Build your Sleep Well Portfolio today

Hi everyone,

Yesterday, I bought a sleep well business that:

• Scored 15/20 points on my sleep well checklist.

• Possesses all four moats - scale/cost, network effects, switching cost, and brand.

• Competition is the best thing that has happened to this company, as FCF has compounded at 41% since this player entered its market over 10 years ago.

• On track to grow at least 20%+ for 5-10 years and available at <15x FCF and <3x Sales with a net cash balance sheet.

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I am buying more shares in the most AI-beneficiary businesses, one of which is trading at ~17x FCF (>5% free cash flow yield) and with a 15-20% free cash flow CAGR over the next 5 years. That means the expected return is at least 15-20% in the next 5 years.

The proceeds will come from the sale of SPS Commerce, the least AI-insulated business in the Sleep Well Portfolio.

Before we dive in, a few smarter people have already made the call about the current SaaSocalypse:

One of whom is NVIDIA CEO Jensen Huang, he said:

‘Wall Street has got it wrong’. - Q4’2026 earning call.

He argued that it was ‘the most illogical thing in the world’ to sell enterprise software based on AI-increased demand and utility. Jensen Huang said AI will not replace software but will increase demand for platforms like ServiceNow, as agents will run on them to boost productivity.

The Trade Desk CEO, Jeff Green, echoed with a few details.

Right now, Wall Street has an unprovable bear thesis — “software is dead.” There is fear that Claude and tools like it will enable developers to duplicate Salesforce or The Trade Desk. During a time when the market can’t prove that thesis wrong, the market and the sector go down. What I think they’re missing is that the best companies in the world work hard every day looking for an edge. We’re all looking for every possible practical application of AI, new tools and every other possible advantage. AI changed a lot, but it didn’t evaporate integrations, moats, trust, customers and tools — let alone people with esoteric expertise and obsessive passion to improve things.”

But are these views applicable to our businesses?

Absolutely. They also support my findings that AI is a net positive, particularly for businesses that possess proprietary & regulated data, platform solutions, operate a mix of physical and software operations, and are actively using AI to improve operations.

Link to detail findings in this article

TLDR (too long didn’t read):

For nine of my twelve positions, AI is actively expanding the value these businesses deliver. CrowdStrike benefits because more AI means larger attack surfaces. Veeva benefits because AI agents operating in biopharma need a validated, compliant data infrastructure. Cellebrite benefits because digital evidence becomes more voluminous and complex. GTT benefits because it is the only viable technology for the LNG infrastructure that powers the AI data center buildout. Dino Polska, Sea Limited, Meli, and Grab operate in physical-world markets where AI is a logistics optimizer, not a competitor. SWI’s AI Risk Assessment

Let’s dive into why I bought more Veeva Systems, and have ordered to buy more Mercado Libre, Cellebrite, and Sea Limited.

This trade alert write-up replaces my monthly Best Buys edition to remove duplications.

1. Why am I buying Veeva Systems?

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• Scores 14/20 points on my sleep well checklist. (vs. 12.8 average)

• 30% free cash flow margin with over 10% of market cap in cash (net debt).

• Possesses deep and widening moats - scale/cost, switching costs, brand, and incredibly high barriers to entry.

• This SaaS platform has multiple growth levers (organic, product cross-sell, geography, M&A)

• Due to the recent CEO transition, budget delays, and procurement process issues in government contracts, the market is underappreciating the quality and expecting a free cash flow growth of just 7.5% CAGR over the next decade, compared to an achievable 15% CAGR.

I am buying this business for the second time today because it adds a unique defensive angle (an anti-fragility quality) to the Sleep Well Portfolio. Together with CrowdStrike (SWI #1) and Fortinet (SWI #12), form a highly defensive utility for the portfolio (15% of the portfolio) in the event the world goes into chaos (I hope not).

In case you missed it, recently, I reviewed the FY2025 Sleep Well Portfolio. A good place for you know what to expect.

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Let’s examine what I bought today and how it fits the Sleep Well Portfolio.

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If you are new to SWI, check out our FAQ and Owner Manual.

