452: Constellation Software's Big Win, Big Tech Deep Value, Excel Era, TikTok & Bytedance, Herb Kelleher, LEGO, DALL-E 3, and Melatonin
452: Constellation Software's Big Win, Big Tech Deep Value, Excel Era, TikTok & Bytedance, Herb Kelleher, LEGO, DALL-E 3, and Melatonin
"endlessly scrolling short-form videos on InstaTikTube"
It is hard to beat a person who never gives up.
—Babe Ruth
🔂 📲 ⛓️🔧 I’m sure you have habits you’d like to change.
Everybody is different. Some people are incredibly effective at being the film director of their lives — cf. Jocko — while others struggle more (🙋♀️).
There’s a whole industry built around this type of advice.
Some of it is just bad, and some of it is good for people who are wired a certain way but doesn’t do much for others. It can be hard to navigate and easy to become cynical about it all (Atomic Habits was a huge best-seller and so was The Secret — I’d recommend the former, but not the latter…).
One technique I’ve been thinking about lately is replacement habits (I got this from Cal Newport, but I’m sure this is ancient wisdom).
The concept is simple: If you want to stop doing XYZ, don’t just stop cold turkey and try to white-knuckle it. 🦃
That may work if you’re on the Jocko end of the spectrum, but for most people, it’s a lot more effective to try to replace that thing with something else that fills some of the same needs but in a more desirable and valuable way (to you — it’s all subjective).
Otherwise, the hole left by that habit will just tend to be filled again by what filled it in the first place, since that’s the path of least resistance.
For example, if you feel like you want to spend less time endlessly scrolling short-form videos on InstaTikTube, you may try replacing it with something else that you find entertaining, but that fits with your goals for yourself and that you’ll feel good about.
Maybe it’s listening to audiobooks or podcasts, maybe it’s playing board games with your family, maybe it’s a hobby like learning to play guitar or build model sailboats inside of wine bottles, I dunno ¯\_(ツ)_/¯
📘 Friend-of-the-show Shane Parrish (🍁) published his first book, ‘Clear Thinking'.
My order is in, I’ll share more about it once I’ve had a chance to read it.
I have so much respect for long-form writers.
With my writing, the feedback loop is relatively short. I go *clickety-clack* on the keyboard, hit publish, and hear back within minutes. If I have a new idea or mess up, there’s always a new Edition just around the corner.
It’s more like a continuous flow of writing coming out of me…
Shane has been working on this book for *four years* — writing, rewriting, editing, polishing and repolishing.
Can you imagine working on something for so long and having so much rest on that one moment when the bird jumps out of the nest...? It must be nerve-wracking while you hold your breath, hoping that it will fly! 🕊️
💚 🥃🐇 The price of a couple of coffees or one alcoholic drink per month isn't a bad deal for supporting this newsletter and getting exclusive members-only editions!
The entertainment has to be worth something on its own, but for those who care most about the bottom line, there’s optionality:
If you make just one good decision that makes your life better per year because of something you learn here (or avoid one bad decision — don’t forget preventing negatives!), it'll pay for multiple years of subscriptions (or multiple lifetimes).
As Bezos would say of Prime, you’d be downright irresponsible not to be a member, it takes 12 seconds (3 seconds on mobile with Apple/Google Pay):
🏦 💰 Liberty Capital 💳 💴
✨ Constellation Software’s ✨ Acquisitions from Black Knight are even better than I thought! 🚂
In Edition #438, I wrote about the gift that Constellation got from antitrust regulators. They forced ICE to divest some large quality assets from Black Knight to close that merger.
It looks like the deal was even better than I thought:
Based on new disclosures from Black Knight, Constellation is paying just $40MM for Empower, well below our initial estimate for $190MM and an unconfirmed Reuters article suggesting a possible takeout price of $400MM.
Constellation paid $240MM cash upfront (and $500MM note) combined for Empower/Optimal Blue, which the market valued at ~$3.4B
as part of Black Knight.
We now estimate 28-38% levered IRR on the two acquisitions, up from 26% previously, assuming -2% to +2% organic growth per annum and 34-37% long-term adj. EBITDA margins.The $500m note mentioned above is also *very* interesting!
It has a 40 year maturity at 7% interest and Constellation doesn’t have to make interest payments for the first 5 years. 🤯
The big question about Constellation over the past few years has been: Can they scale up capital deployment without crushing ROIC and losing discipline? Can they successfully decentralize something that in the early days of the company used to be done largely by a few people at the head office?
