Chit Chat Stocks - UiPath (PATH) | Deep Dive

Episode Date: May 30, 2021

UiPath provides an end-to-end automation platform for clients. The company has seven pillars to its offering, ranging from management to deployment. UiPath is a recent IPO with an intriguing business. Listen closely as Brad, Brett, and Ryan dive into the company's history and where it could grow from here. As always enjoy the show! Subscribe to Potential Multibaggers: https://seekingalpha.com/checkout?service_id=mp_1308 Follow Brad and check out his work on Twitter: https://twitter.com/StockMarketNerd?s=20 Follow us on Twitter: https://twitter.com/chitchatmoney Subscribe to our Youtube Channel: https://www.youtube.com/channel/UCG5Ni-SI-jyrEsoNUhqftNQ Email us: [e-mail] Timestamps Company Background | (2:51) Industry | 7:31) Management & Ownership | (8:23) Valuation | (10:18) Earnings | (11:36) Balance Sheet | (13:49) Our Analysis | (15:10) Disclosure: Chit Chat Money hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Brett Schafer and Ryan Henderson are general partners and portfolio managers at Arch Capital. Arch Capital and its partners may hold securities discussed on this show. Learn more about your ad choices. Visit megaphone.fm/adchoices Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Chit Chat Money. On this show, host Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investing. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Ryan and Brett are also general partners at Arch Capital, and Arch Capital may have positions in the securities discussed in this podcast. Anything discussed on Chit Chat Money by Ryan or Brett or any other podcast guests is not formal advice or recommendation. Now, please enjoy this episode. Welcome in. This is the Sunday Deep Dive episode. We have Brad Freeman here, and we're talking UiPath, a new IPO. We're not going to have Brad next week, so I guess, like we were saying

before, we should savor this episode. It's likely going to be just me and Ryan next week. But Brad, how are you doing? Where are you headed? yeah this is this is an emotional time uh parting ways with with the chit chat money team for two whole weeks but uh or one whole week um but i'm going to virginia beach with some friends uh i haven't seen them in a while so it's a pretty excited and then i'm going from there to northern michigan to hang out with my brother so fun time but but excited to do that and then get back to some more more deep dives nice yeah yeah and then you end up onto the the up is that what they call The very northern, the northern tip of the lower peninsula.

But yes, UP is the correct terminology. Right, right. Okay. And we're going to be talking UiPath today. I will be letting Ryan introduce the company. But first, we have to talk about our sponsor, Potential Multi-Beggars. This is a service from our friend and prior guest on the show, Chris, at From Growth to Value. And Potential Multibaggers is a service that is aiming to find stocks that have the potential to 10x over the next 10 years or compound at 26% per year. Potential Multibaggers has picked stocks such as Shopify at $77 a share, Okta at $64 a share, Cloudflare at $39 a share. We go on and on. But seriously, it's a great service, great community.

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I see your tweets every day. A lot of good stuff out there. Yeah, Ryan, you want to introduce UiPath. Try to describe this highly complex software company. Yeah. So it's an enterprise automation software vendor. And so if that sounds like a bunch of jargon, it is. But they're basically providing software that helps enterprises automate sort of these menial tasks or like any, you know, those processes that you have that are kind of monotonous, they're repetitive, they're not really providing that much value. The goal is that UiPath can kind of automate those through their enterprise software that the big businesses subscribe to. And then that way, the people don't have to spend time doing

those pointless tasks. Um, that's the basics of the business, but then there's also, uh, I'll get into the actual platform pillars. So there's seven that they go through. So discover is the first part. And that's basically identifying the problems that you could use automation for. And then build is their low-code drag and drop platform that employees can use to help fix those processes. So it's not just for like professional developers that, uh, the software is created for. It's also for normal people that just want whatever it is, if you're copying and pasting something every day, and you want that solution, or you want that system to be automated, so you don't have to waste your time on it, you can just implement this. And then three is managed. So this

is a centralized spot where if you're thinking about a huge enterprise, the IT team or whatever can take one automation process that everyone uses and deploy it across the entire business. and then four is run this is basically just deploying the software robots for uh robots but it's not like anything like like it's just code right yeah they really yeah they made it seem like they have these like uh at first you think it's robot automation yeah and it's not i think robot is like a fancy word for saying ai which yeah yeah just helpful code um but anyway right And then engage is their fifth sort of pillar. And that was engaging with automations. It used to be limited for only the people that built the automations. But this tool basically, it helps the basic employees engage with them as well. Then measure, which is basically what you might think it is. You're measuring how successful UI paths automations have been for your company, what kind of progress or less time you've spent on pointless tasks. And then govern. This is basically allowing a centralized place for the company to see what tools are being used. A bit of like if you need a little IT surveillance across the enterprise. And you can select the tools by industry too. And that's one of the other perks of the platform.

