Patience is required.

The good news is that my investment period runs until 2037, so what has happened in the past 6 months might not matter much in a few years, and definitely not in over a decade. I still believe that consistently (i) putting aside emergency funds, (ii) investing excess in high-quality companies, and (iii) staying invested through tough times will help me build a reasonable capital and knowledge base for my daughters’ future.

Today, I am putting money where my mouth is - I will initiate a starting position in SWI Pick #24 and add more over the next few quarters.

Learning from my mistake, this is a more predictable business and will be a smaller starting position.

• #24 is a technology leader whose alternatives are legacy solutions and AI as an accelerator instead of a competitor.

• The product is mission-critical to top-tier hospitals, 100% of whom renews long-term contracts lasting 5+ years.

• Durable growth opportunity with a large whitespace and a market cap of under $10B.

• Clean financials and prudent accounting, no debts, 50% of cash allocated to dividends, and capex-light.

• Risks include high valuation, looming succession planning, legacy solutions fighting back, and AI still bringing uncertainties.

• Why now? The business has been perennially expensive, but it has been bundled with the ‘AI SaaSapocalypse’, pulling the stock down by nearly 60% in the last 7 months from its peak, giving it a good time to buy in stages (dollar-cost-average) into a position, or at least to do the work now before we get a better entry point.

If you are new to SWI, here is the link to all write-ups.

What is Sleep Well Investments?

1. Deep research on a few exceptional niche leaders.

2. Patiently waiting and thoroughly following up for buying opportunities.

We will go through:

• Investment Thesis

• Why does it help us sleep well?

  • Mission-critical product, slow-changing customers

  • Founder-led management

  • Solid moats and barriers to entry

  • Organic growth opportunities

• Limited competition

• Risks - legacy fighting back, key man

• Valuation

• Sleep Well Scores

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To start 2026, I have selected the best of the best. The bar is incredibly high, and by 2037, I would like my daughters to own only businesses like this. This deep dive will help you understand the business like an owner.

If you are new to SWI, please read our manual and FAQ.

A sleep well business, to me, is irreplaceable. Its existence elevates the lives of end users and customers and operates in harmony with suppliers and regulators. When it’s gone, the community it builds around it would feel deep pain. Importantly, competitors can’t quite figure out a way to break in. Therefore, the business enjoys the advantage of generating consistent, growing free cash flow per share. However, what makes the business sleep well is also its ability to adapt, and the excess it purposely puts away to withstand the inevitabilities of external shocks and competition.

Intuitive Surgical (ISRG), a $185B leader in the robotic-assisted surgical market, ticks many of those boxes. However, there are serious emerging risks, and the price we pay (~80x FCF) today may only yield satisfactory returns over 10+ years if certain growth opportunities are realized.

Content of the deep dive

• Executive summary

• How is it a sleep well investment for 2037?

  • irreplaceability - product relevance

  • business model - predictability

  • moats and barriers to entry - early ‘lock-ins’

  • competition - old and new

  • anti-fragility - endurance

  • opportunities

  • management

• Risks - what can go wrong

• Valuation and execution

• Sleep well scores

Executive summary

I am eyeing owning part of Intuitive Surgical because:

• It has been a poster child for the industry as a pioneer since its founding and is now a standard of care in multiple complex surgical procedures.

• 60%-80% market share in total robotic-assisted surgeries, with at least a decade's head start compared to imitators.

• The market position is nearly impenetrable thanks to multi-layered switching costs cultivated very early in the customer acquisition phase, a vertically integrated business, and high barriers to entry—perhaps the most ‘moaty’ businesses I have come to learn.

• High predictability of revenue, as every robot system sale brings 7-10 years of recurring consumables and service revenue.

• Multiple ways to prolong its double-digit FCFPS growth, including expanding procedures, system and instrument categories, geography, and occasionally breakthrough technologies.

• Highly AI-proofed and has $5B of cash with another $4B in long-term investments and no debts to buffer unknowns.

Most importantly, Intuitive Surgical's success enhances the quality of life for people around the world.

I have spent months in the hospital with my daughter and gone through surgeries. I see why robotic surgeries are the preferred choice, not only better outcomes for us but also for the surgeons, hospitals, and the healthcare system.

Intuitive Surgical creates value for all parties involved.

Let’s dive into the company and why it could be a sleep well investment.

If this is not for you, all other write-ups are here:

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Disclaimer

As a reader of Sleep Well Investments, you agree to our disclaimer. You can read the full disclaimer here.

The 22nd sleep-well pick has had a stellar run so far this year, up multiple times; however, I think this business development is so good that shares are still cheap at the current level.

This isn’t a typical compounder.

It offers a rare combination of triple-digit free cash flow growth and sleep-well qualities that can buffer against future adversity.

My first goal remains protecting our capital, but it doesn’t have to come at the expense of a lower return. This one has the most upside potential of all my picks with fading risks.

