed its primary endpoint. Neither touches the core obesity thesis directly. Both are new data points on non-GLP-1 pipeline execution that didn’t exist in May.

• New this quarter: quality of growth. Trade receivables grew 25.5% since year-end, DKK 70.9 billion to 88.9 billion, roughly twice the pace of H1 revenue growth. Plausibly just the ~60-country Wegovy rollout. Still, a working-capital line to watch next quarter.

4.2 Bull Case Prerequisites

• Efficacy gap with Zepbound closes, via Wegovy HD. In progress. Launched in the US in April, in the UK in June alongside the single-dose pen. No comparative prescription data yet.

• Valuation gap vs. Lilly (PE 10x vs. 36x) is an anomaly. Still wide open. At ~308.7 DKK, the stock prices closer to the Bear and low-Central scenarios than the Bull case. See the updated scorecard in section 5. The market is rewarding today’s execution without re-rating the multiple.

• Prices fell, volume hasn’t followed. Yet. This is the prerequisite that finally shows up in the numbers. Obesity care accelerated to +16% CER. Wegovy pill scripts kept climbing past 265,000 weekly by mid-July. Volume is now outweighing price at the net-sales level: +7% adjusted CER, despite ongoing MFN cuts.

• Guidance was sandbagged. Confirmed again. It is the second consecutive raise under Doustdar.

• Production moat: 14 fill-finish sites, 5 to 7 years to replicate. Reinforced by the same capex and net-debt evidence above. The moat is largely built and starting to convert into cash rather than absorbing it.

• Market stays a duopoly through 2028. No new information either way this quarter.

• CagriSema delivers in Phase 3. Mixed. REDEFINE 9, the lower-dose trial, showed statistically superior weight loss vs. placebo. It also lands in the same quarter as the monlunabant termination and the ZEUS failure.

5. Valuation

I’m sticking with the original deep dive assumptions. The only update is the current price. The end date stays fixed, which mechanically inflates the annualized figures, since the same target price is now spread over a shorter time horizon.

CAGR calculated from 308.7 DKK to December 31, 2028 (2.4 years), dividends included.

How to read this table: in the central scenario at PE 22x, the price target reaches 572 DKK by December 31, 2028, a total return of +95% from current price, or a CAGR of 32.0% including dividends. It is the floor of my conviction.

The assumptions depending on the PE:

• PE 15x — The market sees a mature pharma under pressure, losing market share to Lilly, facing patent cliff in 2031. Just a dividend stock.

• PE 22x — The market recognizes a quality compounder, solid second in a structural duopoly, with a manufacturing moat. GARP territory.

• PE 30x — The market prices leadership potential. Wegovy HD closes the efficacy gap, the oral pill scales, CagriSema delivers. Novo challenges for pole position.

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Disclaimer

All content published by JB Peter on this platform is strictly for educational and informational purposes. It does not constitute investment, financial, legal, or tax advice, nor does it represent a personal recommendation or solicitation to buy or sell securities. This research is operated by ORIACON (SASU) and reflects independent corporate analysis. Every reader must conduct their own independent research (Due Diligence) or consult a licensed professional before making any financial decision, as financial markets involve a high risk of capital loss. At the time of writing, ORIACON or the author HOLD shares in the company analyzed in this article. Following this publication, ORIACON and the author reserve the right to buy, sell, or modify positions in any security mentioned at any time, without prior notice to readers or subscribers.

EverQuote delivered on revenue, growing 25% year-over-year. Operating margin expanded from 9% to 12%, and operating income grew 65%. EPS growth was muted by a tax headwind, but the underlying results are solid.

Nothing here shows any sign of disruption to the business today.

EverQuote delivered another quarter of growth and profitability.

The investment thesis has always rested on a simple observation: a platform like EverQuote already exists and works in Europe — MoneySuperMarket and GoCompare in the UK, CHECK24 in Germany, LesFurets in France — and the US is simply following the same path with a lag. This is a genuinely good business that the market has beaten down.

With a PE of 11.4 and a PFCF-SBC of 12.5 on a price of $24 (premarket), EverQuote is a quality small-cap that should re-rate toward double its current price

Verdict: Another quarter, another fear of disruption that is still not showing up. Re-rating will come.

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My Reaction

Management is talking extensively about its EBITDA Adjusted.

To focus on this point, I dislike the usage of EBITDA, as it doesn’t reflect the true health of the company.

But Adjusted EBITDA? It is something I strongly dislike:

• The term isn’t standardized and its definition can be adjusted to whatever management wants to show you.

• If the GAAP term were good, they would present it.

• It gives me a seductive vision from management, showing you the parts of the truth they are willing to and not the actual situation. I cannot feel trust in such conditions.

In this kind of situation, I usually check for financial shenanigans, to see if the partial vision provided by management is also distorted in the financials.

Management defines it as: “net income (loss), excluding the impact of stock-based compensation expense; depreciation and amortization expense; restructuring and other charges; acquisition-related costs; legal settlement expense; interest income; and income taxes. “

Luckily, the numbers for EverQuote are still strong and the net cash position tells you the company generates enough cash to fund itself and still return some of it to shareholders

But still, I won’t comment on any Adjusted EBITDA metrics.

I have held EverQuote since April 30, 2026 and I’m up 60% at the time of writing, a pretty solid result.

The company is heavily profitable, and priced like it’s dying. I still don’t see any disruption. Management is able to take advantage of the undervaluation to buy back as many shares as possible, a good point for the long term. I can clearly see the company trading around $100 within a few quarters

When? The main question is when the market will consider that EverQuote is a winner, and won’t be disrupted anytime soon.

2. The Numbers

2.1 At a Glance

This table summarizes the key metrics from EverQuote’s Q2 FY2026 earnings release: https://investors.everquote.com/news/news-details/2026/EverQuote-Announces-Second-Quarter-2026-Financial-Results/default.aspx

2.2 Commentary

Revenue: 15% year-over-year in Q1, 25% in Q2. Those are good numbers, as they usually increase the operating leverage. But it cannot be found yet in the increase of earnings. This is the reason, in my opinion, why management is talking about EBITDA Adjusted.

The main activity is in the Auto segment (+23.3%, $172.1M), but the Home & Renters segment is gaining more traction +35.2% ($23.0M). A good signal, as it isn’t their core activity and they take market share from their competitors - online: MediaAlpha and offline: TV, display advertising, physical agents (i.e., in-person/traditional insurance agents).

Operating Margin : 12% in Q2 vs 12.3% in Q1, vs 9% in Q2 ‘25. The operating income grew 65% YoY for just 25% growth of revenue. The leverage is the key to the rerating and earning growth I am looking for. It went from a small basis, though.

Net income and Free cash flow: Free cash flow - Stock-based compensation dipped sequentially, $22.8 million versus $28.1 million in Q1. The dip reflects a working-capital timing effect.