So if you go on to UiPath and you go products, buy industry, and I pick banking, a lot of banking probably have the same processes that they're going through that could use automation. So if one bank has already done it and they have a solution for that, you can just go ahead and embed that same one. And it might be something you don't even think about. And so you can, when you're thinking about this business, you start to think about all the broad applications of it. there are so many different processes that you could use automation for that you don't think about. So that's really the market they're trying to capture. They have 61% of fortune 500 companies using them. So it's really going after the big enterprises. And then a little history about the company. The company was actually started in 2005 in Bucharest, Romania. It was originally called

desk over and was just 10 people in an apartment. And it started by outsourcing automation libraries, but they sort of started to pivot to their own robotic process automation, RPA. If you're reading their stuff, you're going to see that. A lot of RPA. Yeah. Let's figure out what that term is. Right. And so they started to make that pivot in 2013. And by 2015, they were getting their first seed round and they've had a lot of venture money come into the business. They went all the way to a series E and they went global fast. So it wasn't like they just captured one particular market and expanded they are trying to grow within every single market they're in europe they're in north america they are in uh blank asia i believe as well um so so they're all over the place and they

went public about uh what a month ago now yeah so we only have the s1 no earnings reports they got that uh forward-looking calendar where their year actually ends in like february almost so their earnings should come out sometime in june uh but we'll look forward to that get their first you you know audited financial statements coming out all hit industry landscape competition not much here they in they internally estimate that they are going after a 60 billion dollar market opportunity again you know take that with a grain of salt because it's always the internal estimates competitors include automation anywhere edge verge which is a subsidiary of infosys i think that is a public company uh there's also blue prism soft emotive which is

an interesting name i think that's a good name and then work fusion so there's a ton of competitors out there but a lot of them are going after different parts some go for more small businesses and it's hard to tell who truly is the best because there are there is a ton of competition and unless you're in the it industry you're not really working with these products but it looks like ui path from the numbers we saw on the s1 is currently the leader among large enterprises so that's kind of their target market right now uh brad you want to introduce management and ownership? Yep. So CEO is still the founder. Daniel Dines, as Ryan kind of said, they started in 2005, but they didn't find a ton of success for the first almost decade of their business

before pivoting to that RPA, robotic process automation niche that we're talking about. So I found that pretty cool. Didn't find a lot of success for 10 years, showing the determination in the grid, pivoting and figuring out how to succeed with something else. Before UiPath, he was a software engineer at Microsoft. He's got an 89% Glassdoor rating with a bunch of reviews. Some other executive team highlights, the CFO is a former financial executive at GE. The chief legal officer is the former general counsel at SAP. And then there's a former senior vice president from Carbon Black. In terms of ownership, there's this dual class share structure that we see so often or so frequently. Now, the class B comes with all the voting power,

Daniel Dines. So this is going to go down because this is before the offering and they did sell stock, obviously, but Daniel Dines had 91% of the class B voting power and 94.6% of it was spoken for as of before the offering. So take that with a grain of salt. It should be pretty similar, but it will go down. Class A, Daniel Dines has virtually zero Class A shares, but he does have a lot of suite options packages and stock incentives that will get him paid if he succeeds. And then Excel Partners has 29% of these shares with directors and officers owning about 38% of that flow. Okay. Wow. Excel, or I don't know how to say that. I always pronounce it like Microsoft Excel, but they've done really well with UiPath. They, I believe they were in the

seed round and probably it's obviously been an incredible investment for him yeah and then get some follow-ons probably most likely as well um all right i'll hit all evaluation market cap from when i was looking is 44.4 billion dollars ticker is p18 so just half price to sales is 73 based on their last fiscal year numbers price to gross profit of 82 which ryan will get into uh the you Gross margins are really high here. But price to sales is quite expensive. It's one of the most expensive on the market. They have a heavy-ish amount of deferred revenue. So bookings would give them a slightly better multiple on the earnings. But still, it's going to be sky high. And they're just barely cash flow positive. So there's not really any relevant multiple there.