I am buying more Wisetech (WTC). Best of class business (86% gross margin, ~35% free cash flow margin, growth at ~20% expected mid-term), trading at the low end of the last 10 years p/fcf valuation at ~40x.

Read my past writeups for full context: deep dive, buy alert 2, buy alert 1, FY24 update, H1 FY25 update, CEO shake-up, E2Open acquisition, Back to basics. (tracking sheet below)

And in case you missed it, WTC was featured in my November Best Buys, and a few days before buying WTC, I also bought Sea Limited (SE) for my PA at $136/share.

What’s going on with the stock?

The stock has declined 55% to AUD 60 from AUD 134, primarily due to the ‘loss of focus’, to put it mildly, by the co-founder and current executive chair, Richard White (30%+ owner of shares). He has led the business for the last thirty years. Still, the sex scandal and power-grabs saga undoubtedly derailed business momentum, delayed key product releases, and slowed revenue growth.

I am a bit annoyed as it was an unforced error (more here), but as someone who wants to own the Wisetech business forever, I am a happier buyer here.

What’s going on with the underlying business?

But it’s been a year since the news broke, and I feel vindicated as I am still holding and now in a position to add more. My thesis-breaking event has always been that if a key top large freight forwarder (e.g., UPS, DHL) leaves, then something more rotten is going on, and that means I would have to reconsider my position.

Yes, growth slowed in the last 3 quarters, but instead of losing clients, WTC has continued to onboard large clients, and the last two top 25 LFF wins are going to produce 3x the wins of 2024. They are Nippon Express, a $20B revenue company and the most prominent logistics logo in Japan, which signed CargoWise due to losses from internal software failures, and LOGISTEED, a $6B revenue company with a presence in 100 countries.

What changes are being made?

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Build your Sleep Well Portfolio today

Hi sleep-well investors,

I would like to bring to your attention a warm and personal (and rare) interview with Sea Limited’s founder and CEO, Forrest Li, conducted by Nicolai Tangen, CEO of Norges Bank (Norway's approximately $2 trillion Sovereign Fund). Two billionaires (Nicolai reported had a net worth of ~700M in 2020) discussed my favourite company, Sea Limited, a 23% position in the Sleep Well Portfolio.

I highlight my key takeaways, which are: Sea’s road to success, peerless time horizon, talent advantage, AI, and Forrest’s personal routines.

Before that, I reiterate my stance on adding on dips, which I mentioned in the recent Oct Best Buys edition (alongside three other positions at attractive levels).

Key highlights:

• SEA’s early focus on building and solving the logistics problem in the region proved to be the biggest reason for its early success in the region, and today it is the most significant barrier to entry for competitors. Localised problems, such as opaque addresses and a lack of credit access to consumers, mean new entrance is required to spend time, money, and acquire local knowledge to develop a better logistical infrastructure than SPX Express (the 2nd largest logistics company in SEA) and better financial solutions than Monee ($7B loan book with rich first-party data from Shopee and Garena) — not easy at all.

• Forrest Li’s ‘forever time horizon’ in building a company to solve a personal shopping inconvenience (his daughter’s) and serving the 700 million users in the region is something rare and challenging to replicate. Who’s going to be able to commit decades of their lives to work for ‘Amazon’ or ‘Alibaba’ to build a business that riddles with tough decisions (market share grabbing without profitability insight) while having Sea Limited breathing down its neck? Let me reverse the question: Who is in their right mind opening up a new e-commerce site to compete with Amazon in the US, where habits are formed?

• Sea's underappreciated competitive advantage is its direct access to local talent. Forrest shared that when Shopee was created, there was no talent with ‘relevant experience’ as there was no e-commerce or technology company on Sea’s roadmap and ambition (yes, there was Lazada and a couple of local sites, but not with Sea’s DNA). Fast forward 10 years, and relevant talents for such a company are now bred within the Sea’s umbrella, and more are incubated in Sea’s local university’s partnerships. Competitors must either offer substantial sums to lure Sea’s loyal employees or import Amazon-like executives from the US/EU, who also need considerable time to learn the local ways. Not to mention that these execs will need to be committed for at least a decade to build a Sea’s replica and must compete with an incredibly hard-working workforce. I see that as an unlikely possibility, or at least an additional hurdle to overcome for entrance.