SWIs members can expect:

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

• aligned management with high ownership and 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.

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• Leader in a niche that has perennial growth. Less than $5B market cap.

• Mission-critical solution to very sticky customers, including federal agencies.

• 20% organic growth. Additionally, the CEO in transition is allocating more capital to inorganic growth.

• Stable and growing free cash flow per share by over 40% CAGR since available financial data (> 5 years).

• Temporary negatives are the low ~3% insider ownership and high SBC (1/4 of FCF and growing by a 1/3).

• Why now? The management team transition and the uncertainties of government budgets for this niche industry create opportunities to acquire shares at a lower valuation, ~30x free cash flow, and implied growth of just 8% for the next decade—a very reasonable price.

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

Latest portfolio: 2 baggers, 11 holdings, at 55% CAGR return since Oct 2023.

Transactions record (23/25 are correct decisions), no transactions had more than a 6% loss.

For all write-ups:

What is Sleep Well Investments?

1. Focus on not losing by doing deep research on a few and exceptional niche leaders.

2. Patiently waiting and thoroughly following up for more buying opportunities.

Let’s dive into the 21st sleep-well pick and why we are accumulating today.

Investment thesis

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Since its IPO 15 years ago, revenue has grown by 50x, and free cash flow by 100x, which has never been negative.

An investment of $10,000 would have turned into $221,000, or 22x your money, a 23% CAGR over 15 years.

Best yet, today's valuation is near the 10-year low levels, while the business adds another growth lever.

Let’s discuss the 20th Sleep Well pick and see how it fits in our Sleep Well Portfolio.

1. Company overview and thesis

2. Why is it a sleep-well business

   1. Downside protections

   2. Upside - 4 levers of growth

3. Competition and other risks

4. Simple valuation

5. Sleep Well Scorecard

6. How does it fit in the Sleep Well Portfolio

Sleep Well's track record since sharing the portfolio in October 2023.

• 23 of 24 trades are green

• No losers in the portfolio, average return 64%, annualized.

New to Sleep Well Investments? Start here.

• Suitable for long-term investors. Deep research and follow-up.

• No trading, no quick pitches, no ‘10x your money promises’.

1. Company overview and thesis

The 20th pick is a cloud-based supply chain management platform. Ninety percent of revenue comes from the US, and customers include Amazon, Costco, and Walmart.

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Sleep Well is pretty good (and lucky) at avoiding losers. Since October 2023, only one of 16 transactions has lost money, and the average gain of our 11 sleep-well portfolio holdings is 45%.

This 19th sleep-well pick aims to avoid another loser and preserve our wealth.

The business has endured everything in the last 100+ years and is still founder-led after four generations. They think and act with an ultra-long-term mindset. I am impressed with their track record and relentless investments, which the market has yet to appreciate because it wants complete visibility and instant results! As such, it has created a reasonable entry point today.

Most importantly, as a prerequisite of a sleep-well pick, the core of the business is exceptionally resilient.

What do I mean?

• It has a timeless product that delivers superior customer surplus.

• Predictable cash flow stream from a diversified revenue and a vertically integrated business.

• It has an ultra-long-term investment horizon that builds moats that competitors can’t replicate.

• Abundant slack capabilities and redundant resources to buffer for unknowns.

This business doesn’t care about next year’s earnings per share. It only cares about consolidating its dominance, widening the moat for the next generation, and building resilience for uncertain times.

While the market will focus on the ‘low profitability’ today, the above is music to my ears, as growth is delayed in a coiled spring.

Longevity is the name of the game.

So, if you are here for a quick gain, it’s not for you.

I am confident they will be around beyond 2037 when my daughters take over the Sleep Well Portfolio.

As a reminder, while Sleep Well Investments has the potential to continue beating the S&P500, its first aim has always been to preserve wealth by building a resilient portfolio.

Companies we own are vetted to endure knowable risks and have capabilities buffers for the unusual ones!

The most recent pick perfectly fits the description. It has been the gold standard for the naval industry for over 60 years. Despite the tariff noise, the position is already in the green.

Ok, get a coffee and protect our wealth with this indestructible business.

If you are new, check out the Sleep Well Portfolio performance, construction, and financial metrics. For everything else, read here.

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My track record? My annualized return per pick is ~45%, and since inception on Substack, the Sleep Well Portfolio has outperformed the S&P500 by ~17%.

Flawless decision-making underpins this achievement; 4 of 4 sales and 12 of 13 buy transactions have been correct. The only losing ‘trade’ is the one I bought just before the tariff rhetoric.

The company featured today has been the gold standard in the industry for over half a century and a prime beneficiary of the multi-decade green energy transition.

• there is NO viable alternative, NO AI risk.

• 95%+ gross 40%+ free cash flow margin, consistent for the last 10 years.