But you got to expect to get that high margin expansion over time. And it looks like they had quite a bit of stock-based compensation over the last few years but we'll kind of see what share count does over the next few years we haven't really had a good um track record like all right what are they doing this quarter this quarter this quarter since they they've been public it's only been a month or so you're not going to really be able to see that uh yeah that's how it's public for at least a few quarters if not longer so and given all the given given all the venture money I imagine there's going to be a lot of lockup expirations coming. So, you know, just kind of expect that.

Yeah. And I'll get into the earnings. So they had 580 million in annual recurring revenue. That's growing at 65% year over year. I believe their ARR or normal revenue was growing a little faster. No, they had a weird ARR number. It's not true ARR. If you guys saw that, right? I don't know. I didn't look into the definition. I imagine it's very similar and the discrepancy or the differential between

revenue and annual recurring revenue was very small, but total gross margin in 2021 was 89%, 90%. If your non-gap was 90% and then they have almost 8,000 customers and 13% of them are contributing more than a hundred thousand dollars in annual recurring revenue. So a lot of, and as we talked about, there's a lot of enterprise customers that are leaning on this software a lot. And then the dollar-based net retention rate was 145%. Really strong. I mean, if you just throw that number in your S1 and you're guaranteed to get sales multiple above 40. That's correct.

But operating margin was negative 18%. The year before that, it was negative 154%. There is clear operating leverage in this business, and there is definitely a world in which they get the margins could be very high. Yeah, depending on sales and marketing, capital margins could be 40%. Yeah, and I think the biggest expense for them moving forward, right now they do spend a lot on sales and marketing and research and development. I think it's going to be research and development in the long run because they're constantly iterating on this product. Possibly. but yeah if those can shrink or even stay generally where they're at on a dollar basis they're going to be uh printing money and then they had 26 million dollars in free cash flow

uh not a huge amount but as i mentioned earlier the sky is kind of the limit for operating margins with this business and right now stock is compensation i think outstrips their total free cash flow so they're basically they're basically a break even when you're not you're This isn't about the stock, I guess, is what I understand. Brad, you want to hit balance sheet to wrap up the first half here? Sure. So before the offering, they had about $350 million in cash on hand, plus $100 million in marketable securities. And then they raised another $1.3 billion in the IPO to give them about $1.65 billion in liquidity. They have another $300 million in untapped credit facilities. They have another $1.2 billion in convertible

preferred stock. And then to compare that with liabilities, they have 20 million in lease liabilities and 2 million in non-current liabilities. So they can be as aggressive as they want to be. The balance sheet is pristine for sure. Yeah. It's one of these simple ones where they've just been raising through share offerings. So the balance sheet is clean. The one thing you're probably going to watch out for is share dilution and probably also want to check see if that convertible uh converted during the idea because a lot of times that can happen because this is kind of a good thing to look at once if they um once they release their first quarter report we're kind of in black right now i have a hard time believing that convertible's not gonna

hit yeah it's not going to occur multiple or else that's maybe a very bullish sign maybe maybe maybe maybe i i would doubt the pcs uh we're expecting your deal than this yeah but we'll see all right All right, that's going to hit the first half of the show. We're going to take an ad break and then kind of give our thoughts on UiPath. Cox Panoramic Wi-Fi includes advanced security to help protect all your connected devices. You'll get real-time alerts. Oh, like this one, so you don't have to worry about malware. Or when your kid downloads a song from a shady link.