• AI is the future. Forrest sees AI as a platform to take Sea to a trillion-dollar class, 10 times its current value. Today, AI is already making incremental improvements to Garena’s UX and covers 80% of Shopee customers’ queries. In the future, AI will play a key role in creating new revenue streams, starting with solving internal problems before being applied to the external market. In fact, Shopee was the 6th idea when the company was trying to find ways to allocate Garena’s excess cash back in 2015. With direct and frequent contact with consumers in the region, Sea’s AI will again have the most reliable data to train its models.

• A peek into Forrest’s identity. Forrest’s name comes from the character Forrest Gump in the movie of the same name, with whom he shares a humble and kind nature. This is a movie that Forrest has watched over 10 times, starting from his college days, so perhaps the most accessible way to get to know Forrest Li is to watch the movie.

  Spoiler’s alert! Indeed, the ending of Forrest Gump aligns with Forrest’s journey so far, ‘nice guys come first.’ Forrest's kindness to people around him is having an incredible impact on the 650 million people in the region. And expect more as his humility goes hand in hand with confidence and ambition. This is someone humble enough to learn from others and committed to serving his customers—very Amazon-like. He works all the time, from 6 a.m. to 11 p.m. He eats less as he gets wealthier :). And he still enjoys the freebies from his own company (free shirt and free pants with Sea’s corporate logo). While he has time, he spends it with his young children, learning how the new generation uses e-commerce and plays games.

• Trust - the way he carries himself shows he is an excellent example for his employees. He knows the birthdays and the names of the children of his first group of employees. Now, with a different scale, he still finds ways to build trust with the 80,000 employees at every opportunity, whether that is through letters at the start of every new year, every quarter, or every IPO anniversary, or town hall AMAs with 100 employees, or visits to the local office when he travels. Combining the ‘forever time horizon’ with an 18% ownership stake in Sea’s destiny, customers, partners, and employees can trust that he will do what’s best for the company.

Do I add more shares at this level?

If you are new, consider reading SWI’s manual to learn how we approach building the Sleep Well Portfolio.

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To understand why I made a third purchase today, please read the required readings below: [deep dive, 1st buy, 2nd buy, risk management, 1st live event, mispriced]

The latest one is most interesting.

This is a company that exhibits multiple ways to win through fundamental performance and potential multiple expansion (and at this valuation, even being acquired by its partner).

• high reinvestment opportunities with 50% returns on investments (ROIC)

• aligned management with high ownership and excellent execution

• mission-critical products to slow to change end-users

• unfocused competition and high barriers to entry

• squeaky clean balance sheet

• low valuation

• fading risks

If you are new, read more about us here, and our latest portfolio review here.

If you are looking for an above-market return while taking low risk, you can read our Sleep Well Manual to understand our investment process.

For our records, I purchased an additional 2% position at SEK128/share. To my surprise, the stock fell to these levels before shooting up to SEK 160/share after the anticipated Q3’25 preliminary results were announced.

Here are the Q3’25 preliminary results:

• Q3 revenue of more than SEK 220M, EBIT exceeding SEK 130M.

• Q2 revenue was 217M, EBIT was 145M

• Q1 revenue was 201M, EBIT was 118M

Hence,

• FY2025 revenue is likely to be SEK 800-900M, if the trend continues.

• And EBIT is likely SEK 500-600M.

The Q3’25 preliminary results imply the year-end numbers will far surpass the last guidance of SEK 700 and SEK 400 for revenue and EBIT.

Even better, liquidity stood at SEK 750 million (in the form of cash of SEK 243 million and unused credit facilities of SEK 507 million), a ~SEK 550 million improvement from SEK 200 million (100 million in cash and 100 million in unused credit facilities). So I guess more receivables have been paid and converted to cash in Q3.

Additionally, management has indicated a SEK 100M allocation for buybacks, which is greater than 2% of the company's value. If they do so, I don’t think there are any doubts by bears that Intellego is all made up!