• customers pay in advance and can’t withdraw from the multi-year contract.

• net cash position, 6% dividends, and M&As just starting,

• 5-year backlog and steadily rising,

Yet, we can buy this quality business at just ~17x free cash flow and ~13x earnings.

It scores 14/20 points in my sleep well scorecard and is the cheapest stock I buy for the portfolio. The quality and reasonable price will protect the downside. The upside may be as high as the 20% CAGR return in the past 10 years and will come from a twin driver of value creation.

• The (at least) 10%+ free cash flow growth and

• Possible multiple expansions and M&A success.

I am optimistic that, provided the business passes my thesis tracking system each year, we can make a market-beating return.

This company is highly technical, so I will keep the deep dive simple. But regular readers will know that my reports are still very deep compared to what you find elsewhere. You will learn a lot today.

Furthermore, you won’t find a deep dive into this business anywhere on Substack (400+ investment newsletters). If you do, I’ll give you a refund.

If you want to make money and sleep soundly, read on!

We will discuss:

• Company History

• Why is it a sleep-well business?

  • Industry tailwinds

  • Unique business

  • Resilience in crises

  • Reinvestment opportunity

• Unproven Competition

• Minimal Business Risks

• Reasonable Valuation

• Sleep Well Scorecard

• What to Track

If you are new, all my write-ups can be found here.

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Build your Sleep Well Portfolio today

Hi friends,

Enjoy the 17th Sleep Well pick - Grab (GRAB).

This business will enter my Sleep Well Portfolio, where 8 out of 9 ownerships are in the money (33% average return).

• monopoly-like business

• 15%+ growth for the next decade

• scale and switching costs advantage

• weak local competitors

The market expects just 4% CAGR free cash flow growth for the next decade, compared to an achievable 15% CAGR. I also like that the business has a negative working capital business model (Scott Fraser’s favorite) and ample excess cash, and the company is starting to buy back stocks, all indicating an attractive opportunity to build a position.

On a personal note, my daughter is now home after 5 weeks in the hospital. Things are on the up as she learns to walk again soon. While I was in the hospital with her, I have written the following, in case you missed them:

• The 16th Sleep Well pick - The Most Sleep Well Investment Of LATAM

• Sleep Well Portfolio Sept Update

• 5 Lessons From Scott Fraser

• 7 Lessons from Ralph Wanger

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Southeast Asia's dominant ride-hailing, food, and grocery delivery app is Grab (Ticker: GRAB, market cap $16B, enterprise value $12B). Its expansion to fintech, insurance, health, and travel booking solutions, to name a few, has made Grab a super app, like WeChat in China.

Although it was unprofitable from its founding until FY2023, co-founders Anthony Tan (CEO) and Hooi Ling Tan’s resourcefulness and resilience impressed me enough to research further. Grab could displace one of the existing positions in the Sleep Well Portfolio.

Grab has a marketplace business model similar to Sea Limited [deep dive, buy alert, latest update] and Mercardo Libre [deep dive, buy alert]; thus, the background knowledge of the network effects, market dynamics, and moats is well-covered. I will focus on Grab’s execution, competition, and expansion opportunities here.

1. Why Grab impressed me?

   • Exceptional execution

   • Beating the best

   • Monopoly market share

   • Enduring moats

2. Super App potential

3. Valuation

4. Risks

5. Sleep Well Scorecard

6. What to track

1. Why Grab impressed me?

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Thank you for your heartfelt encouragement over the last few weeks 🙏. My daughter is still fixed on the hospital bed, but she is smiling more every day, and we are two weeks away from the next phase - rehabilitation. Lots of joy awaits.

In this post, I bring you the 16th candidate for the Sleep Well Portfolio - Mercado Libre (MELI).

Since its IPO in 2007, it has grown

• revenue at 43% CAGR

• free cash flow per share at 45% CAGR, and

• the stock has risen by 33% CAGR.

Impressively, it can still triple in size in the medium term, and shares are available at the cheapest level in the past 10 years!

Disclosure: my second largest position after Sea Limited

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Structure of write-up

1. Business model overview

2. Why is it a sleep-well business?

   1. Anti-fragility

   2. Manageable competition and moats

   3. Reinvestment opportunities

3. Key risks

4. Valuation

5. Sleep well scorecard

6. What to keep track

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If you are new to Sleep Well Investment, here is

• How I select sleep-well businesses.

• How I construct my Sleep Well Portfolio [Latest Portfolio Update].

• How I keep track of their performance.

Performance of all deep dives (29% average return) below:

Below is how I track these businesses:

**Links to thesis updates, buy-and-sell, and deep dives—all in the Sleep Well Portfolio spreadsheet above.

For all write-ups, read here:

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Build your Sleep Well Portfolio today

Sea Limited (SE) is a $40B Southeast Asian e-commerce/fintech/gaming success story.