And now all your computer can play is... Red color, red color, where are you? All blocked thanks to advanced security included with Cox panoramic Wi-Fi advanced security must be enabled in the panoramic Wi-Fi app restrictions apply okay welcome back next up we have anecdotal evidence and customer stories Brad anything here I know we're not any of us are IT guys so I don't know yeah nothing for me I played with robots when I was a kid and that is that is the extent of my of my robot insight here and real robots not these not the software robot transformers so so the good ones yeah yes yes yes it's uh i as far as customer stories or like anecdotal evidence

enterprise software is going to be that one class of equities that i never really know that well yeah i mean you gotta just look at the online reviews on the third-party sites my kind of process really is two steps like online reviews on the third-party sites and then dollar-based net retention rate if those are consistent that's kind of a good indicator but with these it is really difficult to tell if a disruptor actually has a chance of coming in and replacing them or coming up with a better product you're it you're not going to know firsthand like we say like a consumer product or something like that you're only going to know after the results get bent so that's the concern with this angle with a product like this yeah and i guess how many big customers

do they have would also be important. And when you have 61% of the fortune 500, it gives that last 39% more of a vote of confidence to sign on with you because you know, you're not taking some risk on some tiny software provider. So I guess there's maybe some benefits there. What about competitive advantages, Brad? Yeah. So when I think when competition is for labor is as intense as it currently is right now. I think of companies like Progeny offering enterprises fertility benefits that make employers more attractive.

In a company like this, automating tedious activities, I think can be a sales pitch for attracting new talent in this macro economy where there's not a lot of spare labor and spare talent to go around. Yeah, that makes sense to you.

Or making your existing employees kind of supercharge them. One thing I do worry about, and this is also a competitive advantage is it seems like their implicit pitch is to replace employees and you know they never say that but there are i mean that's a good value proposition for a business's profit margins at least their customers profit margins there there has been yeah i'm curious uh what this what implementing this software what kind of bloat it leads to and if there's firings after oh like realization of bloat like oh wow this person did nothing

within the company except tedious tasks uh yeah well there's a lot of stories out there of people's you know yeah there's a lot of apparently meaningless jobs apparently apparently there's a ton of them there's been a lot of research lately that there's just people getting hired they don't really do anything we all know that yeah yeah uh all right i'll get i'll get it in mine uh i could be wrong on this one so don't crush me if i am and frankly i don't i don't have a hands-on experience with the product so it's kind of hard to grasp competitive advantages but it feels like there would be a huge time cost for both implementation you mean no well yeah because you're you're constantly integrating it more and more right you're using it for more

and more processes. So then it gets harder to get rid of, or it sort of becomes so integrated within the system that you don't want to get rid of it. Kind of like iOS for consumers. Like once you've been on iOS for like three or four years and you've uploaded all that data and you've spent all those, spent all that time on it, you kind of don't want to switch. I think it can kind of be similar for the enterprise here. Yeah. There's a lot of examples that are somewhere bratty or anything on that and i mean could we almost call peer pressure a competitive advantage here i mean i'm sure cfos talk to each other and if there are these companies having amazing success becoming more efficient and leaner with ui path couldn't that create a little

envy and a little fomo and and i don't know if you call that a competitive advantage but it's kind of going along with what ryan's saying yeah that's interesting it's so weird it seems like every software company says, ah, we're 50% penetrated with the Fortune 500. I feel like the bloat might not be the employees. It might be all the SaaS products. But I don't know. I don't want to ruin investors' hopes. But the competitive advantage I have is similar to Ryan's. I think switching costs would be high. It's kind of the one you think about here. Employees get used to the system. The system gets used to the employees. That might be a little bit more of a moat where the system is theoretically and what they're claiming supposed to train itself over time

and customize it to the specific use cases. And that could potentially, you know, I hate the data economy of scale stuff because a lot of times I think that is overblown, but there could be a data economies of scale here where, you know, they, you know, you guys kind of know what I'm saying. It's hard to describe just without using the product, but it learns over time. Hopefully it's better. Yeah, I think you're right on the stickiness because their gross retention rate, which I think is basically just inverted churn, was 97% in 2019 and 98% in 2020. It seems like once customers sign on, they are very unlikely to sign off and if not spend more within UiPath.

Yeah. All right. Future growth opportunities. Brad, what was your thoughts here? Yeah, we're talking about bloat and inefficiency and not being super productive. And when I think of those things, I think of the government. So continuing to pursue these large government clients, I think there's a lot of low hanging fruit for UiPath to make their workflows a lot better and governments are very deep pocketed. So it's a little bit of a lazy future growth opportunity because it's just kind of a keep doing what you're doing. But I think that they're in sort of the early innings of pursuing this revenue channel. Yeah, it's interesting. It definitely could apply, you know, local governments, Department of Defense, parts of that, Department of Energy, parts of that. It seems, you know, any of these agencies could really use something like this, you'd think. Yeah. But at that point, are you stepping on Palantir's shoes? That's a question. Maybe that's a dumb question, but. I don't think so. Maybe. I don't know. It's way too over my head.