As a result, I still firmly believe that the quality of the business has improved significantly, and the future cash flow is poised to grow by triple digits over the next few years.

The investment risk isn’t that the share price has surged or declined sharply; the risk is that we don’t understand the product and evolution of the business deep enough to know where it will be in 5 or 10 years.

Please read my deep dive for a comprehensive understanding of the product, alternatives, and why the business model is highly defensible.

The reasons I bought Intellego for the third time are:

1. Disinfection using UV light is an emerging but superior solution to existing alternatives. It’s a safer, more cost-effective, and easier-to-validate alternative to chemical sprays in medical settings, which are responsible for ~40 million hospital-associated infection cases in the US annually.

2. Intellego’s UVC dosimeter product is a more cost-effective and versatile solution than radiometers for validating disinfection procedures/runs in medical settings (e.g. Veteran Affairs SEK 30-50M hospitals deal in 2024, cost per UVGI robot). In particular, if you see curing (drying) machines at an industrial scale (for semiconductors, adhesives, etc), there is just no space for a radiometer to fit in. Hence, the new curing market is for Intellego to take.

3. Intellego has expertly navigated through major roadblocks in setting up a go-to-market strategy that aligns incentives for all parties. It created Yuvio and acquired Daro, both of which sell UV disinfection devices. Hence, distributors are more willing to sell high-value devices and lower-value dosimeters as a bundle.

   The results have immensely changed the face of its business model (consumer to business pre 2022, transactional to recurring post Daro/Yuvio, and vertical integration post Daro/Yuvio). By selling both the disinfection devices (robot lamps) and the UVC dosimeters, they can also guide clients on the proper usage of UVC disinfection.

4. Transformational collaborations with Likang (both dosimeter and disinfection devices) and Henkel (utilized internally and for sales) are already covering most of the current guided FY2025 revenue, approximately $ 80 million.

5. Guidance for FY2025 was raised every quarter this year and is highly likely to be raised again in the official Q3, as well as the 3-5 year guidance of SEK 2 billion. Q1’25 revenue was as much as the whole 2024 financial year. But even if management doesn’t raise the 3-5-year guidance, revenue would still be growing at 45% per annum for three years with the existing guide (SEK 2B). The valuation appears reasonable at 9x EBIT this year and single digits for 2026 (SEK 4.5B market cap).

6. In detail, valuation does not account for (i) business model generating more recurring revenue and stronger cash conversion, (ii) favourable regulation mandating businesses and hospitals to validate their disinfection procedure, (iii) expanding application of the technology into the larger curing market (hardening of adhesive, coatings, paint, dental, and industrial usage), and white space in agriculture (plant cultivation). The likelihood of the above materializing is high in the medium term. And a ‘technology platform of UV solutions’ will demand a different multiple.

7. Meanwhile, new entrances will have to go through patent hoops that expire in 2029, 2041, and 2042. One interesting snippet is that Henkel attempted to create a similar solution in the past but opted for Intellego instead (after a 2-year discussion behind the scenes). As for existing competition, radiometers are only competing within the disinfection market and are showing signs of losing out, as UV disinfection using dosimeters for validation is growing much faster.

This is how the Sleep Well Portfolio looks after the transaction: 13 SW businesses, 2 losers.

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The stock rose 50% while I was writing up the report, and has surged 3,000% in the last four years. However, I understand the potential and the fading risks deeply, and I am not hesitant to complete the second purchase. It’s an excellent outcome because I could get it at a lower price thanks to an unsubstantiated news report.

You can expect:

• high reinvestment opportunities with 50% returns on investments (ROIC)

• aligned management with high ownership and excellent execution

• mission-critical products to slow to change end-users

• unfocused competition and high barriers to entry

• squeaky clean balance sheet

• low valuation

• fading risks

If you are new, read more about us here, and our latest portfolio review here. If you are looking for an above-market return while taking low risk, you can read our Sleep Well Manual to understand our investment process.

A quick shout out to , who have shared some vital background to the business. I will pick his brain when writing for the Q3’25 update, as he has owned the company much longer than I have.