Income before income taxes is up from $15.1M to $24.5M (+62% YoY), but the tax rate went from 2% to 21%, due to a one-time tax credit last year. It was a one-time event that won’t occur next quarter.

Cash position : $192.3 million in cash, zero debt, $50 million bought back since last August. Net cash as a share of market cap fell from 32.1% in Q1 to 23.0% in Q2. This number is pretty satisfying, as this “lowers” the effective PE ratio by 23%, and management will be able to buy shares back and push the share price higher.

3. Key Takeaways from the Earnings Call

Management spent a lot of the call on AI — a new bidding tool called Smart Campaigns, internal AI agents, early work on capturing traffic from AI search and what they called “agentic commerce.” It’s a real shift in framing: AI used to come up as a threat to comparison platforms like this one, and now it’s being pitched as EverQuote’s own weapon.

Management follows a metric, the Variable Marketing Dollars (VMD), which is Revenue minus the expense for traffic acquisition from Meta, Google, etc. It tracks the true value the company adds. The ratio of this metric is the Variable Marketing Margin (VMM).

The most-asked question on the call, more than once, was whether the margin would compress as the company invests in AI. CFO Joseph Sanborn kept steering it back to dollars, saying the company does “not solve for VMM margin, we solve for VMD,” and reiterated a target in the high 20s. That’s a defensible way to run the business, and keeps a focus on operational leverage.

The AI story moved from a defensive talking point to an offensive one. For the moment, only the story changed: it is still to be found in the VMM.

Combined ratios stayed healthy — “in the 80s,” per management — which is the clearest evidence available that the 2023 collapse was cyclical, not structural.

On capital allocation, management laid out three priorities in order: organic growth, buybacks ($50 million cumulative), and M&A as a lever toward the $1 billion target. No sign of a deal happening soon.

4. Where the Investment Thesis Stands

I had no time to formalize a deep dive yet, although I meticulously checked the company on a checklist I have.

4.1 Bear Thesis Signals — Triggered or Not

- AI disintermediation (Google/Meta build native insurance comparison tools) → not triggered. Management is positioning EverQuote as an AI infrastructure partner instead, though that’s a claim only and not a measured outcome yet.

- Traffic dependency (rising Google/Meta click costs compress margin) → not triggered. VMM held at 29.2%, in line with last year.

- Rising carrier combined ratios cutting marketing budgets → not triggered. Combined ratios described as healthy, in the 80s.

- Stock-based compensation dilution → partially active. SBC is real ($10.8 million year-to-date) but partly offset by $29 million in buybacks over the same period.

- Product concentration in Auto insurance → still structurally true (88% of Q2 revenue), though Home is growing faster and slowly diluting it.

4.2 Bull Case Prerequisites — Status

- Recovery of the auto insurance cycle → confirmed. Healthy combined ratios, accelerating Auto growth.

- Operating leverage from AI and scale → confirmed and strengthening. Operating income growth nearly tripled revenue growth.

- Disciplined capital return → confirmed. $50 million bought back, consistent pace.

- Diversification into Home insurance → in progress. Home grew 35.2% against Auto’s 23.3%.

- Path to $1 billion in revenue → reaffirmed by management this quarter.

- VMM expansion above 35% → not observed. Still at 29.2%.

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Disclaimer

All content published by JB Peter on this platform is strictly for educational and informational purposes. It does not constitute investment, financial, legal, or tax advice, nor does it represent a personal recommendation or solicitation to buy or sell securities. This research is operated by ORIACON (SASU) and reflects independent corporate analysis. Every reader must conduct their own independent research (Due Diligence) or consult a licensed professional before making any financial decision, as financial markets involve a high risk of capital loss. At the time of writing, ORIACON or the author HOLD shares in the company analyzed in this article. Following this publication, ORIACON and the author reserve the right to buy, sell, or modify positions in any security mentioned at any time, without prior notice to readers or subscribers.

• Over the trailing twelve months, the portfolio is up +26% against 18% for the S&P 500 (total return).

• Year-to-date, +8.3% against roughly +9.5% for the index. At the end of May I was at 18,9%, and with an ATH of 24% in June

• Since inception (2nd of October 2023): +19.5% vs S&P 500 +21.7%

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, I plan to write about this later.

My job here is to follow around 15 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.

2. Sentiment

I moved up with the market, and now I’m moving down with it. How do I feel about that? Genuinely, I don’t care. I’m confident in every single company I own, and I let their thesis play out.

I had a bit of FOMO with memory stocks going up so much in June, so I initiated a position in Sivers Semiconductors (0.5% of the portfolio), and sold it a couple of days after. I usually never invest without doing due diligence first, but I made an exception this time.

It was a bit of a bad surprise to see Atos Group didn’t reprice yet, because I strongly believe the company will recover and rerate significantly.

I feel like the semiconductor selloff will continue, and that I’ll get a chance to build positions in memory stocks — the prospects look very good for Micron and SanDisk.

What am I worried about? Losing my existing capital, with losses based on fundamentals. The market’s sentiment is now fluctuating because the investors don’t know how to position on AI stocks or how much to value them, since so much depends on the assumptions you start with.

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3. Pedagogical module : Compounder vs Multibagger: The Ratchet Effect

The concept: The portfolio runs on two buckets with different mandates.

Compounders

Do you remember the first rule of investing? Don’t lose.

The goal of this category is to secure your capital and let it appreciate over a long-term horizon. It’s the Quality phase of Warren Buffett (after his cigar-butt phase).

The objective is to maximize risk-adjusted return by holding exceptional companies you buy at a good price. Peter Lynch called it Growth at a Reasonable Price (GARP).

The rationale behind this is simple: roughly 4% of stocks generate 100% of long-term market returns.

The longer you hold them, the more important the growth of free cash flow becomes, and the less important the entry PE ratio becomes.

You can invest actively, holding individual stocks, or in a passive way with ETFs.

You may ask: which ones?

Since the best long-term risk-adjusted returns are in quality stocks and large ETFs, you would rather hold the Mag-7 or the MSCI World / Nasdaq-100 than no-growth dividend stocks. You could expect 15-25% per year of growth just on the FCF, plus a rerating of the PE.

Investors who got beaten down on a quality stock may say ‘I’m here for the long-term’. It is a good sentence because in this category, time is your friend, and you’d probably recover if you are patient enough.

Multibaggers

The goal of this category is to get massive gains in a short period of time. Why wouldn’t everybody do that ? Because it’s damn difficult ! You may find:

• Growth stock: finding it before everyone else

• Turnaround stocks: distinguish which company will recover

• Cyclical stocks: correctly anticipate the direction before the actual move

• Cryptoassets or commodities: correctly anticipate the direction before the actual move

You can also invest here in an active way, with the holding of individual stocks, or in a passive way with ETFs.