Sea’s growth is nothing short of phenomenal. From humble beginnings, Forrest Li and Gang Ye founded Garena, a gaming platform that ignited a global phenomenon with Free Fire, enjoyed by half a billion players with its fast-paced action and freemium model. Garena’s success blossomed into Sea Limited / ‘Sea,’ a digital empire encompassing e-commerce (vertically integrated with its own logistics and advertising) and fintech.

Shopee, Sea's e-commerce arm, conquered Southeast Asia's burgeoning internet market with 50%+ market share thanks to its mobile-friendly interface, broad SKUs, strategic integration with social media, and competitive pricing. SeaMoney, the company's financial services arm, is seamlessly integrated with Shopee, offering users an intuitive and convenient one-stop shop for digital payments and financial solutions.

Since 2014, sales have compounded 62% annually and are expected to generate at least $1.5B in free cash flow annually.

I have owned Sea since 2020 and feel comfortable sharing my thesis with you today. It will replace CrowdStrike as my top position in my PA, and I will add it to the Sleep Well Portfolio this week. Below are all the deep dives and performances.

Why own Sea Limited now?

First, Sea’s phenomenal success has met with crushing depths post-COVID (FY2022 cash burn of $2B). The fall culminated in several internal and external pressures, from (i) economic headwinds, which saw its Gross Merchandise Value (GMV) growth slowing from 85% in 2021 to a mere 28% in 2023, (ii) Free Fire's sharp decline as user downloads dropped from 240 million in 2021 to 150 million in 2023, with revenue dipping proportionally, casting doubts over its durability. (iii) Overambitious, cultural, and local competition miscalculation, leading to ineffective global expansion plans into India, Europe, and Latin America, drained resources from Sea's core markets. (iv) Sea’s aggressive marketing and promotional campaigns at the expense of long-term profitability were deemed unsustainable. Coupled with geopolitical turbulence in the war in Ukraine, it further disrupted supply chains and compounded Sea’s existing challenges, added fuel to the $2B cash burn fire in 2022. Sea’s sharp slowdown was a stark reminder that even the most formidable tech giants are not immune to the market's vicissitudes.

I have watched my share ownership fall 80%+ from $370/share in 2021 to $33/share in Oct 2023. This translates to a staggering $170 billion wiped off the company's market capitalization, leaving me questioning the future Sea.

Today, Sea’s has found the balanced formula to grow sustainably. In the past six quarters, it has proven it has the grit to overcome the ‘sea change’ challenges above and has worked on building defensive qualities to fence off more resourceful competition. The achievement is a testament to its visionary leadership and ability to adapt and capitalize on the region's rapid digital transformation.

As a result, Sea’s has earned my sleep-well label, which I wasn’t entirely comfortable calling it a few years ago.

As we advance, Sea will have three durable cash-generating businesses at the current run rate of over $1.5B free cash flow. Importantly, Sea shows clear evidence of reinvestment opportunities that will expand the empire's resiliency.

Best of all, the market has not given enough credit, valuing it at just 25 times free cash flow for a tech titan with multiple years of 20% growth and margin expansions. Together with future multiple expansions, Sea’s value is well-positioned for outsized long-term gains.

Here is a quick overview of the segments and how they make Sea a sleep-well pick.

Garena, the gaming segment / Digital Entertainment, owns Free Fire, the most successful battle royal game in the past seven years; it attracts nearly 900B views on TikTok, 300B (!) more views than the next most popular games (Roblox and Fortnite), has 595M quarterly active players and 49M paying. After a roller coaster post-COVID, Garena has stabilized and is en route to generating $1B of free cash flow annually for the near future. Adding to the $4B net cash, Sea can redirect this excess cash to fortify Shopee and SeaMoney.

Shopee, with a $85B gross merchandise value (trailing 12-month GMV), commands over 50% market share in Southeast Asia. Shopee is more dominant than Amazon's (AMZN) 38% share in the US or Mercado Libre’s (MELI) 30% in Latin America. The monopoly-like share is a testament to Forrest Li’s leadership and superior local knowledge compared to competitors. Since the last few quarters, Shopee has been breakeven in the core market - South East Asia. Future success is supported by 15%+ e-retail growth, improving logistics and unit economics in live-commerce business thanks to more rational competitive behaviors following Tiktok's merger with Tokopedia.

SeaMoney / Digital Financial Services, the fast-growing and high-margin fintech segment, offers credit services to Shopee sellers (SME loans) and buyers (buy-now-pay-later and short-term cash loans). SeaMoney empowered 18 million Southeast Asians to participate in the digital economy, bridging the gap between traditional finance and the world of mobile transactions. It is a direct benefactor of Shopee’s success. SeaMoney generated $500M of free cash flow in the last 12 months and has durable 20%+ growth thanks to Shopee integration, disciplined risk management (decreasing non-performing loan ratio of 1.4%), and growing monetization in insurance and mobile wallet services.