Let’s discuss why this European technology platform improves the current Sleep Well Portfolio below. 🎯

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The stock rose 50% while I was writing up the report, and has surged 3,000% in the last four years. But now that I understand deeply the potential and the fading risks, I am not hesitating.

You can expect:

• high reinvestment opportunities with 50% returns on investments (ROIC)

• aligned management with high ownership and excellent execution

• mission-critical products to slow to change end-users

• unfocused competition and high barriers to entry

• squeaky clean balance sheet

• low valuation

• fading risks

If you are new, read more about us here, and our latest portfolio review here. If you are looking for an above-market return while taking low risk, you can read our Sleep Well Manual to understand our investment process.

Let’s discuss why this European technology platform improves the current Sleep Well Portfolio below. 🎯

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The 20th and 21st picks had a few creases that needed time to iron out. That’s why I initiated a small position after my deep dive and planned the second one for when I would have gained more clarity.

20th sleep well pick: deep dive, buying plan, first buy, Q2’25

The Q2’25 results review on July 31st provided me with enough information to proceed with the second addition. Even better, prices are now also 20% lower. I am laying out seven reasons for adding today.

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My top position is dropping by 7% due to some news that should be very beneficial for the business in the long term.

Existing members are aware that I am setting aside some funds to build for the 20th and 21st picks, so today’s addition is small, but I like to water my best flowers.

That flower is…

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• Scores 14/20 points on my sleep well checklist. (vs. 12.8 average)

• Possesses deep and widening moats - scale/cost, switching cost, brand, and incredibly high barriers to entry.

• This SaaS platform has multiple growth levers (organic, product cross-sell, geography, M&A)

• Due to the recent CEO transition, the market is underappreciating the quality and expecting a free cash flow growth of just 7.5% CAGR over the next decade, compared to an achievable 15% CAGR.

I am buying this business today because it adds a unique defensive angle (an anti-fragility quality) to the Sleep Well Portfolio.

In case you missed it, recently, I shared the following:

• 21st Sleep Well Pick

• 20th Sleep Well Pick - Boring and Anti-fragile

• Sleep Well Portfolio May Update - 64% Annualized Return

• Wisetech’s Step-change acquisition

• Transition of the Mercado Libre CEO.

• Q1’25 results review: VAT, Kinsale, MIPS, Mercado Libre, Sea Limited, and Grab.

Don’t miss out on my in-depth analysis and profitable investment decision.

No marketing spam, just research and investment-related content.

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Let’s examine what I bought today and how it fits the Sleep Well Portfolio.

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• Scores 13/20 points on my sleep well checklist.

• Possesses deep moats - network effects, scale/cost, switching cost, and brand.

• This SaaS platform has multiple growth levers (organic, product, geography, M&A)

• High probability of reaching 15% growth for 10 years with low capex, margin expansion opportunity, net cash balance sheet, and available at a 10-year low valuation.

• The market hasn’t appreciated the quality and expects free cash flow growth of 9% CAGR over the next decade, compared to an achievable 15% CAGR.

I believe it can improve my portfolio, despite its performance at a 65% annualized return rate.

In case you missed it, recently, I shared the following:

• 20th Sleep Well Pick - Boring and Anti-fragile

• Sleep Well Portfolio May Update - 64% Annualized Return

• Wisetech’s Step-change acquisition

• Transition of the Mercado Libre CEO.

• Q1’25 results review: VAT, Kinsale, MIPS, Mercado Libre, Sea Limited, and Grab.

Don’t miss out on my in-depth analysis and profitable investment decision.

No marketing spam, just research and investment-related content.

Subscribe now

Let’s examine what I bought today and how it fits the Sleep Well Portfolio.

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Excerpt from the health check report:

Nine of our sleep-well businesses have minimal direct impact from the tariff; four don’t have any operations in the US, and their competitors will suffer more in this challenging period.

Eleven niche leaders are incredibly resilient. All have been robust during past crises and agile when needed. Ten have a net cash balance sheet to buffer a prolonged trade war.

I see four worthy of addition, one worthy of trimming, and six not at an attractive price yet.

