Another great write up - thank you. This is a new name to me. Very interesting.
Just playing devil's advocate on the bear thesis in an attempt to encourage others to engage in the debate.
You say, "The reported 21.9% operating margin masks an economic reality where true cash margins approximate 5-6% when all R&D flows through the income statement. In other words, RaySearch is borrowing profitability from the future, betting that today's algorithmic innovations will generate returns three to five years hence."
But you then go on to say, "At 44x earnings... RaySearch trades at premiums typically reserved for hypergrowth SaaS companies"
However, without the aggressive capitalizing of R&D expenses, if adjusted operating margins are closer to 5-6% as you say, then net margins are closer to 4% and the company is actually capitalized at closer to 198x earnings.
At these kind of margins, an EV of ~8x revenue would require growth rates well beyond where they are now to justify.
It appears to be priced beyond perfection. Is this a great company at the wrong price?
When Johan Löf sold 2m of his shares in March this year, despite the price having seen a short-term rally since, maybe he reached a similar conclusion?
You're absolutely right, and you just made my bear case way stronger than I did.
Basically, I was trying to show two different lenses on the same company.
Mr. Market sees 44x P/E based on reported earnings.
My analytical view says those earnings are inflated by capitalising 71% of R&D, so the "real" economics are 5-6% margins.
Both can be true simultaneously.
The market IS paying 44x for what it sees. I'm just saying what it sees is accounting theater.
But your math is brutal and correct: if my analytical lens is right, then we're not talking about 44x earnings, we're talking about 200x+ real earnings.
Which is, I mean, come on.
So thanks for taking my own framework and showing me the valuation is even more bonkers than I suggested. "Expensive" doesn't cover 200x+ anything.
The Löf sale timing hits a bit differently now. He converts his super-voting shares and sells exactly SEK 500M worth right as margins peak? I initially wrote it off as diversification. But maybe he did the same math you just did and thought "yeah, this seems totally sustainable."
(This is why I write these things. Readers always catch the obvious stuff you miss)
International accounting rules were not designed with investors in mind. They were, primarily, to aid the authorities in collecting taxes.
The whole concept of capitalized spending and depreciation is madness.
You and I could set up a software company tomorrow in two parallel universes. Everything could be identical - including our initial investment - but you build your software inhouse so have to expense it immediately, while I buy my identical software from a third party and so can capitalize it and write it down over a number of years at my discretion !?!?! Really ??!?!
Although our capital deployed and investment is the same, and we have the same number of customers and revenue levels, our financial reports will appear to be entirely different. That is just nonsense. Accounting rules were designed in a time when most business was tangible asset heavy, yet the world has evolved and the rules haven't kept up.
All that to say, I never take financial reports at face value - they are generally misleading.
Our mutual conclusions about this company simply confirm that approach to be the correct one.
Another great write up - thank you. This is a new name to me. Very interesting.
Just playing devil's advocate on the bear thesis in an attempt to encourage others to engage in the debate.
You say, "The reported 21.9% operating margin masks an economic reality where true cash margins approximate 5-6% when all R&D flows through the income statement. In other words, RaySearch is borrowing profitability from the future, betting that today's algorithmic innovations will generate returns three to five years hence."
But you then go on to say, "At 44x earnings... RaySearch trades at premiums typically reserved for hypergrowth SaaS companies"
However, without the aggressive capitalizing of R&D expenses, if adjusted operating margins are closer to 5-6% as you say, then net margins are closer to 4% and the company is actually capitalized at closer to 198x earnings.
At these kind of margins, an EV of ~8x revenue would require growth rates well beyond where they are now to justify.
It appears to be priced beyond perfection. Is this a great company at the wrong price?
When Johan Löf sold 2m of his shares in March this year, despite the price having seen a short-term rally since, maybe he reached a similar conclusion?
I welcome the thoughts of other.
You're absolutely right, and you just made my bear case way stronger than I did.
Basically, I was trying to show two different lenses on the same company.
Mr. Market sees 44x P/E based on reported earnings.
My analytical view says those earnings are inflated by capitalising 71% of R&D, so the "real" economics are 5-6% margins.
Both can be true simultaneously.
The market IS paying 44x for what it sees. I'm just saying what it sees is accounting theater.
But your math is brutal and correct: if my analytical lens is right, then we're not talking about 44x earnings, we're talking about 200x+ real earnings.
Which is, I mean, come on.
So thanks for taking my own framework and showing me the valuation is even more bonkers than I suggested. "Expensive" doesn't cover 200x+ anything.
The Löf sale timing hits a bit differently now. He converts his super-voting shares and sells exactly SEK 500M worth right as margins peak? I initially wrote it off as diversification. But maybe he did the same math you just did and thought "yeah, this seems totally sustainable."
(This is why I write these things. Readers always catch the obvious stuff you miss)
International accounting rules were not designed with investors in mind. They were, primarily, to aid the authorities in collecting taxes.
The whole concept of capitalized spending and depreciation is madness.
You and I could set up a software company tomorrow in two parallel universes. Everything could be identical - including our initial investment - but you build your software inhouse so have to expense it immediately, while I buy my identical software from a third party and so can capitalize it and write it down over a number of years at my discretion !?!?! Really ??!?!
Although our capital deployed and investment is the same, and we have the same number of customers and revenue levels, our financial reports will appear to be entirely different. That is just nonsense. Accounting rules were designed in a time when most business was tangible asset heavy, yet the world has evolved and the rules haven't kept up.
All that to say, I never take financial reports at face value - they are generally misleading.
Our mutual conclusions about this company simply confirm that approach to be the correct one.
> International accounting rules were not designed with investors in mind. They were, primarily, to aid the authorities in collecting taxes.
Goes in my top quotes collection. Well said.