The way you deal with it is with the intrinsic asymmetry of the stock market: what you can lose is limited (max 100%), and what you can win is potentially unlimited. When you are leveraged, you break this asymmetry (generally, don’t be leveraged, especially in multibaggers). The ideal setup is a stock where ‘either I gain a significant amount, or I don’t lose much’. Don’t forget these are riskier stocks.

Some market spots are ideal for this category: small-caps, as they are under-covered, and inaccessible to big money because of illiquidity — meaning they can rapidly become a major shareholder.

Most 10-baggers come from small-caps, and some of them have the advantages of compounder as they have quality stocks, and of a multibagger with the re-rating.

I said you could expect 15-25% per year for the compounders, plus the rerating. For the multibaggers, almost everything is possible here, plus the rerating. It is a reason why I don’t like small-caps indexes. Moreover, the best ones will leave the intermediate indexes to be in the top indexes (nasdaq100, SP500, etc.)

Some stocks compound for so long that you end with a 10-bagger just by sitting on them: if you hold a stock for 10 years with a 25% CAGR, you have a 10-bagger. They are multibaggers in disguise - I still categorize them as compounders.

In this bucket, time may bless you or punish you. And the volatility is quite high (30-70% in a year is normal), you need a stronger stomach than in compounders. And if you’re leveraged, volatility is your enemy.

How to deal with both

• In a bull market, multibaggers may capture a significant part of the upside. When a multibagger pays off, it usually compensates for all the losers left along the way. As the portfolio grows, part of the gain stays safe in compounders, and part gets reallocated into other multibaggers. I call this a ratchet effect. It matters because a portfolio has a natural tendency to concentrate, especially toward its multibaggers, giving them a disproportionate size.

• In a bear market, capital can be reallocated from compounders to multibaggers to regain exposure to the upside and get strong entry points on beaten-down multibaggers.

• Tax matters from the moment you enter a position, not just at exit — always think in after-tax terms.

• As the portfolio grows, the natural tendency is to shrink the multibagger percentage and grow the compounder percentage. Above $1M, being 100% in multibaggers feels like madness: why risk losing everything you have for money you don’t need?

My personal portfolio of six figures is designed to run 50% compounders, and 50% multibaggers, though I frequently need to reallocate toward compounders (the ratchet effect).

Questions

This probably raises a few questions worth asking yourself:

• Categorize your own positions: which bucket does each one actually belong to?

• Are you satisfied with your current allocation between the two?

• Is there redundancy in your portfolio — multiple positions doing the same job?

• Is there real diversification, or does it just look diversified on paper? Are the underlying theses and key factors correlated?

• Do you understand what you hold and why you hold it?

• Is each stock you hold actually better than its category ETF?

4. Positions

Nebius Group - 21,93% of the portfolio

Status: Thesis on track. Exceptional business. The valuation went down from the June ATH, and I would increase my position with a price under $150. Generally speaking, when I tell myself such a price, the stock has a floor a bit higher. It just bottomed to this price on the 29th of July with the Situation Awareness selloff.

Atos Group - 15,19% of the portfolio

Status: I just published yesterday an article about the followup of the thesis. H1 followup

Management is delivering improvements, that the price didn’t catch up. According to my scenarios, Atos Group could be priced around €60-70. My portfolio stays in line with the SP500 performance since Atos price isn’t moving yet. Once it does, I should outperform the index.

Adobe - 11,39% of the portfolio

Status: Thesis on track, no change to the moat read laid out in the deep dive. Q2 FY2026 results, published June 11, confirmed the core of the thesis: record revenue of $6.62B (+13% reported), ending ARR of $27.1B (+12.5%), record gross margin, and EPS beating consensus ($5.96 non-GAAP vs. ~$5.82 expected). Adobe also repurchased 8.5M shares, continuing the buyback that’s been quietly compounding EPS regardless of sentiment.

The June 18 product announcement reinforced the moat thesis directly: Adobe is distributing Creative Agent through third-party LLMs (ChatGPT, Claude, Copilot, Gemini) instead of being disintermediated by them — confirming that the moat is orchestration and distribution, not raw model quality. The six largest global agencies (Dentsu, Havas, Omnicom, Publicis, Stagwell, WPP) are now standardizing on Adobe, which speaks directly to the enterprise lock-in argument from the deep dive.

The honest nuance: Adobe has still lost UI/UX to Figma and the consumer segment to Canva. The thesis rests on the 81% of revenue that sits in the fortresses — and nothing in this quarter’s numbers (ARR growth, gross margin above 87%, stable Creative Cloud retention) signals that those fortresses are cracking. The stock trades near a 7-year low, around 11x earnings, on sentiment and management transition noise (CFO departure to Marvell, CEO/CFO transition uncertainty) rather than on any fundamental deterioration.

The stock is up 30% from its lowest. I don’t see anybody left selling Adobe: those already did. As there are no more sellers, the stock is due to go up.

Q2 follow-up

Novo Nordisk - 11,29% of the portfolio

Status: Thesis on track, no breach versus the original deep dive — but it still needs to materialize in the numbers.

Novo Nordisk added a new U.S. distribution rail on July 23: a Crux collaboration giving employers transparent, no-markup Wegowy pricing through the NovoCare Network Pharmacy, funded via HRA contributions applied at point of sale.

As the efficacy of Wegowy HD vs Eli Lilly’s drug and prices are similar, and as Novo’s volumes are ahead, I do not see any reasons for the valuation gap to not close.

The stock is up 34% from its lowest: the momentum is quite in favor of the company for the coming quarters.

Next results: 5th of August, the earning call will be very interesting, with a potential guidance modification since Novo sandbagged its forecast for 2026.

Alphabet - 11,08% of the portfolio

Status: Thesis on track. Exceptional business — the kind I’d consider holding forever if I were a buy-and-hold investor.

Alphabet is still an incredible cash-machine with world class products. The 82% improvement in the Cloud business is impressive at such revenue. The margin is expanding, so are Microsoft’s and Amazon’s. I see it as a confirmation of the profitability of AI’s investments.

For now, the PE is compressed by the exceptional results in the P&L of Anthropic and SpaceX.

Q2 followup

Booking Holdings - 8,54% of the portfolio

Status: Thesis on track, sleep-well-at-night territory. I funded this position by selling OKEA ASA, a Norwegian oil play I’d held since August 2025, for +110% in nine months. The rotation wasn’t incidental — my view was that the geopolitical conflict would stay on a plateau rather than escalate, which made rotating out of an oil-cycle bet and into a quality consumer cyclical at a sentiment trough the same logic applied twice, on opposite sides of the oil price. If the situation actually deteriorates into something closer to a real crash, that’s a different scenario entirely — I have a dedicated crash plan for that, and Booking’s sizing doesn’t need to account for it on its own.