Sea Limited - added at $93/share

The first one I added was Sea Limited (SE). Details on why it is a good addition are here. The valuation was 18x FCF for a business firmly dominating the region’s e-commerce, financial, and gaming sectors. $6B cash net of provisions is aplenty to adapt to downturns. Sea Limited is also blessed with strong tailwinds from the fastest-growing economies still underpenetrated (20% e-commerce vs. 30-40% in the US/China, and 2/3 of the 650M people are underbanked). More importantly, the unfortunate event of higher tariffs will fall harder on its competitors—Lazada, Temu, and Tiktok, affirming why Sea Limited is my favorite business to add.

Sea Limited readings - deep dive, buy alert 2, buy alert 1, Q4’24, Q3’24, Q2’24 update

Other three - order placed

I don’t want to spoil the party, so I will notify you when the other two orders are filled.

I am not bottom fishing, so I will buy when I can raise cash and when I find Mr. Market's offers reasonable.

Selling MIPS at SEK 330 to raise cash

To fund the purchase, I had to sell MIPS. The reason was well documented in the Q4’24 review (high valuation for a cyclical business, yellow marked in the tracking sheet below). The drastic change upon us (thanks, Mr. Trump) has nudged it to a candidate to trim.

I am exchanging MIPS for more resilient businesses, albeit for less upside.

Read more here: buy alert (at SEK 300), earnings reviews, Q4’24 (trim candidate), Q3’24, Q2’24, Q1’24, Q4’23, Q3’23, Q2’23, Q1’23. deep dive.

Here are the current portfolio and transactions

Performance - a huge drop last week from nearly 40% since inception to 22% today vs. 9% S&P500.

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Portfolio holdings and cost basis:

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Build your Sleep Well Portfolio today

Hi, sleep well, investors,

I am intrigued by the opportunity at hand. The company I bought today helps large enterprises navigate customs taxes and cross-border trade paperwork. It’s the prime beneficiary of the current tariff war.

Its core offering integrates customs clearance and border compliance into a single platform, automating tasks like import/export documentation, tariff classification, and data submission to customs authorities. It’s built to handle multi-country regulations with real-time updates on legislation and trade rules. This helps users avoid delays, penalties, and fines by ensuring accuracy and adherence to local requirements.

Yet, it is being punished together with everything else in the market.

Let’s look at the company’s solution and why I bought it.

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Time like this shows who is swimming naked.

The Sleep Well Portfolio is not.

Tariff wars and actions can have negative impacts, but not evenly. Thus, I am taking advantage of the ongoing sell-off.

Why?

My in-depth research ensured that my portfolio companies could tackle challenges (competition, recessions), including higher global tariffs.

The short-term impact comes from higher inflation, higher interest rates, and lower demand in some industries and geography. But these companies have flexible supply chains / fabless manufacturing models / and since this is the US vs. the world, not all will be impacted.

Only four of the 10 companies are domiciled in the US, and only three have primary revenue sources (import) subject to higher US tariffs. Others operate almost entirely outside the US and within their constituents. 

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Build your Sleep Well Portfolio today

Hi, sleep well, investors,

We have a 10/10 success rate. Today's purchase and sale are taken under some uncertainties, but I see fundamental changes and a price and value dislocation; I am optimistic it will pay off once the dust settles.

I will buy a wonderful business that has generated free cash flow by 41% CAGR in the past ten years while the stock price has increased by 43% CAGR. It was profitable from Day 1 and has a twin-engine of growth (organic and inorganic), a sticky customer base that will still provide a long-run way for growth. So, the business structure is there to keep growing and delivering top-class products and value to shareholders.

To fund the purchase, I’ll be selling Floor and Decor, a position I purchased in October 2023, which is up 13%. The reason isn’t that Floor and Decor has had a difficult 2023 and 2024 due to the slow existing house sale market. What made me decide to sell the business was the change of words in the FY2024 10-K.

Floor and Decor had subtly changed a paragraph. Combined with my previous business update, I am questioning its long-term ability to meet its 2032 targets.

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Build your Sleep Well Portfolio today

Hi everyone,

Today, I bought a sleep well business that:

• Scores 13/20 points on my sleep well checklist.