So far so good:
Constellation has deployed a record $2.07B capital on acquisitions YTD, surpassing the $1.69B deployed in all of FY22. Despite the record amount of capital deployed, the return on acquisitions appears likely to remain high, in our view, as shown by the IRR on Empower/Optimal Blue. We believe Constellation's M&A model is scaling, as the company has been able to sustain a high pace of acquisitions (tracking to >100 acquisitions this year) and make larger acquisitions, all while retaining its high IRR threshold.h/t Misty Capital
For more on ✨ Constellation Software✨ check out:
🐙💻 When Big Tech was Deep Value 🌳💰🌳
My friend MBI (💎🐕) writes:
In the beginning of 2013, Big Tech’s (defined as Apple, Microsoft, Alphabet, Amazon, and Meta) market cap were:
Apple: $500 Bn
Microsoft: $225 Bn
Alphabet: $232 Bn
Amazon: $114 Bn
Meta: $58 Bn
In aggregate, Big Tech was worth $1.1 Tn at the end of 2012. Over the last ten years (2013-2022), Big Tech collectively generated $2.3 Tn Operating Cash Flow (OCF), slightly more than double their aggregate market cap ten years ago! To say it differently, Big Tech was a form of deep value investing that was deeply underappreciated even though they are all widely followed companies at that time!
MBI then goes on to slice and dice the numbers in a few different ways to show that even if you take into account SBC and look at FCF, Mr. Market was still underestimating these companies as a group.
Looking forward:
Many of those optionalities could not possibly be modeled back then and the reality is the world has never seen such a dominant group of global companies in the history of capitalism which led to this deep underappreciation for such a long time which arguably somewhat still persists.
But it also introduces questions: what are the current set of optionalities for Big Tech today that are hard to model and hence value appropriately?
It’s an interesting question to ponder 🤔
MBI shares his thoughts on what these may be, but I think it’s a good exercise to try to come up with your own answers before you read MBI’s.
🇨🇳 💰💰💰 Bytedance financials are bonkers 🤯 (but are they real?)
ByteDance’s revenue rose 34% to $24.5 billion in the first quarter of 2023, a slight slowdown from its 38% revenue growth in the 2022 calendar year, according to detailed financials [...]
the company generated $6.8 billion in cash from operations in the period, an improvement from $5.8 billion in cash flows from operations in the same period a year earlier. [...]
In terms of revenue, ByteDance is getting closer to Facebook owner Meta Platforms, which generated $28.6 billion in the first quarter. [...]
ByteDance’s cash holdings grew to $30.4 billion as of March 31, up from $22.3 billion at the end of 2022. The company, which owns TikTok but generates most of its revenue from a TikTok-like service in China, generated a $2.7 billion profit in the March quarter
I knew TikTok was huge, and Bytedance’s Chinese apps were also gigantic, but I didn’t expect their combined revenue to be approaching Meta levels.
That’s surprising to me, which doesn’t mean that it isn’t correct, but I’ll be waiting for more data points and confirmation to move up my belief level (everything is a probability!).
Speaking of TikTok: There are reports that they are testing a paid subscription model, which would remove the ads for $5/month. Everybody’s looking for some of that sweet subscription revenue…
✈️ Founder Spotlight: Herb Kelleher of Southwest Airlines 🏃♂️
Another great podcast by my friend David Senra (📚🎙️), who himself is a maniacal founder — who will record the Founders Podcast episode about David Senra someday 🤔
*scribbles down a note*
Back to Kelleher: I loved this episode!
David’s right, the definitive biography on him still needs to be written, but based on what we know, he was quite the iconoclast and marched to the beat of his own drummer.
The simple heuristic of taking the best of what is out there when it applies but rejecting the rest and doing things your own way when it doesn’t is incredibly simple, but rare in practice.
I love the anecdote about how some marketing guy joined Southwest from a big company. He was laying out how he thought they could be ready to shoot some commercial in 9 months. Herb told him something like “How about next Thursday?”
🧾 The Excel Era: The Impact of Spreadsheet Software on Bookkeeping Jobs 🗄️📂
I don’t want to over-extrapolate from one chart. There are so many factors at play — the economy has grown, population went up, total number of businesses is higher, etc — it’s very hard to extract causality from any apparent correlation.
However, it’s clear that this technology has had a huge impact, similar to how the large pool of typists and secretaries from the Mad Men era disappeared in part thanks to photocopiers, printers, and personal computers.
I wonder what the *real* impact of productivity software like Excel has been. On one hand, it’s incredibly useful across a wide range of tasks. Few applications are Swiss Army Knives the way that Excel is.
On the other hand, so much of what people do for work is BS and unproductive. Is doing that BS more efficiently or with more complexity really better? Does it just allow people to do more BS, or does some of that efficiency free up resources/time for actual valuable work? ¯\_(ツ)_/¯
🇩🇰🧱 LEGO Group's annual revenue (in Danish Krone) 📈
LEGO produces around 60 billion LEGO bricks each year (the number varies by source, but this seems like a recent one from what looks like a fairly reliable source).