My simple and conservative sum-of-part valuation of Sea indicates an undervalued enterprise of $44B compared to the current market cap of $40B. I value:

• Garena at $12B (12x EBITDA, low range of industry 12-20x EBITDA),

• Shopee at $25B (2.5x EV/Revenue, lower than peers at 3x), and

• SeaMoney at $7B (15x EBITDA).

I believe the market hasn’t appreciated the value in

(i) Garena’s durability, especially if Free Fire is relaunched in India, and

(ii) Shopee’s scale advantage and defensive quality in SPX, its own logistics, and

(iii) a higher advertising take rate towards the end of FY2024, a 0.5% increase, leads to $400M of ad revenue alone.

(iv) a higher multiple as time will show Sea is an enduring enterprise.

Lastly, Jeff Bezos often says that free cash flow per share is the ultimate financial measure. Sea’s free cash flow per share is only starting to move upwards.

Details of my analysis are as follows:

1. Overcoming challenges

2. Garena

   1. Staying power

   2. Free fire upside in India

3. Shopee

   1. Improving unit economics

   2. Moats vs. competition

   3. Market and take rate growth

4. SeaMoney

   1. High margin

   2. Disciplined execution

5. Simple valuation

6. Sleep Well Scores

7. What to track

Check out my research, including FREE write-ups, in the link below.

1. Overcoming Challenges

Since its inception in 2009, Sea has encountered the following challenges:

Challenge 1: Shopee entered the market in 2015, when Lazada, AliExpress, and Tokopedia had a headstart from 2012, 2010, and 2009, respectively.

Response: Shopee had no notable differentiation, but by focusing on building an intuitive mobile-centric C2C platform with intelligent integration with social media and cheaper items, it was suitable for the region with predominantly small family businesses and a general lack of trust within online retailing. Additionally, Shopee’s hyperlocalizing apps in different countries, data, and cross-promotion from Garena propelled it to the largest e-commerce platform in 2021.

Challenge 2: With Shopee’s meteoric rise, Garena’s cash explosion gave Sea unbounded confidence and budget to expand to Latin America, Europe, and India. But within a year, it was too quick, too soon. Excessive partnership/reliance on external logistics limited Shopee’s quality of service; competition, cultural miscalculations, and lack of interest in Shopee’s promotion strategy in Europe and poor logistic infrastructure in India ended Shoppe’s aggressive expansion. At the end of 2022, it burned $2B in cash. The market questioned whether Shopee’s business model was sustainable.

Challenge 3: India banned Free Fire in February 2022, coinciding with the post-COVID reopening, magnified the impact. Garena’s quarterly active users dropped to 620M from 730M and 56M paying users from 93M. Garena’s cash flow of nearly $900M a quarter was chopped by half within a few quarters.

Response: On 15 September 2022, Sea's CEO and founder, Forrest Li, sent a memo to all employees outlining cost-cutting measures the company would take to achieve "self-sufficiency" within 12-18 months, reducing the reliance on Garena.

Impressively, within 12 months, Shopee exited Europe and India, swiftly cutting mistakes, while Free Fire continued to innovate on new game features and returned to growth. Sea extinguished Shopee’s $2B cash-burning bonfire, turning it into a break-even business. Meanwhile, Garena and SeaMoney have generated over $1.5B in free cash flow at a 12-month run rate.

Going through this period has made us leaner, fitter, and savvier.

There were more challenges, and Sea will always counter unknowns, but I am most impressed with the successful adaptation.

Garena looks more like a durable gaming franchise, and Shopee is profitable across markets; meanwhile, SeaMoney’s high-margin business is growing at 20%+.

This happens amid intense competition from Lazada, Tokopedia, and ByteDance-backed TikTok and uncertain economics and geopolitical environment. I am comfortable saying that Sea will do fine with future challenges.

2. Garena

Like Amazon's AWS, Garena is Sea’s cash cow, providing roughly $1B of free cash flow annually to build market shares in e-commerce and financial arms. This gives Shopee an unfair advantage over Tokopedia, Tiktok, or Lazada, which are reportedly still unprofitable in Southeast Asia.

The question is, how many more years can Garena generate excess free cash flow?

Staying power

Gaming is an ultra-competitive field. Gamers often move on quickly to a new game once there is another exciting one or when new features fail to impress.

I only know a handful of games that have become a global phenomenon and have stayed relevant for over a decade. That’s League of Legends (2009), Grand Theft Auto (2013), Wii Sports (2006). The rest come and go. Remember Age of Empire or StarCraft?

Free Fire is in its 7th year (Dec 2017). It’s hard to say how many more years it will continue to deliver $1B free cash flow. However, I am impressed by the staying power. Despite the recent ban in India, it’s still the most downloaded game in 2024 and has nearly 900B accumulated views on TikTok, over 300B views than the next most popular games (Roblox and Fortnite). There were 595M quarterly active players and 49M paying in Q1’24. Let that number sink in: 1 out of 12 people plays Free Fire.

