Pretty impressive growth. 20% year on year. I think there’s still a big opportunity for monetisation and such tailwinds.

I tried to make an order yesterday on strawman and the closing prices dropped on what I was liquidating to buy more 360!

The narrative continues and they keep hitting targets

@mikebrisy I haven't been following the 360 business as close as others. Our family does use it and it's a good product from what we've seen. However, with the multiple at 200 times trailing 12 months earnings, I'd have thought you'd want a lot more than 20% YOY growth in key metrics? Especially, given how early stage the business still is and the chances of some new or stronger competition over the next 5 years...

@Karmast I have never held $360 because I aligned with the thesis that this was a product that could easily become a feature of phone manufacturers. Personally, the product never resonated with me, because I’ve always found the idea of tracking loved ones unappealing, although in writing this, I understand why people do this and I am not critical of their choices, and I also understand the use cases where the features are valued.

Because of this, I’ve never done the work I always put in before making an investment on $360.

Having read @Strawman’s weekly letter this morning (as usual sitting in bed with my first coffee) I do believe we are at an interesting time in the Aussie tech sector where quality growth darlings will need to show they can sustain high levels of EPS growth to justify super-PEs, and I recognise I am very exposed to that. Several are maturing, and so the next year or two will see some “fall off the perch” never to return.

Of course, $360 is relatively early in its growth, with 2025 to be the maiden positive NPAT year, and the business to benefit from some pretty strong operating leverage for the next couple of years. On consensus numbers, P/E falls to 33 in 2027, and so in defence of its metrics and valuation, I tend to ignore P/E when a business is passing through NPAT breakeven … when the dominator is very small, you can get crazy values, so it pays to look at the rate of change in both numerator and denominator separately,, and see what you might expect a couple of years out.

As an example, consider a firm with a share price of $1.00 and a prior year EPS loss of -$0.15. Consider two cases for its maiden NPAT year. Case 1, and EPS of $0.01 and Case 2 an EPS of $0.03. These are increases in the EPS of 16c and 19c, respectively, significantly but not dramatically different. But now look at the P/Es in the maiden year: in Case 1 it’s 100, and in Case 2 it is 33. Without the context that it is the maiden NPAT year, for what is actually quite a modest difference in EPS growth, the PEs look very different.

Now let’s say that in the next year the company adds an incremental 15c of EPS. Now in Case 1 the EPS for that year is $0.16 and in Case 2 it is $0.18. Let’s further consider that the SP doubled to $2.00 in that year (in response to the business becoming profitable). Now the PE in Case 1 is 2.00/0.16=12.5 and in Case 2.00/0.18=11.11. Not only is the PE a lot lower, the two Cases have converged, as they should.

And that’s why I largely ignore P/E altogether when businesses are transitioning from loss making to profitability.

Coming back to $360, I have no personal view on $360 and therefore I don’t have my own valuation. But it has done very well for those who have owned it, and if it can grow users at 20% per annum, and drive ARPU on top of that through offering more value, and if it can further drive material ad revenues on top again, then it is not a huge leap to see a few years of >30% revenue growth, and with high margins and strong operating leverage then EPS growth might well be eye-watering for a few years. Again, I’m not expressing any view as to whether that will happen or not.

So, I can see the bull case for it, but I can’t generate any conviction or enthusiasm for it as a business I’d like to own.

Disc: Not held, never have

The sell off in aussie tech has been quite brutal, more than I realised until I looked more closely (which I should have done with this morning's update.. rereading it now I've made some sloppy errors with entire words missing! Ugh)

Anyway, I agree @mikebrisy that PEs are tough at the early stages of profitability. Price to sales ratios have a lot of weaknesses, but can be a useful tool to eyeball things in such situations. In the case of 360, it's something like 12x. Which is up there.

Strong and sustained top line growth combined with a more steady cost base can really change the equation of course. But it still feels like there's little room for error.

The reason I like 360 isn't so much for the growth in users (whilst that is great!), but for the monetisation of their tracking data. The optionality here is really open and being able to get on the advertising bandwagon and get a new considerable revenue stream then that gives it some legs as well. My understanding is they haven't monetised their advertising yet and only rely on the paid subscriptions.

I liken it to Chemist warehouse and their internal advertising business, or Woolies, where they are hundreds of millions in revenue advertising to a captive audience.

Loved your explanation there @mikebrisy , I'll be saving this one.

Yes good points and insight @mikebrisy and @Strawman

I get the inflection point idea and the idea of operating leverage. However here is my big question...

To me there are similarities between 360 and Xero. Both innovative and well embraced pieces of software, that are trying to go global. I would contend though that great accounting software has a stronger trapdoor moat, than great family tracking software. The effort required to switch would be much lower.

Nevertheless, both companies understandably were unprofitable in the early years as they invested in grabbing market share and product development. Six years ago Xero hit it's inflection point and since then sales per share have grown at about 21% a year, and earnings per share has grown at 160% a year. It's been a bumpy ride but good example of operating leverage at work.

How have investors in Xero fared since their inflection? Not great depending on your exact timing of course. The share price is basically where it was 6 years ago and no dividends along the way. It's been up to double the current share price at different times for brief periods but basically this is the classic tale of a company that has grown earnings a lot, while the multiple compresses from sky high levels, resulting in a terrible result for shareholders holding on since inflection.

No one has any idea of course, whether 360 follows a similar or different path. However my question is, with a similar rate of sales growth right now and many of the same risks/challenges about taking on the world, how confident can one be that 200 times current earnings is a sensible price to pay?

On the sales side, a multiple of 13 times price to sales is around 4 times what Chris Mayer of 100 Baggers fame advises is the most you should pay for these early stage companies, if you want to maximise multi bagger returns.

It could be different with 360 and again I don't know the finer details as well as others, so just my high level opinion on the risks of ownership at these kinds of multiples.