I’ve seen their profit margin described as being between 25-30%.
What a great business!
Another interesting bit of trivia: Purchasing LEGO on the second-hand market over the past 20 years outperformed VC returns, and if you buy with even a little bit of skill, you would’ve massively outperformed!
Via Chartr
🧪🔬 Liberty Labs 🧬 🔭
✏️🏭🇯🇵 Hypnotic pencil manufacturing in Japan
Who knew pencil manufacturing could hold my interest for 10 minutes?
The world is full of interesting things, we just rarely notice them or even know they exist.
🥱 Be careful with melatonin supplements 💊 🌛
Via Dr. Peter Attia:
In a 2023 study published by the Journal of the American Medical Association, Cohen et al. investigated the presence and quantity of melatonin, cannabidiol (CBD), and serotonin in 25 over-the-counter sleep aid gummies with nominal melatonin content ranging from 1-10 mg. [...]
In the other 24 products, melatonin levels varied significantly, ranging from 1.3 to 13.1 mg per serving. Notably, the actual melatonin content deviated considerably from the labeled amounts, with discrepancies up to a striking 347%. A mere three of the 25 products (12%) had melatonin quantities within ±10% of the declared amount, suggesting that a vast majority (22, or 88%) of these sleep aids were inaccurately labeled, potentially leading to unintended consequences for consumers.
A decade+ ago, I used to take melatonin supplements fairly frequently. As I’ve learned more about it and its potential unwanted effects, I diminished the quantity, and then basically stopped using it except once in a while, and mostly at 0.25-0.50mg dose.
For sleep quality, the supplements I take fairly regularly are Theanine, Magnesium L-threonate, and sometimes Ashwagandha. Your mileage may vary, everybody is different, but in my experience, they’ve appeared to help (always hard to be certain with an N of 1 and so many variables, the placebo effect, etc — but in the end, what matters is that these things seem safe, and I’m sleeping well).
⚡️ Plentiful energy is necessary for life, security, and prosperity 🛢️
It’s easy to forget about the important stuff when it has been working well in the background for a long time, but the price to pay for messing things up when it comes to energy is so high that we shouldn’t take that risk.
This graph of electricity generation per capita shows just how wide the distribution is:
If we look at other sources of energy, like oil, natural gas, uranium, and coal, we’d see a similar distribution (but with the countries moving around… Though Norway and Canada have a lot of oil too).
It’s a similar story when it comes to energy use per capita, though that is mostly based on wealth and climate (heating is very energy-intensive). Norway uses 292x more energy per capita than Chad. Talk about a wide dispersion!
🖼️🎨🤖 DALL-E 3 looks promising
It felt like OpenAI had fallen behind on generative AI for images, but DALL-E 3 appears to be competitive.
I haven’t had a chance to try it yet, so I can’t say how it compares to SDXL or Midjourney, but the images in the announcement and on DALL-E’s Instagram are impressive (with the caveat that they were hand-picked because they are impressive).
What I’m most curious about is the interaction model with back-and-forth and the integration with GPT-4/Bing. That’s going to make it more accessible to a lot of people, and I’m looking forward to what people create with it.
🎨 🎭 Liberty Studio 👩🎨 🎥
🇬🇧🇮🇪🇺🇸 ‘Catastrophe’ (2015-2019, UK) 📺
*Warning: extremely light spoilers… not even spoilers, but indirect allusions to spoilers*
My wife and I have been watching ‘Catastrophe’ thanks to friend-of-the-show Matthew Ball (👨🚒🪓) who recommended it (“People who like Fleabag tend to like it”).
It’s not reaching Fleabag levels of brilliance (but what is?), but it’s well-written, acted, charming, and funny.
Three seasons in, I'm REALLY enjoying it.
It's definitely not for everyone — it's 10,000% based on character and dialogue — but if it's for you, it's probably *really* for you.
The chemistry between Rob and Sharon is what makes the show, which is even more impressive considering they originally met on Twitter.
I'm kind of sad that I only have 6 episodes left to watch.
These UK shows go by so quickly. I was also left wanting more after watching 'Crashing' (2016, UK, with Pheobe Waller-Bridge). I suppose sometimes it’s better to have that than have shows that overstay their welcome and get progressively worse over 5-6 seasons…
I wonder if there's something else out there that fans of 'Catastrophe' and ‘Fleabag’ tend to like 🤔 Please send me your recommendations!
Maybe Starstruck (https://www.imdb.com/title/tt10801368/) is the closest thing to those I can think of.