I am also surprised that Free Fire gamers can compete in tournaments like League of Legends. The Free Fire World Series (FFWS) is Garena's annual professional Free Fire World championship tournament. The 2021 edition of the event became the world's most-watched esports event by peak live viewer count. The total prize pool was $2 million in 2021. Last year, the prize pool was reduced to $1M due to cost-cutting. The 2024 prize pool would be an excellent alternative for judging Free Fire’s relevance.

Growth potential if FF India relaunch

As a bonus, there is a chance that Free Fire will relaunch in India this year; this is an incredible upside, as India represented 40M monthly active users in 2022 before the ban.

Forrest Li said in the Q1’24 conference call:

we are actively working with order -- like stakeholders, including like the regulators, the potential local partners, right? And to figure out what is the best plan to relaunch Free Fire in India. And well, if that is successful, I think that will be a meaningful potential upside in terms of the users and the bookings considering India is a very, very big market.

Interestingly,

just to clarify, at this moment for our outlook for the rest of the year […] is not taking into the consideration of the relaunch of the India.

3. Shopee

Most dominant player

Regarding gross merchandise value (GMV), which is how much users spend on Shopee per year, Shopee has roughly a 55% market share in Southeast Asia.

Sea doesn’t break down its $84B GMV (current run rate) into countries, but per my guesstimates, it has $76B in GMV in SEA and $8B in Brazil, so that’s at least 50% GMV share in a $129B (SEA: $109B + Taiwan $20B) market in 2023.

The dominant share is consistent with Momentum Works’s stats for FY2022, where Shopee had a 48% market share, more than Lazada and Tokopedia combined.

Impressively, Indonesia was the only country where Shopee had ‘real’ competition. Even so, Tokopedia reportedly had only 18M active users in FY2023 (vs. 103M Shopee in Indonesia), a massive drop from 100M at the peak, which prompted the Q1’24 sale to Tiktok for roughly $2B valuation, half of Shopee’s net cash position. Former Tokopedia’s owner GoTo cited ‘intense competition and loss of market share’ and ‘needed large investment to survive’ for the sale to Tiktok.

Shopee rise to domination is incredible: From a measly 10% of Lazada in 2015, then 50% of Lazada in 2016 (Hayden Capital, 2019), to now, over 50%.

This is more dominant than Amazon in the US at 38% and Mercado Libre in Latin America at 30%.

I believe Shopee’s position is unlikely to change as the market has reached a mature stage with 20% e-commerce penetration. Shopee’s customer demographic, which has a median age of around 32 years (Malaysia) and is digitally literate, also ensures a long customer lifetime.

Recently, Facebook / Meta has collaborated with Shopee in Thailand to enable commerce on Messenger.

Meta has integrated shopping features within its messenger service and collaborated with e-marketplace Shopee to use Shopee's merchant product catalogues for Messenger to help Shopee merchants close sales on multiple platforms.

This is a bid to increase Meta's advertising revenue and to compete with TikTok. Meta chose Shopee because of its huge user traffic. This is a nice development, as Thailand has approximately 60M facebook user, the roll out benefits both Shopee and Meta going forward.

Improving unit economics

Shopee is the only growing and profitable e-commerce platform in SEA. This is a testament to the aforementioned rapid scale expansion and the following improvement in marketing efficiency and logistics services.

Improving sales and marketing efficiency

Since Forrest Li’s rally to self-efficiency in September 2022, Sea have cut sales, marketing, and general expenses to 20-30% of revenue from 50% while maintaining positive sequential revenue growth!

Alibaba and Mercado Libre spend roughly 12-15% and 15%-20% of sales on selling, marketing, and general expenses, so there is meaningful room to become even leaner.

Investment in own-logistics

E-commerce is ultimately a logistics business. Getting goods from point A to point B requires infrastructure and data, as you’d know from my deep dive into Wisetech. The more Shopee controls, the greater its ability to manage key customer pain points (delivery times, missing parcels, etc.) and drive efficiency.

According to a Momentum Works survey, this was Shoppe’s weak point before 2021.

So, I am excited by the cost and service quality improvements after the company doubled down on its logistics, SPX Express, including building the largest sorting center in SEA in the Philippines and Malaysia in Q1’24 and Vietnam in Q4’23, capable of processing 3M-5M daily orders. The aim is to ship 95% of orders on the same day by working closely with brands, sellers, and partners. It also wants to provide a fuss-free shopping experience by allowing no-question-asked refund-and-return. This is a mighty important promise as, together with the 15-day Shopee Guarantee period and Shopee Mall, it gives customers the confidence to check out their desired products, including high-value goods, that they cannot touch or feel when shopping online.