Yeah. I don't know what kind of overlap they'd have, but that makes me think also, and I, sorry if I am stealing your future growth opportunity because you're mentioning this, I'm not sure SM, I'm not sure this works for small to medium-sized businesses. Well, in its current form, maybe not, but yeah. So little per transaction or per workflow that you need a lot of workflows. Is that kind of, you need a lot of scale for this to make sense? Yeah. And it's like, it's just not worth the, yeah, it's just not quite worth the investment for, for smaller businesses. Maybe, maybe. But if you're, you know, the, the anecdotes for every

small business is that they're overwhelmed and there's not enough hours in the day. So I'd argue it's the opposite. You know, they might not have a large enough bank account. Well, that's true. I mean, yeah, it has to be a different type of product. I'll get to my future growth opportunity though. They have, I mean, they've demonstrated this, they have expansion capabilities within their existing customers. So the more use cases that start to get applied to employees sort of daily operations, the more people are going to lean on them. We talked about it, 145% dollar-based net retention rate. And then also getting into small parts of bigger organizations is a nice way to sort of enter because then we've talked about

that one pillar where people can see how those tools are applied. They can measure the success and they can start to say, all right, let's apply this to the rest of the organization. It's reaping benefits. So what's yours? Yeah. So you hit on it. I guess you guys might disagree here, which is fine. But I think moving down the marketing SMBs is where they're going to have to go eventually or not, maybe not SMBs, but just intermediate, like someone with 25 employees or something like that, or 25 people at headquarters. It's going to be more difficult because right now, at least the anecdotes from kind of what you read when we're reading their S1 is that it's a heavy current onboarding process

for UiPath, but it opens them up to a larger market opportunity. I mean, if the product is ubiquitous and it's basically, we can save time with any menial task. Every company has menial tasks. You know, it feels applicable. If they can get the product right, they might have to change things up. I think I have to make it more plug and play, but there's an opportunity there. It might not be their current focus, but eventually the spend has got to, at least with evaluation, it's got to move somewhere else.

My thing is, think about us. We have a bunch of menial tasks that we go through basically every day. I'm pretty far from spending a whole bunch of money to automate that. I'll stick with the menial tasks until I get larger. Yeah, I mean, we have no employees. yeah but that's isn't that to say that you need scale before this is worth it and i mean it depends on much i mean what scale i mean you don't know all a five thousand dollar license uh for an annual license they're custom so like you know i mean it has to come out with

a new product i mean every company has menial tasks so that's an opportunity i think all right yeah uh highlights low lights brad sure uh highlights so the the client list is really impressive just two examples applied materials and crowd strike uh two behemoths in in their respective fields um i think yeah i i think just attracting clients entertaining clients like that is a clear piece of evidence um for how how high quality the technology is which i'm very i'm looking for other pieces of evidence like that, because I don't understand robot process automation as well as some other people. So seeing, reading through the tea leaves of a company like CrowdStrike and Applied Materials, or both of those companies, that makes me a little

more comfortable. The low light, it's hard to pick one other than valuation. And I know valuation is cheating. So I'll go with Daniel Dines having such an overwhelming majority of a class B voting power. There's nothing wrong with him. He seems like a really morally sound person and a candid leader and a capable leader. But things can always change. And I'm not saying they're going to. But again, it was hard to find something to pick at other than valuation. So I'm going there. Yeah, the voting control stuff can be, I don't know, it's a double edged sword. sometimes it's great sometimes you might not like it if they underperform it kind of you know i tend to like it it's good if the company's doing well but it's bad when the company's doing bad

it really works against us i guess gopro is sort of the epitome of that yeah i it's it adds more not literal leverage but a little more leverage to your bets yeah it just it raises the stakes for every decision he makes being the right one um i i mean and it sounds like it or not sounds like he has he's built a very capable team around him hopefully i'm sure he's listening to all of them yeah track record's good you know so yeah uh i'm gonna touch on a few more of the customers since brad got into them i've got it here you got chipotle chevron adobe autodesk crowd strike uh bank of america bank of montreal smbc i mean it it's a really uh credible i mean 63 percent of the 4500 yeah there's gonna be no all right uh my highlights uh they preach humility