Initiated on May 12 at a normalized PE of ~18x — the third time in ten years Booking has traded this cheap, after March 2016 and March 2020. The thesis is simple: a quality compounder priced as if it’s broken, when the numbers say otherwise. A great buy, and one I can hold without checking the price every day.

Move: No change this month. Prepared to add up to 20% of the portfolio if the stock falls further and the thesis holds — the original deep dive has the full scorecard.

Microsoft - 6,91% of the portfolio

Status: I started a position on the 2nd of July. All the information is in the deep dive.

Since my article, the stock is up 24%. The PE ratio of 22 seemed to be the floor for the stock. I am lucky to get such results this quickly.

Strategy Inc. - 6,65% of the portfolio

Status: Thesis on track, no breach — patience is what’s required here. Bitcoin is sitting around its floor near the 200-week moving average, slightly below it right now. The market is currently obsessed with AI and has little appetite for crypto, but I’m confident it comes back into focus eventually. No bankruptcy risk for MSTR — the balance sheet holds — but sentiment stays negative for now.

Everquote - 3,53% of the portfolio

Status: Thesis on track. A deep dive is coming, but the short version: this is an asymmetric position that combines the upside of quality with the structural discount of a small cap. The core bet is that the profitability collapse of 2022 doesn’t repeat, while the market is still pricing in a level of uncertainty that no longer matches the business. Patience is the main input here — I expect it to be rewarded over the next few quarters.

Move: I trimmed to add to multibaggers stocks in robotics.

Harmonic Drive Systems - 1,72% of the portfolio

Status: FY March 2026 closed out with revenue of ¥59.6bn (+7% YoY), but net income dropped -53.7% to ¥1.6bn, with net margin compressing to 2.7% vs 6.2% the prior year — so top-line growth is real, but profitability has weakened. The bright spot: FY March 2027 guidance is aggressive — revenue targeted at ¥68bn (+14.2%), operating income +141.5%, net income +179.7%, driven by demand in industrial robots, semiconductor equipment, and medical applications. TTM gross margin is around 28.3%.

The market is pricing in a sharp profitability rebound next year — but with a TTM P/E already north of 280x, this is a bet on guidance execution. The stock is in a pullback along with all the semis since June.

The company will publish next results on the 7th of August.

THK - 1,31% of the portfolio

Status: The fundamental momentum here is cleaner and more immediate: management has raised FY2026 guidance twice, on stronger-than-expected industrial machinery orders both in Japan and internationally. Latest guidance: H1 revenue of ¥138bn (+8.7%), H1 operating income of ¥15.4bn (+51%), and full-year revenue of ¥276bn with operating income of ¥31bn — a solid rebound after a 2025 marked by a large net loss. THK reports earnings on August 5, 2026 (in 4 days), worth watching closely to confirm the trajectory. The stock is also in a pullback along with all the semis since June.

5. Outlook

I have the following companies on the radar:

• Micron and SanDisk: both are good buys at these prices. I am looking for a continuation of the selloff considering the risk of cyclicity.

• Netflix: a good buy at current price.

• Super Micro Computer: a very attractive PE of 15, with risk of commoditization vs opportunity of bottleneck.

• Dino Polska: A genuinely beautiful Polish compounder, sitting on my watchlist. I’m waiting for signals that the Polish grocery price war is ending before entering.

• AppLovin: the PE ratio tends to compress over time. The growth stays amazing.

• DLocal: a good buy at current price.

I write “good buy” meaning that the long-term outlooks are very good, but the stock could go in any direction within a year.

I follow companies on an “anti-radar”:

• Nvidia: The PE has been compressing quarter after quarter, which on the surface looks like the same setup as Adobe or Novo — a quality business getting cheaper. It isn’t. On a cyclical name approaching the back end of its cycle, a falling PE is often a misleading signal: the market is pricing in earnings that haven’t shown up yet to fall, and the multiple compresses precisely because the cycle, not the sentiment, is turning. This is the trap the good buy / great buy / scream buy framework is supposed to help you avoid — the multiple alone doesn’t tell you which kind of “cheap” you’re looking at.

• Eli Lilly: I will track financial shenanigans because of the trial for misleading information about drug efficacy vs Wegowy. It is generally the consequence of the little arrangements with the truth that the company is accused of.

Conclusion

Performance of the portfolio is in line with the SP500, as Atos Group’s price doesn’t reflect the positive changes from the H1. The outperformance of the portfolio could happen fast after the rerating. I entered new positions where the theses are playing out, such as Booking, Strategy, Microsoft and robotic stocks.

My objective is also to reach 15 positions, so my dear readers can have a variety of stocks to read, but I’m in no rush to get there. The primary point is to identify great buys. I am pretty confident I’ll achieve 30% at the end of the year if the market continues in this direction. Otherwise, I would be happy to buy great companies at better prices. We are here to take advantage of the inefficiencies and madness of the stock market: that is where alpha lies.

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Important Disclosure & Disclaimer

All content published by JB Peter on this platform is strictly for educational and informational purposes. It does not constitute investment, financial, legal, or tax advice, nor does it represent a personal recommendation or solicitation to buy or sell securities. This research is operated by ORIACON (SASU) and reflects independent corporate analysis. Every reader must conduct their own independent research (Due Diligence) or consult a licensed professional before making any financial decision, as financial markets involve a high risk of capital loss. At the time of writing, ORIACON or the author HOLD shares in the company analyzed in this article. Following this publication, ORIACON and the author reserve the right to buy, sell, or modify positions in any security mentioned at any time, without prior notice to readers or subscribers.

1.1 Synthesis

Atos is coming back from a near-bankruptcy: at the end of 2024, a commercial court ordered the restructuring of its balance sheet. Today, the firm is progressing toward its 2028 objectives:

• €9-10 billion in revenue

• 10% operating margin

• An investment-grade credit rating profile

The first chapter is the cost-reduction phase of the Genesis plan, delivered ahead of schedule. The initial target was achieved within a year and has since been raised to €800M.

The second chapter is the improvement in operating margin: €190M in H1, up 43% year-on-year, from 3.7% in H1 2025 to 5.7% in H1 2026.

Management indicates that the actions behind these two chapters are complete and will continue to deliver results over the coming quarters.

The next chapter is commercial expansion, where management’s focus is now shifting.

The balance sheet is expected to improve significantly by year-end, supported by continued progress on debt refinancing.

None of the bear thesis’s warning signs have been triggered, and the bull thesis is gradually playing out.

Verdict: The company is progressing through its turnaround. The market still applies a discount, and management is advancing relentlessly toward resolving it. The price does not yet reflect the positive developments of the first half.

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1.2 My Reaction

Management has been heavily focused on cost-cutting measures and will continue acting to protect the margin of the business. I’m still very bullish on Atos, and I think the market is still pricing it as though the company will remain a broken IT services business.

