However, I think it wrong to use valuation metrics to compare OVH with larger peers in the industry. The multiple at which a company is capitalized relative to top line sales is a product of profit margins. If peers have far larger profit margins - while OVH struggles with profitability - then there is no way that they should be trading at the same multiple. Additionally, many US peers in the tech space are vastly over valued, to there is a strong argument that their multiples ought to be lower, rather than that OVH ought to be higher.
Capital allocation is an issue. When struggling with profitability, why allocate debt capital to repurchase shares? That kind of capital allocation, along with dividends, should mostly only be made out of surplus capital on the balance sheet for which the company has no other use. Why impair the balance sheet to prop up a share price when, if the profitability issue is not resolved, the share price will simply sink again? Where is the long-term benefit to the company and its shareholders? Is there any? Or are they just being burdened with unnecessary debt?
Next, the world of tech is evolving at a rapid pace, particularly with the recent advent of AI. This requires higher levels of compute power than ever before - which is why the big US cloud providers are filling their data centers with super expensive NVIDIA GPUs. I don't see how OVH is able to compete - it doesn't have the cash flows or balance sheet to evolve as quickly as it needs to. The world of tech is all about survival of the fittest and, judging by recent capital allocation decisions, I am not convinced that OVH is the fittest.
Finally, every time the management of a company changes, shareholders are required to roll the dice on the outcome. Apple was a great company, but John Sculley nearly took it to bankruptcy. IBM was arguably once the best company in the world, certainly the most valuable, but Lou Gerstner caused irreparable damage to it from which it has never recovered. The truth is that bringing in outsiders, no matter how much success they have enjoyed elsewhere, is a huge risk. I prefer the way Amazon managed succession with Andy Jassy taking over from Jeff Bezos having worked together for the prior 20 years - the culture and ethos remained unchanged. The new CEO at OVH is a wild-card in the deck and only time will tell if it worked for the best.
Excellent write up.
However, I think it wrong to use valuation metrics to compare OVH with larger peers in the industry. The multiple at which a company is capitalized relative to top line sales is a product of profit margins. If peers have far larger profit margins - while OVH struggles with profitability - then there is no way that they should be trading at the same multiple. Additionally, many US peers in the tech space are vastly over valued, to there is a strong argument that their multiples ought to be lower, rather than that OVH ought to be higher.
Capital allocation is an issue. When struggling with profitability, why allocate debt capital to repurchase shares? That kind of capital allocation, along with dividends, should mostly only be made out of surplus capital on the balance sheet for which the company has no other use. Why impair the balance sheet to prop up a share price when, if the profitability issue is not resolved, the share price will simply sink again? Where is the long-term benefit to the company and its shareholders? Is there any? Or are they just being burdened with unnecessary debt?
Next, the world of tech is evolving at a rapid pace, particularly with the recent advent of AI. This requires higher levels of compute power than ever before - which is why the big US cloud providers are filling their data centers with super expensive NVIDIA GPUs. I don't see how OVH is able to compete - it doesn't have the cash flows or balance sheet to evolve as quickly as it needs to. The world of tech is all about survival of the fittest and, judging by recent capital allocation decisions, I am not convinced that OVH is the fittest.
Finally, every time the management of a company changes, shareholders are required to roll the dice on the outcome. Apple was a great company, but John Sculley nearly took it to bankruptcy. IBM was arguably once the best company in the world, certainly the most valuable, but Lou Gerstner caused irreparable damage to it from which it has never recovered. The truth is that bringing in outsiders, no matter how much success they have enjoyed elsewhere, is a huge risk. I prefer the way Amazon managed succession with Andy Jassy taking over from Jeff Bezos having worked together for the prior 20 years - the culture and ethos remained unchanged. The new CEO at OVH is a wild-card in the deck and only time will tell if it worked for the best.
I welcome your comments.