which i tend to like uh and i read a few interviews which i know is kind of ironic that preaching humility bragging about humility but uh i read interviews and it seems like it is pretty ingrained in the culture um at least with the top executives um and then also i think the switching costs are high once customers get start to rely more and more on ui path it gets harder and harder to switch away um low lights for me uh well for one i don't really think i have an edge in it at all like not even close uh and i don't completely understand the tech i also i don't like picking up someone else's exit and i feel like a lot of vcs got their exit with this ipo uh at least yeah for the next few months or whatever yeah like it feels like this is being

treated like it's over like we we did great yeah that's always tough i just i have a hard time being the one to buy their shares yeah it's risky i mean that's that's that's the risk of the ipo yeah um highlights for me uh margin expansion has been very strong there's a clear path you know the cash flow margins that we were saying i mean there's no way you'd be surprised if this hit 40 something like that 40 is obviously really best in class but this is just thinking about how there's no physical assets basically and the high gross margins so their cost of goods sold it's not like payments where you're taking out like half of that already to pay the other people or something like that or like music or whatever content um so you know the cash flow margins being super high

makes sense product provides a ton of value at least from reading the reviews so the value proposition is there seems like that leads them to potentially have pricing power so i mean that retention rate kind of shows the pricing power they have well maybe not like maybe that's just expanding to customers or employees within these customers um so we'll see but i do think that you know it leads them to have pricing power um like ryan said with these type of products there's a lock-in with the fortune 500 but i ask again how many sas products are these merc these mega corporations going to pay for i uh question autodesks uh you know you're paying for all these products and the shareholder guys um you know do we need all of them uh do these martin

can these margins stay the same with less than these i don't know it seems like microsoft you know or something like that they always list them as a big customer and you're like dang it's Microsoft paying for a hundred SaaS products. I thought they were. Yeah. I don't quite get that. Every, like every company that reports 140% Dibner is somebody else's Dibner. Yes. Yep. Or just. Brad, do you have any thoughts on that? Have you seen that?

Any software companies? How they, how they're just all each other's partners. And so they can all, and yeah, I guess. SaaS cesspool. I haven't thought about it a lot, but I guess the, the Silicon Valley community is probably pretty tight. So scratch my back and I'll scratch yours kind of thing. Yeah. I mean, I guess it can be a bad thing. Maybe, well, maybe it can,

but I don't know. I just questioned how many of these companies can go after fortune 500 customers, but we'll see. Well, I, so, you know, like both of you guys said to understanding the competitive position is hard with a company like this, a lot of competitors, It's hard to know who's truly the best. And I would worry about with a company like this, high S&M spend, because it seems like this is something that's hard to get into the door. And we talked about kind of the product speaking for itself a bit among maybe the executive suites and how much money they're saving people.

But, man, there's a little bit of friction of onboarding that may lead to perpetually high sales and marketing spend. and that's happened to a lot of software companies in the day that has really inhibited them from getting profitability um and okay last one i have so this is an industry high-tech stuff where there's a ton of brain power going after after the market opportunity it's yeah that's tough because that puts them at a higher risk of destruction you know like okay the easy example is okay no one's really going after sherwin williams or something like that yeah it's more boring yeah it might not be as big of a market opportunity it might be super mature but there's not 20 different teams of ivy league and stanford

engineers and whatever all the big colleges around the world trying to trying to yeah and the other like everyone loves the disruptor but eventually there's going to be a disruptor to that disruptor potentially potentially yeah i guess unless they have a really strong competitive advantage, which I'm not sure I can really evaluate UiPaths. Yeah, Brad, do you have any thoughts on that? I think that's why the billions on the balance sheet is so important for this company right now, especially because they can afford to buy these tiny disruptors and hopefully Dynes has an appetite for which ones to buy before they become these intimidating competitors. So So, yeah, I would hope that they're going to be pretty aggressive on the M&A front with pretty tiny, small microtransactions, sort of like CrowdStrike's been doing.

And, yeah, we'll see what happens. Yeah, we'll see what happens over time. All right. More or less interested. Brad, what are your thoughts here? Yeah, I mean, there's nothing not to like about the company. And I'm still less interested just because of that valuation and not to sound like a broken record. But these high-flying IPOs oftentimes have a way of giving us a juicier entry point. And a company like this will take me a really long time to understand and to fully grasp.