In the West, the confidence that you can pay for something upfront without touching it and receive it a day later is taken for granted. E-commerce penetration is still relatively lower in Southeast Asia.

The conviction to invest in better logistics gives the consumer all the power (quality guarantee, no-fuss returns, competitive prices) and earns their trust, ensuring Shopee remains the dominant platform.

But this isn’t just for customers. It solves the critical pain points—logistics and fulfillment for merchants. SPX Express completes the end-to-end commerce solution, from infrastructure to the shop front, making it difficult for emerging competitors like TikTok to replicate.

In Q1’24, approximately 70% of SPX Express orders in Asia were delivered within three days, with significant cost reductions per order: 15% in Asia and 23% in Brazil YoY. The return-and-refund service has 45% of cases resolved within one day, a 30% YoY decrease in resolution times. This is particularly important as the region's return rates for e-commerce sales are still high, between 15 and 20 percent, twice the median return rate in mature markets. In terms of days, SPX can complete a return-and-refund within two and half days, compared to the industry median of seven days. It also has two times more drop-off points and doorstep pick-up options.

The management didn’t share these stats in prior years, 2021-2023, but going forward, as customers trust Shopee and purchase higher-value items, these stats would be a good measure of Shopee’s moat.

I’ll leave this quote in Q3 ’23 here as it highlighted the belief in Shopee’s strategy during intense competition (TikTok) last year and that the results of Q1 ’24 were the seeds sown a few years back.

even in the market with the higher competition, we are able to gain market shares. The key is investment efficiencies. This is what allows us to gain market share while having better economics, unit economics than our close competitors in our market. The key for that is our competitive advantage we have built over the past many years. I think number one, if you think about this, will be scale. As a clear market leader, we have a bigger scale that translate to a much better monetization capabilities and also better cost efficiencies, of course. Number two is the local leadership and operations teams. We have a deep understanding of our market with a strong localized execution across very diverse markets in our region.

Moats vs. competition

It’s safe to say Shopee has beaten the biggest competitors, Tokopedia and Lazada, and it is well-positioned to fence off TikTok’s emergence.

First, Shopee’s brand affinity, scale, logistic prowess, and service quality advantages will prevent TikTok's emergence.

Second, TikTok’s success in the US is not easily translated to Southeast Asia or Latin America.

As per Bloomberg 31/May/24 - TikTok is pausing its global e-commerce push to focus on the US market.

TikTok has put on hold plans to launch its fast-growing e-commerce business across major European markets, focusing instead on growth in the US where it’s fighting a divest-or-ban law.

The move, which may catch many merchants in the region by surprise, reflects ByteDance’s objective of entrenching itself in the US as a way to prove its value to domestic merchants and consumers. ByteDance’s leadership wants to concentrate on its most lucrative market — with 170 million monthly users — to thwart a potential US ban that’s discouraged some merchants from signing up for the new platform, the people said.

This isn’t the first time the company has scaled back a global launch. The FT reported in July 2022 that the company abandoned its plans to expand its live e-commerce initiative in Europe and the US after it struggled to gain traction in the UK.

Now that the ban in the US has been signed into law, the company seems to be struggling to sign up merchants onto its platform due to uncertainty.

Lastly, TikTok is likely to have its work cut out in SEA as it intends to use Tokopedia’s operation to run in SEA, which is already far behind Shopee’s in its turf, Indonesia, not to mention regions outside of it.

Growth opportunity

Shopee’s long-term growth is derived from a 10-20% market growth due to still relatively low e-commerce penetration in SEA and increasing take rate (marketplace, transaction fees, logistics, and advertising). In particular, advertising revenue could double Shopee’s business within 3-5 years.

First, using China as a reference point, Southeast Asian markets could sustain robust double-digit annual growth of 15 and 25% for the next five years.

Southeast Asia's average e-commerce penetration rate (excluding food and beverage) is 20%, which suggests a long growth runway before it matches China’s penetration rate of 47%. Between now and 2026, the Southeast Asian market is projected to triple at a compound growth rate of 22% and will reach around $230 billion in gross merchandise volume (McKinsey & Company).

While Indonesia remains the most significant market (50% of incremental GMV), growth is high and robust across the board compared to the US and Europe.

Advertising take rate

Shopee’s overall take rate was 11.6% in Q1’24, rising consistently from 5% in 2019.

This level is still 3% lower than that of Mercado Libre, and the area that will boost the overall take rate the most is advertising. Management doesn't disclose an exact number but mentioned it’s a few percent lower than peers.

compare with our global peers, for example, in China or in the U.S., we are kind of like still meaningfully lower than where they are. We still have a few percentage to catch up to them. So there is meaningful room for us to increase the ad take rate. I think there are a few tools that we can deploy to do that.

How will they achieve that?

1. improve ad tools, and make it simpler.