They have succeeded on the cost-cutting front, are well on their way to improving operating margin, and are removing black contracts wherever they can — the ones that generate extra revenue but kill the margin.

They are now focusing on revenue: the commercial pipeline is growing significantly, and the 91% book-to-bill ratio, while it looks disappointing, doesn’t include framework agreements. Some of their clients were forced to end their contracts because of Atos’s previous sub-investment-grade status, and are keen to come back as soon as they can.

I’m a bit puzzled by the -7% move on results day. Turning around a company like Atos isn’t easy, and the bull thesis is playing out in the right direction — just not as fast as the market seems to expect.

I’m still confident the stock will move upward over the coming quarters. One day, management could raise guidance, and the stock will re-rate. And I’ll be there. I don’t mind waiting two years for a 5-20x return, because I’m convinced Atos will turn around.

2. This Quarter’s Numbers

2.1 At a Glance

This table summarizes the key metrics from Atos’s Q2 FY2026 earnings release: https://www.atosgroup.com/en/investors/financial-results-reports/h1-2026-results

2.2 Commentary

Numbers are those of ’26 vs. ’25.

Revenue (go-forward perimeter): €3,304m vs €3,626m and operating margin: 5.7% vs 3.7%

Management is “cost-killing” and removing black contracts with two effects: the revenue goes south and the margin goes north. Revenue will improve in the next quarter, as will the operating margin. The revenue decline is decelerating every quarter since ’25.

Organic growth: -8.9% vs n/a
H1 total organic growth rate, calculated by Atos at constant scope and FX. Not applicable to H1 2025 since it’s the comparison base.

Underlying EBIT: €190m vs €133m
+43% (+€57m) year-on-year. Every improvement in revenue will drastically increase EBIT.

GAAP net income: -€504m vs -€695m
Loss narrowing by €191m year-on-year, but still heavily weighed down by one-off refinancing costs (call premium, accelerated IFRS9 depreciation) and restructuring charges — not a clean read on underlying profitability yet. Management targets a “clean” P&L by year-end 2026.

Operating cash flow: -€120m vs +€28m (published, not comparable basis)
The -€120m figure includes €127m of restructuring cash-out — strip that out and underlying cash generation is close to flat to slightly positive. The H1 2025 published figure isn’t calculated at the same current perimeter, so it’s not a clean comparison; treat both cautiously.

Total liquidity: €1,805m vs N/D (30 June 2025)
Comfortably above the €650m covenant floor. Next payments are in 2030, giving management the time it needs to turn the company around.

Book-to-bill (global): 89% H1 / 91% Q2 vs N/D (Q2 2025: 84%)
Below 100% at face value, but methodologically conservative — framework agreements (the €187m European public sector deal, the Dutch police contract) aren’t counted. The +7pt year-on-year improvement, and >100% book-to-bill in France, UK and Eviden specifically, tell a stronger story than the headline number.

Renewal rate: 94% vs 91%
Confirms the “back to normal” narrative management pushed on the call — this is roughly where renewal rates sat before the 2024 restructuring shock hit client confidence.

3. Earnings Call Key Takeaways

Genesis ahead of schedule: Phase 1 (€650M) completed in one year, by Q1 2026. Phase 2 launched, horizon 2027-2028, total target raised to >€800M. Total restructuring cost envelope confirmed at ~€700M (~€200M spent in 2026).

Margin/revenue mechanism openly acknowledged by management:

Philippe Salle, CEO:

• “Whatever happen on the top line, we will deliver the bottom line”

• “I have just adjusted Genesis to protect the margin”

A nice way to say that he will reduce workforce whether or not it’s needed.

Official book-to-bill is conservative: 91% (+7 pts YoY), but framework agreements (the €187M European public sector contract, Dutch police, European Patent Office) aren’t counted. France, UK and Eviden all above 100% in Q2.

Qualified pipeline: +€900M in Q1, +€760M in Q2 = roughly +€1.7bn cumulative over H1.

No net client losses in H1 2026 — a contrast with 2024-early 2025.

Management posture shift: “refocus the mind of the management to the top line” — an explicit pivot from survival to growth.

Management is now explicitly focusing on revenue expansion. It is the last chapter of the turnaround story. I’m bullish that management will make it happen.

No price deflation on renewals: margin on signed contracts close to 25%, presented as evidence against broad-based pricing pressure.

Black accounts: down from several problematic contracts to just two today; one of the two loses ~€10M/year, with a maximum remaining duration of 2 years.

Debt structure: no maturity before the 1.5L tranche (2029-2030) following the May refinancing. Debt buybacks already underway: €109M on the open market + €38M linked to the South America disposal.

4. Where the Investment Thesis Stands

The objective of this section is to confront the quarter / half against the deep dive bear and bull thesis.

4.1 Warning Signs of the Bear Thesis — None Triggered

The three signals that would have invalidated the thesis (original deep dive, “Points of failure” section):

• FCF vs. reported EBIT divergence: Not triggered — the gap is almost entirely explained by the restructuring cash-out

• Book-to-bill sustained below 90%: Not triggered — 91% official, likely understated (frameworks excluded)

• Flat or rising Genesis charges: Not triggered — declining trajectory confirmed for H2 (€127M in H1 → guidance of ~€70M max in H2)

4.2 Bull Case Prerequisites — Status

As laid out in the original deep dive, the bull case rests on fourteen independent arguments. Most haven’t moved this quarter. Below are only the ones that have evolved since the deep dive:

• Argument 2 (contract rationalization → hidden operating leverage) — confirmed: EBIT +43% on declining revenue across two consecutive half-years.

• Argument 3 (judicial shield + 2031 refinancing) — confirmed. No debt maturity before 2029-2030 following the completed refinancing steps. The existential risk this argument addressed is now closed.

• Argument 4 (counterparty-risk unlocking) — in progress, strengthening. Zero net client losses in H1 2026, a clear contrast with 2024-early 2025. North America book-to-bill at 115%. Management’s own posture shift — explicitly refocusing on the top line.

• Argument 5 (deleveraging flywheel) — in progress, strengthening. Debt buybacks already executed (€109M open market + €38M from the South America disposal), and oversubscription of the refinancing from the bond market in May. I see it as the main point playing out.

  

• Arguments 7-8 (AI doesn’t destroy the IT services model / regulated sectors need Atos) — qualitatively reinforced. New contracts with sovereignty-sensitive institutional clients (European public sector agency, Dutch police, European Patent Office) support the thesis, though this remains anecdotal.

5. Valuation

The following images provide the different scenarii embedded in the deep dive

The deep dive laid out a nine-scenario scorecard, I don’t provide a unique valuation, merely scenarii . The market is still pricing Atos close to S2, the market-crash scenario, at a current price of ~€33 against an S2 target of €28. That’s roughly where the implied EV/EBIT of ~5.6-6x has sat since the deep dive was written — essentially no re-rating despite the quarter’s execution.