• Possesses all four moats - scale/cost, network effects, switching cost, and brand.

• The multi-platform product is so strong peers ceded competing and became investors.

• High probability of growing 15%+ growth for 10 years with low capex, higher earning growth, and available at >25x FCF with a net cash balance sheet (30% of market cap).

• The market hasn’t appreciated the quality and expects free cash flow growth of 4% CAGR over the next decade, compared to an achievable 15% CAGR.

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In case you missed it, recently, I shared the following:

• Buying this anti-fragile business

• Sleep Well Portfolio Sept Update.

• 5 lessons from Scott Fraser

• 7 lessons from Ralph Wanger

• 5 lessons from Terry Smith

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Build your Sleep Well Portfolio today

Hi everyone,

Yesterday, I bought a sleep well business that:

• Scored 15/20 points on my sleep well checklist.

• Possesses all four moats - scale/cost, network effects, switching cost, and brand.

• Beaten the best competition you can think of to compound FCF at 44% since IPO.

• On track to grow 20%+ growth for 5-10 years and available at >25x FCF with net cash balance sheet.

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In case you missed it, recently, I shared the following:

• Seven lessons from Ralph Wanger (16% CAGR over 30 years)

• Five Timeless Lessons from Terry Smith (15% CAGR over 14 years)

• The Most Sleep Well Investment Of LATAM.

• Sleep Well Portfolio Sept Update.

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Build your Sleep Well Portfolio today

Hi, sleep-well investors,

Two months ago, I was fortunate to trim my position at $381/share. Since then, CrowdStrike’s market valuation has been cut in half due to the global IT outage it caused.

I reflect on the long-term impact and my remaining ownership of CrowdStrike.

Crowdstrike was the leader in endpoint security, boasting the fastest threat detection capability and 6x return on investment for customers thanks to its superior cloud-first, AI-native, and lightweight agent architecture.

Nearly 30,000 enterprise customers flocked to the platform since its IPO in 2019, of which 65% are adopting more than 6 modules. The annual recurring revenue grew by 60% CAGR to reach $3.6B, estimated to increase by 20% over the next 5-10 years. CrowdStrike enjoyed a premium multiple of up to 150x FCF and never dipped below 30x post-Covid.

Until the global outage two weeks ago, however, everything CrowdStrike had achieved was put into question.

The event was well-documented. After an initial review of the impact, I cautiously concluded that I would only add CrowdStrike at a specific price, given that it wasn’t a security breach but an internal (reparable) DevOps incompetency.

I am cautiously placing an order to buy CrowdStrike but only at $285/share or lower, where the expectations of the business performance are reduced to 15% free cash flow growth for the next decade, above the market growth rate for cyber security market at around 10% CAGR. I’ll continue to monitor how the company deals with the issue going forward and reflect accordingly.

After much reflection (and a short holiday), I still believe CrowdStrike can recover from this unprecedented challenge. This is driven by management's strong incentive and early evidence of thorough remediation actions on the Post-Incident Review analysis.

As such, this is how I view CrowdStrike in the next few quarters and years and my plans for my existing ownership.

Short-term view

PR and competitors will take every opportunity to create headlines and attack CrowdStrike.

SentinelOne’s CEO, Tomer Weingarten, recently took a stab.

This is a product of bad design, bad design decisions....This is not just an honest mistake. It's a result of how the architecture was used — or maybe even abused, I would say...This is not force majeure. This is bad architecture.

That’s to be expected, given that CrowdStrike CEO and co-founder George Kurtz has openly criticized SentinelOne’s platform in recent years (read my Q1’24 review, Fal.con review).

For now, the market will ensure CrowdStrike's terrible mistake in its sales pitch, and impacted customers will want CrowdStrike (and Microsoft) to pay the price.

Since then, CrowdStrike has lost over 45% of its market value, the third-largest drawdown behind the 60% drawdown in 2023 and 2020.

The last two times were industry-wide, but this time is different. Will CrowdStrike crumble from this debacle?

Let’s address the elephant in the room.

