Hi AUROPAL
Far be it for me to preach to anyone, but I thought I'd share something I heard Scott Phillips (TMF) once say, "You don't have to make it back the same way you lost it."
It was somewhat of a "Light Bulb" moment for me. Once I accepted not all investments are going to work out, I found selling my weeds, somewhat liberating.
BTW, Livetiles was one of my weeds too..
All the Best, UW
#hugowallyreply#noddyreply
Hey HugoWally, thanks for sharing the graph – I found it useful. Let me park the goodwill bit to the end because it’s kind of geeky and frankly a subjective assessment. I think we kind of broadly agree in that there’s a lot to like about this company. It screens as ‘cheap’ (but for me it’s in inverted commas) and if the thesis plays out it will end up being just that. Where we differ is that for me there are too many red flags, which are largely around management and the board. I won’t back over them again because I think I spoke to them in my valuation but it just doesn’t give me confidence that even if they return to substantial top line growth (not an unreasonable bet in my view) that they can convert that to substantial shareholder return.
In terms of the ARR and conversion to revenue and cash it sounds like we’re on the page – and I think your graph backs that up. Something is going on there that doesn’t add up for a growing company. A couple of things to bear in mind about at ARR. First, it’s not an audited number. That’s not to say they’re plucking it from thin air but it speaks to the second thing about ARR and that is not all ARR is created equal. There is no one definition and a surprisingly broad array of interpretations between companies about what it is. So that’s why I like to compare ARR to trailing revenue (which is audited) or cashflow (as you’ve done). It’s a sense check but when that sense check doesn’t add up it undermines any kind of valuation that uses an ARR multiple.
Goodwill - I hate goodwill…and intangibles generally but that may just be me. Apologies in advance if I’m telling you how to suck eggs here but goodwill is simply what beancounters need to make double entry accounting work when acquiring a company. If company A acquires company B for $100 and company B has net assets of $60 then the finance department needs somewhere to park the extra 40 bucks, and that somewhere is goodwill. It doesn’t necessary mean company A has overpaid. Synergies, access to customer lists, certain IP, economies of scale etc. – none of these are recorded on company B’s balance sheet and yet they do have a value. In this case company A says they’re worth at least $40. Only in the fullness of time can we say that they’re right. Sounds reasonable but the problem is goodwill doesn’t generate value in the same sense as other assets. Cash can be spent to generate future value, receivables will hopefully be received to generate cash, PP&E gets used up to hopefully generate more value than is getting depreciated, even other intangibles get amortised over their useful life so you can see them being ‘used up’. Goodwill doesn’t do any of that. It just sits there like an anchor waiting for the day someone loses an argument with the auditors about what it's now worth (or a new CEO starts and wants to rebase their performance) and it gets converted to an impairment in the P&L. So I'm not criticising the fact LVT has goodwill on the balance sheet, it's the extent of it. Goodwill is a necessary evil for companies undertaking M&A but for the reasons I’ve described above I almost discount it when assessing the value of net assets and if you do that for LVT the value of net assets is virtually nil. But that’s just me and LVT is not Robinson Crusoe in this regard so take that rant with a grain of salt if you wish.
None of that is to say you're wrong and I'm right. Your perspective when you already own a company is totally different to what it is when you're a prospective owner - I don't know whether that's right but we're all guilty of it. Whereas you've ridden the journey and understand their product suite and prospects better than I do, as a prospective owner I'm just trying to find enough reasons not to invest so I can move onto the next prospect. That sounds pretty ruthless but it's a big ocean to fish in.