Out of this quarter, the price should reasonably start moving to reflect:

• margin convergence over two consecutive half-years

• the book-to-bill once framework agreements are counted

• black-account stabilization (down to two, from several)

• the absence of net client losses in H1 2026

• the improving commercial pipeline (+€1.7bn qualified pipeline over H1)

• any AI/sovereign optionality (MogwAI, Sovereign Cloud, AI Studios)

The rerating will certainly take place once management increases the guidance and when the market realizes that IT services won’t be disrupted by AI any time soon. It is a core assumption of the thesis that should be emphasized.

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Important Disclosure & Disclaimer

All content published by JB Peter on this platform is strictly for educational and informational purposes. It does not constitute investment, financial, legal, or tax advice, nor does it represent a personal recommendation or solicitation to buy or sell securities. This research is operated by ORIACON (SASU) and reflects independent corporate analysis. Every reader must conduct their own independent research (Due Diligence) or consult a licensed professional before making any financial decision, as financial markets involve a high risk of capital loss. At the time of writing, ORIACON or the author HOLD shares in the company analyzed in this article. Following this publication, ORIACON and the author reserve the right to buy, sell, or modify positions in any security mentioned at any time, without prior notice to readers or subscribers.

1. Quarterly Verdict

1.1 The Engines Are Running, The Bill Is Getting Heavier

Nothing in the published numbers contradicts Alphabet’s growth trajectory. Search is up 17%, YouTube up 13%, and above all Cloud is accelerating to 82% with an operating margin that has nearly doubled year over year (20.7% → 35.6%). Twelfth consecutive quarter of double-digit growth for the group.

What has changed, on the other hand, is the scale of the investment effort management is now committing to. Leadership raised its annual capital expenditure guidance from $180-190B to $195-205B — a jump of more than $15B decided mid-year, justified by a faster pace of AI capacity delivery than previously planned, in the face of demand that still outstrips supply. The immediate consequence: negative free cash flow of -$5.9B for the quarter, a first in several years.

It’s this last point, more than growth itself, that drove the stock down after the release. The market read “cash pressure” where management is presenting a calculated bet on the future return of this investment, notably through TPU system sales, the bulk of which won’t be recognized as revenue until 2027.

Bottom line. Nothing in this quarter undermines the underlying thesis on Alphabet, but the market remains hesitant about the profitability of the investments being made. How long is it willing to fund this phase before demanding concrete proof of return? Q3, with the first effects of the shift toward third-party capacity, will give a first indication.

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1.2 My Reaction With a 10% Alphabet Portfolio

I remain very bullish on Alphabet given the quality of their world-class products, and their impressive growth given their size. Search, YouTube and Cloud are each, taken individually, dominant positions in their category — few companies can claim three engines of this scale at once, let alone growing them simultaneously at this pace (17%, 13%, 82%) with a revenue base already above $400B annualized. It’s this combination — product quality, addressable market size, and speed of growth despite the size already reached — that in my view justifies staying invested despite short-term volatility in the stock.

The TPU business looks like a solid growth driver. The first deliveries started being recognized this quarter, but remain deliberately marginal: management is clear that the bulk of revenue from these contracts won’t arrive until 2027, which gives visibility into a growth engine that hasn’t even started running at full capacity yet. Management frames this as an expansion of the addressable market rather than cannibalization of Cloud, which is consistent with the “full stack” strategy: the more layers Alphabet controls (chips, models, infrastructure, distribution), the more value it captures at each layer.

Investing in hyperscalers seemingly requires trusting management on the profitability of these investments — which has held true so far. As a minority shareholder, you can’t audit the return on every dollar of capex poured into a data center yourself; you can only watch whether the indirect signals point the right way (Cloud margin expanding, backlog growing, a consistent narrative quarter after quarter) and note that, so far, these investments have translated into margin expansion rather than dilution. That’s no guarantee going forward, but it’s a track record that deserves credit rather than default suspicion.

If profitability were to decline, they can halt investments, sell off assets, and the income statement and cash flows would mechanically improve. That’s a safety net you don’t necessarily get with other types of businesses: Alphabet’s capex is largely discretionary and spread over time, without being locked in irreversibly for decades. If AI capacity demand were to soften, management could slow server orders, pause new data center builds, or even offload assets to third parties (as it’s already partly doing with leased capacity) — and free cash flow, negative today, would turn positive again fairly quickly.

2. This Quarter’s Numbers

2.1 At a Glance

This table summarizes the key metrics from Alphabet’s Q2 FY2026 earnings release: https://s206.q4cdn.com/479360582/files/doc_financials/2026/q2/2026q2-alphabet-earnings-release.pdf

2.2 Commentary

Revenue. At $119.8B, the quarter beats consensus by nearly 3%. The 24% growth marks a clear acceleration versus Q2 2025 (+14%) — no sign of fatigue in the core advertising business.

Off-balance-sheet purchase commitments and other contractual obligations — $332.4B total (of which $138.0B short-term). This figure comes from the Q1 2026 10-Q — the Q2 10-Q hasn’t been filed yet, so this is included here as a tracking reference rather than a Q2 data point. It’s an important number to flag: it sits entirely off the balance sheet (these are future commitments, not booked liabilities), yet it dwarfs the quarterly capex figures dominating the headlines and gives a sense of just how much additional spending is already contractually locked in beyond what shows up in the P&L or cash flow statement each quarter.

— of which long-term supply agreements (>1 year), including energy and content licenses: $232.7B. Also from the Q1 10-Q. This is the bulk of the $332.4B total and covers technical infrastructure and inventory components, energy take-or-pay contracts (with payments running through 2047), and content licensing — in other words, the multi-year backbone of Alphabet’s AI buildout that sits alongside, and arguably dwarfs, the headline capex guidance figures.

Cloud, the main engine. This is the segment driving most of the positive surprise: revenue up 82%, operating margin jumping from 20.7% to 35.6%, backlog up more than $50B in the quarter alone. The first TPU system sales to customers have started being recognized, but remain marginal — management explicitly states that the majority of revenue tied to these contracts won’t show up until 2027.

Operating margin. At 34.0% versus 32.4% a year earlier, it improves year over year despite rising depreciation charges linked to capex. Viewed sequentially, the picture is different: margin declines versus Q1 2026’s 36.1%. Part of this decline is seasonal — Alphabet structurally posts a higher margin in Q1 than in Q2, as it already did in 2025 (-1.5 pt on the same transition). But the scale of the decline this year (-2.1 pt) exceeds this pure base effect: other cost of revenues (technical depreciation, YouTube content) is rising as a share of revenue, a structural effect tied to the ramp-up in capex, compounded by one-off G&A charges (compensation, litigation) that inflate that line by +50% for the quarter. Management also warns of additional pressure in Q3, tied to increased use of third-party leased compute capacity while internal infrastructure ramps up.