I mean, I started reading about CrowdStrike three or four months before I started a position. These B2B companies are really tough to understand, and I think it's vital to understand them. So I'm probably going to start reading into it now and hoping that that that common dip that we get in the IPOs and new IPOs comes because this is a really impressive company. And I do see that that really strong margin expansion and that really quickly growing TAM and then taking a larger and larger piece of it. But but for now, I just can't get my I can't wrap my arms around it. Yeah. And then that makes that makes a lot of sense that the post IPO dip is not guaranteed, but just historically that it does happen. lot. Right. Ryan, what are your thoughts? I'm really uninterested in it. Uh, and there's, I don't know, enterprise software feels like it has the least price dislocations.

Like every time I look at one of these, it's a valuation I can't get around. If this thing, I promise this won't have multiple expansion. Seriously. I mean, it's, it's almost guaranteed You can't have 140% gross margins, you can't have higher than like 60% free cash flow margins and like three companies in the world have those. Yeah. Well, I guess I don't see, it feels like there will be multiple compression and yeah, it's, this one's really easy for me to write off. Yeah.

I mean, I'm less interested in business looks solid, but when you're looking at a market like this 44 billion i mean i click back to the mapping math thing to do you kind of got you know market cap 44 billion you're probably implying some stock-based compensation maybe that grows to like two percent a year over the next few years so you got a little higher market cap um unless none of those options strike which means that stock probably fell like 80 percent if this thing if this thing compounds at 40 a year for like the next 10 years maybe you'll beat the index revenue growth maybe yeah yeah revenue growth and then then free cash from to become best in class. You have to think, all right, they're doing like, what, $600 million

in revenue right now? You have to think within the next decade, are they going to generate, I don't know, $5 billion in cash flow a year? That is tough to do at this valuation, and that's just going to keep me down. I mean, you have to beat bids rates so hard on this. buy is tough like you have to i mean what if i was they need to generate their market cap and cash over their lifetime that's a lot if i was using it every day and i maybe i knew how important it was to me maybe i changed my mind this is good but yeah brad what do you got yeah and i mean just for context i own i own crowd strike and i i own trade desk and i own these these high multiple names so so i i kind of have an appetite for this and it's still to me it's just

it's it's it almost has double the sales multiple of a crowd strike with inferior margins and slower growth so and we have to yeah we need to recommend things here but like sorry about that yeah yeah no no it's i'm not saying about you but i was gonna say what i was gonna say now um if you're feeling like fomo or something i don't know like the molly fool always has the great thing you just nibble on it a bit. But if it's really expensive, it sometimes can be difficult to take on a huge position. Maybe if you want to nibble, I don't know if you get that FOMO feeling, but it's really tough with these valuations. Everyone was rationalizing or trying to find a way to justify Snowflake six months ago. And what's it done since? And the multiple got cut

in half yeah hey there's no you know the stock can go anywhere but uh this one is just troubling it's troubling i think we're all on agreeance there yeah and anything else brad before yeah i just i mean this motivates me to to be in a position at some point in my life where i can invest in private companies like this because it just i feel like three or four years ago this would have just been such a i know it's easy to play monday morning quarterback and in hindsight I think three months ago, it could have been a good investment. Yeah, that's what it looks like. I mean, even getting in at what Benioff and Buffett got in at,

I mean, they're still way up on their investment. I mean, that's the lesson of the day. Become accredited as quickly as you can. Yeah, that's where the multiple expansion really is. This is where the potential multiple compression is. But we'll see. I mean, we'll hope for UiPath as well. We don't need to belabor this.

More or less interested. Sorry, not more or less interested. Stock for next week. Yeah. I'm less interested. So for next week, my choice, we're going Vimeo, just spinoff of IAC, good business. Another expensive stock, but we'll check it out. Seems like a really strong business. All right. That's going to do it for this episode. Make sure as always to check out Potential Multibaggers, our sponsor for the show. Thank you for doing that. Remember, we are not financial advisors. Anything we say on this show is not formal advice or recommendation.

Ryan and I are general partners at Arch Capital. Arch Capital clients may hold securities discussed in this podcast. Thank you all for listening. We'll see you next time.