What is the total damage CrowdStrike caused?

It was estimated that CrowdStrike has cost Fortune 500 companies as much as $5.4 billion in revenues.

The healthcare and banking sectors were hit the hardest at around $2B and $1B, respectively. (Parametrix)

Meanwhile, airlines such as Delta, American, and United Airlines are thought to have collectively lost $1.3B. Delta was the first high-profile company to announce its hire of lawyers to recover the damage. I expect more of the same ‘bad’ news to come as more companies follow suit.

This is more than the $3B cash on hand and the $1B free cash flow.

Fortunately, to CrowdStrike, I don't see how companies can claim damages directly. I believe cyber insurers would bear most of the cost. Yes, legal fees could be high. But it’s likely in the millions, not billions, and it’s a one-off.

I am more worried about the loss of new customers, the fall in retention of existing ones, and the unwillingness to own the mistake and learn from it. These are the longer-term impacts.

Ownership view

As a part-owner of CrowdStrike, I would want George Kurtz and his team to focus on improving the internal process and using it as a sales opportunity, even if it means lower margins and market share in the next 12 months.

“There’s no such thing as bad publicity,” P.T. Barnum

Or, as Oscar Wilde put it:

“There’s only one thing in the world worse than being talked about, and that is not being talked about.”

There are two overarching questions I tried to answer as an outsider.

1. Can the company recover and adapt?

2. Can I still trust the management?

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Build your Sleep Well Portfolio today

Today, I bought a top cyber security business, Fortinet (FTNT), at $58/share and placed an order to buy CrowdStrike (CRWD) at $285/share after trimming it to $381.64/share a month ago. I am reluctantly selling Medistim (MEDI) at NOK 170/share to fund the purchases.

Reasons:

1. Adding Fortinet

I added Fortinet because it’s the most resilient business in cybersecurity; the recent thesis review also shows promising developments are coming, as 65% of its revenue is about to enter an inflection point. Finally, in light of the global IT outage caused by CrowdStrike’s faulty update highlights the importance of having a backup plan, multi-vendor strategy, and keeping your critical system on-premise—raising the profile of companies such as Fortinet and Palo Alto (PANW). Moreover, SentinelOne (S), the direct competitor of CrowdStrike, is looking to gain the most here. Palo Alto and SentinelOne are extensively discussed in my Fortinet and CrowdStrike deep dives, as well as updates if you want to know more about them.

2. I placed an order to buy CrowdStrike.

I have placed an order to add Crowdstrike at $285/share. I will notify you if the order has been filled out or not. The reasons for putting an order at a lower price instead of buying today are:

I am not buying today as I want to see how CrowdStrike deals with the problem. So far, so good. The CEO quickly found the solution, reported the findings on their website, and went on air on CNBC to apologize to the customers and people impacted. Next, I need time to see changes in internal testing processes and risk management steps to prevent further events like this. Below is the initial technical and root cause analysis CrowdStrike has laid out on its website

Root Cause Analysis

We understand how this issue occurred and we are doing a thorough root cause analysis to determine how this logic flaw occurred. This effort will be ongoing. We are committed to identifying any foundational or workflow improvements that we can make to strengthen our process. We will update our findings in the root cause analysis as the investigation progresses. - 19 July 2024

I am placing the order at $285/share because, at this price, the growth expectation is reduced to 15%, a more achievable feat than at $381/share when I last trimmed the stock. This implies that CrowdStrike would have to grow free cash flow per share by 20%+ for the next decade.

CrowdStrike’s sharp 15% decline in the stock price on the outage day (and 30% from $400) showed the market had no appetite for a sky-high valuation, no matter the quality. Notably, the magnitude of the problem created yesterday at 11:00 PM GMT (18th July 2024) is still unknown.

So far, we only know that the content update related to Falcon Sensor impacted 8.5M computers (primarily corporate) worldwide.

Global media outlets (Sky News), airlines (Jetstar, Delta, Turkish Airlines), banks (Lloyds, Visa, Santander), hospitals, transport networks, and Cafe shops came to a halt (see spikes of error reports below).

The main question now is:

What’s the cost of the error?

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