Free cash flow, the sensitive point. Negative for the quarter for the first time in a long while, entirely attributable to the capex level. On a trailing-twelve-month basis it remains positive at $53.3B but is down 20% year over year. This line, more than the income statement, is what dominated analyst attention on the call.

Financing — the opposite of a buyback. Rather than reducing its share count, Alphabet did the opposite this quarter: raised $49.6B in equity and convertible notes, made no repurchases (versus $13.2B a year earlier), and diluted shares outstanding rose from 12,198M to 12,309M year over year. That’s a clean reversal from the stock’s usual dynamic, entirely dedicated to funding capex.

Quality of net income. Operating income gives a faithful picture of the quarter’s real performance; reported net income, on the other hand, is massively inflated by an accounting revaluation of equity stakes, largely illiquid and unverifiable by the market.

Operating income — the part reflecting the company’s actual business — grew 30% to $40.8B. That’s a solid signal, consistent with revenue growth (24%) and Cloud margin expansion: nothing to flag there.

The portion of income coming from gains on equity securities, on the other hand, is a largely accounting artifact disconnected from operations: $98.0B in unrealized gains, which explain most of the gap between operating income (+30%) and reported net income (+298%). The detail available for Q1 2026 (the Q2 release only publishes the aggregate total) shows that this type of gain comes almost entirely from non-marketable securities — stakes in private companies, valued not at market price but revalued only occasionally upon observable transactions (typically new funding rounds). In Q1, the net gain on non-marketable securities was $36.3B versus just $105M on marketable securities — a ratio of more than 300 to 1. Of the $101.3B carrying value of non-marketable securities as of March 31, 2026, $73.6B had been remeasured during that single quarter.

For Q2, Alphabet does not break down the composition of its $98.0B in securities gains, but financial media (Fortune, among others) attribute it to two stakes in particular: Anthropic, which remained private, whose valuation rose from $350B to $965B over the quarter following a $65B funding round, and SpaceX, which went public in early June 2026 at a $1.77T valuation (versus roughly $400B at its last private valuation), and is therefore now sitting on the marketable side. This specific attribution is not confirmed by Alphabet itself — the 10-Q never names its stakes — but it’s consistent with the pattern observed in Q1: most of the gain comes from a private-stake revaluation, not a market move on listed shares.

3. Earnings Call Key Takeaways

Opening / growth. Twelfth consecutive quarter of double-digit growth; Pichai says Alphabet is still in the “very early innings” of an AI-driven secular shift. Cloud backlog at $514B (+$50B for the quarter), Gemini Enterprise adopted by ~90% of the Fortune 100. Model APIs now processing 22 billion tokens per minute (up from 16B last quarter), Gemini app at 950 million MAU.

Models / product roadmap. Gemini 3.6 Flash and 3.5 Flash-Lite launched just ahead of the call; Gemini 3.5 Pro in testing. Gemini 4 is in training — described as the “most ambitious effort yet,” needed to stay at the frontier. Management is targeting a near-monthly release cadence going forward. Coding/agentic coding flagged as a current weak spot, being actively closed (3.6 Flash: +10 points on DeepSuite vs. 3.5 Flash).

TPUs (the most-probed topic in Q&A). Allocation priority: frontier model development (AGI) first, then Search/YouTube/Cloud, particularly Vertex AI and Gemini Enterprise. Third-party capacity deals (e.g. SpaceX, Blackstone) act as a pressure valve to absorb demand without diverting internal TPUs. The CFO explicitly declined to disclose TPU sale margins specifically — only saying it “expands the TAM” rather than cannibalizing Cloud. Revenue from TPU sales to customer data centers will mostly land in 2027, not 2026.

Capex and financial structure. The guidance increase (to $195-205B) is framed as an acceleration in capacity delivery, not a change in philosophy. Funding waterfall: operating cash flow first, then debt (up from ~$16B to ~$100B in a year), then equity — the recent equity raise isn’t expected to repeat (aside from the ATM program for SBC-related taxes). Anat Ashkenazi: “we will continue to invest as long as we see an attractive return.”

Competition / moat. Pichai emphasizes the “full stack” approach (chips + models + cloud + distribution) as the differentiator rather than any single model. On the “model war” question, explicit positioning across the full price spectrum (Flash-Lite through frontier), not just the high end.

Other Bets. Waymo launched a new vehicle (”Oasis”); Pichai stayed evasive on a possible spin-off, prioritizing execution instead. Isomorphic Labs raised over $2B for its drug discovery pipeline.

Search/YouTube monetization (Philipp Schindler). Retail and finance were the largest contributors to Search growth. AI Max (out of beta): +15% average conversions for advertisers who adopt it. YouTube: 1.7B unique World Cup viewers, new “Buy with Google Pay” format on CTV.

Overall tone of the analyst Q&A: nearly every exchange came back to capex, TPUs, and ROI — relatively few questions on advertising or core Search, a sign that capex/ROI is what the market is trying to understand right now.

4. Where the Investment Thesis Stands

This kind of analysis is usually built on a full deep dive — easy to sketch in broad strokes, but very time-consuming to do properly (segment-level modeling, scenarios, precise invalidation criteria). I haven’t yet had the time to do one for Alphabet. In the meantime, here’s the thesis in summary.

I opened the position in May 2025, at a time when Alphabet, despite world-class products, was trading in “Value” territory — the market was pricing the risk of disruption from generative AI (ChatGPT and the like threatening Search) more than the underlying quality of the business. The original idea: given its financial resources and the quality of its teams, Alphabet remained one of tech’s juggernauts, capable both of reclaiming AI market share and of staying the leader in Search. The quarters since then, and this one in particular, have leaned in that direction — but absent a formalized deep dive, the points below remain a coarse-grained assessment rather than a rigorous checklist.

4.1 Warning Signs — None Triggered

• Structural slowdown of Search below 10% growth → not observed (17%)

• Stagnation or decline in Cloud margin → not observed (35.6%, expanding sharply)

• Slowdown in Cloud backlog → not observed (+$50B for the quarter)

4.2 Bull Case Prerequisites — Status

• Search and YouTube resilience against external generative AI competition → confirmed, record engagement during the World Cup

• Google Cloud market share gains → confirmed, growth well above the sector’s

• Ramp-up of proprietary TPU monetization → in progress, effect expected mainly in 2027

• Return on capex as the business scales → to be watched closely, this is precisely what the guidance increase raises

4.3 What Changes This Quarter

The new element isn’t the strategy — the integrated chips/models/cloud approach was already known — but its pace of execution. By raising its capex guidance by more than $15B in one go, Alphabet is accepting negative free cash flow in the short term to secure capacity faster, in the face of demand it describes as durably exceeding supply. The coherence of the strategy isn’t in question; it’s the speed of execution and its immediate cash cost that are the variable to watch. In short, Alphabet is borrowing against its future cash flows to grow its present.

