How to catch inflection point in Platform companies?
Maybe the Dividend Discount Model or Discounted Cash Flow may not give you the answer
Life is all about unlearning.
Every day, every minute learning occurs only when you have the attitude to keep unlearning.
Don't get me wrong; I am not saying you need to throw all ideas out the window, but there has to be a method to the madness.
Traditional investing concepts talked about Value Investing, the Dividend Discount Model, the Discounted Cash Flow Model, etc., but more often than not, when you try applying these frameworks, you will exclude a large part of the investable universe.
Then come platform and tech stocks - a space that has numerous global case studies and has created tremendous shareholder value, yet purists will always argue,
"Where is the cash flow?"
The issue is that with these companies, since they scale so high and so fast, price is always ahead of cash flows.
So, a framework that has always worked is the rate of change. You can add other layers on top too - capital availability in the space and industry tailwinds for triangulation - but more often than not, the rate of change will tell you where this business is headed.
A while back, I wrote about Zomato and Paytm - great companies, running with stellar teams and executing at breakneck speed. But if you look at shareholder returns, they have delivered maximum value in a zone when their rate of change started showing a path to profitability and they were clear about their near-term targets.
While a traditional investing model would not have given you the answer, the moment you are able to model out what earnings and cash flows can be - at least two years out, provided the rate of change is great - you have a starting point for evaluating a platform company.