5. Valuation: A Gap to Watch Rather Than Resolve

The stock closed the regular session at $341.91 before giving up ground after hours to around $327. This move responds to a specific announcement — the capex increase — not to a reassessment of the quarter’s commercial momentum. This type of reaction, where the market penalizes a spending commitment before seeing its results, is typical during heavy investment phases and doesn’t prejudge the outcome.

Over ten years, Alphabet’s PE has generally ranged between 17 and 33, depending on investor sentiment through the cycle. At the time of writing, the PE sits around 26 — nothing particular to flag at this level, neither expensive nor cheap relative to history. Given the quality of the business, I’d be tempted to sell if the PE were to climb above 40.

The quarter confirms the operational trajectory. The market, for its part, chose to focus on the cost of the strategy rather than on results already visible. The next concrete checkpoint will be the materialization, over the course of 2026 and 2027, of revenue tied to the Cloud backlog and already-signed TPU contracts.

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Important Disclosure & Disclaimer

All content published by JB Peter on this platform is strictly for educational and informational purposes. It does not constitute investment, financial, legal, or tax advice, nor does it represent a personal recommendation or solicitation to buy or sell securities. This research is operated by ORIACON (SASU) and reflects independent corporate analysis. Every reader must conduct their own independent research (Due Diligence) or consult a licensed professional before making any financial decision, as financial markets involve a high risk of capital loss. At the time of writing, ORIACON or the author HOLD shares in the company analyzed in this article. Following this publication, ORIACON and the author reserve the right to buy, sell, or modify positions in any security mentioned at any time, without prior notice to readers or subscribers.

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1. What the Nebius release says

Nebius ($NBIS) is launching a new model: “infrastructure partners.” The split of responsibilities is clear-cut.

The partner finances and owns 100% of the infrastructure — the building, the GPUs, the hardware. It sources powered land, handles construction (mechanical, electrical, plumbing), imports the hardware (customs included), operates the site, secures it physically, and obtains regulatory and export approvals.

Nebius provides the reference design (NVIDIA-validated, from HGX H200 to GB300 NVL72), supply-chain access, a certified assembly partner, deploys and validates the full cloud platform, keeps the SLA, and sells the partner’s capacity to its own global customer base.

The partner owns the hardware. Nebius owns the software running on top of it and the customer relationship.

The precise economics of the deal (revenue share, licensing fees, commissions) are only disclosed under NDA, after an initial qualification call. No partner has been named publicly — the release refers to “initial arrangements” already signed, without detail on who or how much.

Here is the link: https://nebius.com/infrastructure-partners

2. Interpretation

Nebius continues its massive direct capex in parallel — agreements with Meta and Microsoft, a commitment with NVIDIA to deploy more than 5 gigawatts of capacity by 2030. The partner model adds a new growth driver on top of that trajectory.

The underlying logic: Nebius saw hardware commoditization coming before the rest of the sector. Any player with capital and access to the power grid can now build a GPU facility. What doesn’t commoditize is the customer contract, the brand, the software layer, and the SLA that commits to a consistent quality of service. Nebius concentrates its resources on that layer, and delegates land, power, and local regulation to partners better positioned to handle them market by market.

The useful image here is the car manufacturer: it doesn’t make its own tires or seats, but owns the brand and the design, remains accountable for the finished product’s quality to the customer, and has its parts built by suppliers — without diluting its ability to guarantee the product. Nebius’s software layer plays that role: it ensures a customer gets “a single, consistent service” whether running on Nebius’s own infrastructure or a partner’s.

The key question for judging how solid the model is comes down to the quality of that software. If it’s genuinely better than what AWS, Azure, or GCP can offer in this segment, substitution by hyperscalers becomes difficult: they can copy the franchise concept, but they can’t instantly match a software stack built to run on heterogeneous, third-party hardware. That’s where the real defensibility of the model lies — not in the contractual structure itself, which is copyable, but in the underlying technical edge.

Each partner also brings a sector-specific advantage tied to its local position: compute stays close to the powered land and the regional demand the partner understands better than Nebius does. That proximity advantage — grid access, local relationships, regulatory knowledge of the market — is something Nebius couldn’t efficiently replicate on its own in every jurisdiction.

In a commoditized market, value concentrates on what stays scarce: the contract, the brand, and — if the technical edge is real — the software.

3. Opportunities and risks

Opportunities

• Capacity growth without weighing down Nebius’s balance sheet — compute demand already exceeds supply by their own account, so every gigawatt of incremental partner capacity finds a near-immediate outlet.

• Structurally higher margins than conventional wholesale bare-metal contracts, per the CEO’s own terms — to be confirmed once the first deals become public.

• A lock-in effect that builds fast: the more partners run on the Nebius design, the more costly switching platforms becomes for them (operational and software lock-in).

• Access to regional markets (AI sovereignty, local capital) without Nebius having to manage local regulation itself.

• If the software edge is real, the barrier to entry for hyperscalers is higher than it looks — they would need to build a stack designed for third-party hardware, not simply adapt their existing proprietary infrastructure.

Risks

• Zero named partners so far, zero verifiable margin figures beyond the CEO’s own statements. The thesis rests entirely on execution yet to be proven.

• Dependency on a given partner: local powered-land access is often hard to replace if a partner fails to deliver.

• Regulatory and export-control risk on GPUs: the partner bears this contractually, but a failure here reflects back on Nebius’s reputation through the unified SLA it guarantees to the end customer.

• The software edge has to stay real over time. If Nebius’s stack only has a limited head start, hyperscalers will eventually replicate an equivalent offering with their own capital and sales network.

• The scarcity paradox: by accelerating the arrival of new capacity on the market through third parties, Nebius contributes to closing the compute shortage that currently supports the sector’s high prices — itself included.

The metric to watch: customer contract renewal rates, and Nebius’s ability to keep its software layer’s price stable even if spot GPU prices collapse. If both hold, the “contract + brand + software” thesis is empirically validated. If customers start negotiating directly with partners around Nebius, the software edge was overstated.

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Important Disclosure & Disclaimer:

All content published by JB Peter on this platform is strictly for educational and informational purposes. It does not constitute investment, financial, legal, or tax advice, nor does it represent a personal recommendation or solicitation to buy or sell securities. This research is operated by ORIACON (SASU) and reflects independent corporate analysis. Every reader must conduct their own independent research (Due Diligence) or consult a licensed professional before making any financial decision, as financial markets involve a high risk of capital loss. At the time of writing, ORIACON or the author HOLD shares in the company analyzed in this article. Following this publication, ORIACON and the author reserve the right to buy, sell, or modify positions in any security mentioned at any time, without prior notice to readers or subscribers.