2. increase conversion rate, ad efficiencies through technology

3. balance between organic (enhanced/popular products) and ad traffic (paid) depending on SKU and conversion rates

When?

We see there is a meaningful potential to increase the ad take rate over the next few quarters.

Advertising take rate potential - 5% of GMV

An online marketplace’s advertising take rate can reach 5% of its GMV. Amazon achieved this point in 2021 and nearly 7% in 2023, attributable to the launch of its demand-side platform in 2019, which enabled advertisers to place ads across various channels, contributing to the excess revenue above the typical saturation level.

Hypothetically, Shopee increases the take rate by 0.5%, translating to $400M in ad revenue. A few percentages could mean another $1-2B in revenue with minimal costs attached. If Shopee maintains its market share and keeps growing its GMV, advertising could be as valuable as the entire Sea Limited market cap of $40B today.

4. SeaMoney

SeaMoney offers customers and merchants products from digital wallets and mobile payments to online insurance and credit services. SeaMoney empowers 18 million Southeast Asians to participate in the digital economy, bridging the gap between traditional finance and the world of mobile transactions.

Thanks to its integration into Shopee, it’s a high-margin business with little acquisition costs.

In Q1’24, the number of active users for loans rose by 42% YoY to over 18 million, and the total principal of these loans reached $3.3 billion, marking a 29% YoY and 5% QoQ growth. Revenue and EBITDA grew steadily at 21% and 51% YoY, respectively.

Notably, I am encouraged to see that loans not tied to Shopee now constitute over 40% of the total loans (cash loans and off-Shopee SPayLater), highlighting reduced dependence on Shopee and self-reliance growth opportunities off-platform.

Looking at Mercardo Pago, the fintech arm for Mercardo Libre that has grown revenue to almost the same size as the e-commerce platform, one can see the enormous potential of SeaMoney for Sea Limited. Shopee’s current run rate is $10B, and SeaMoney is $2B. A $10B run rate at a 35%+ free cash flow margin could mean another standalone business multiple times bigger than Sea Limited's current valuation, provided SeaMoney can grow at 15% for the next ten years.

Additionally, SeaMoney shows disciplined execution and prudent risk management. The non-performing loan (NPL) ratio is 1.4% and slowly trending down. This indicates that SeaMoney can be a reliable business on its own. It’s also impressive to compare the NPL90+ for Mercado Pago, which is around 18% (8% for 15-90 days).

5. Simple valuation

At $73/share, the market expects very little of Sea, just 7% FCF growth over the next 14 years.

My sum-of-part valuation of Sea is also simple and conservative to buffer in the surprises and unknowns.

Sea is undervalued at $44B compared to its current market cap of $40B. I conservatively value Garena at $12B (12x EBITDA, low range of industry 12-20x EBITDA), Shopee at $25B (2.5x EV/Revenue, lower than peers at 3x), and SeaMoney at $7B (15x EBITDA).

More upside is on the table if the market’s perception matches mine where:

(i) Garena’s durability is recognized, especially if Free Fire is relaunched in India.

(ii) Shopee maintains 50%+ market share, own-logistics SPX service quality, and unit economics continue to improve

(iii) Management increases advertising take rate

As the market sees Sea as an enduring enterprise, my valuation multiples above will also improve, doubling the chance of capital appreciation.

6. Sleep Well Scores

The Sleep Well Scorecard simplifies my thesis and helps me quantify the business's quality, opportunity, and risks.

Sea Limited - the 15th pick, scores 14 out of 20 points. To see the reasoning behind each criterion - read my sleep well framework writeup here.

+1: Product relevance

Sea scores full points for product relevance. Sea provides essential convenience for consumers. It also becoming an irreplaceable infrastructure for merchants as it expands logistics and Shopee shop front functions and quality. E-commerce penetration is still far off saturation; Sea Limited is less likely to become obsolete anytime soon.

+3: Business model

Sea's business model is efficient, adaptable, and scalable; its three segments are synergistic yet growing more independent and predictable. Garena provides cash flow and cross-sale opportunities for Shopee to grow, which in turns help SeaMoney grow and add more value for Shopee merchants and consumers.

+5: Financial strength

Sea’s financial metrics have improved considerably since the September 2022 letter to become self-sufficient. Notably, Shopee is no longer burning cash in the core market. The balance sheet has $8B+ cash and collects $80M+ per quarter of interest income. Reinvestment opportunities are abundant, and I expect logistics infrastructure to remain a priority.

+2: Management

Forrest Li has built Sea from the ground up and is the right man to lead the business forward; he and insiders collectedly own 42% of the company.

+1: Anti-fragile

Sea Limited's business is cyclical. However, the cash from Garena, the highly recurring nature of Shopee and SeaMoney business, and interest income from the $8B cash can counterbalance the impact when the market is soft. The business has proven adaptable and resilient and can thrive despite high market and political uncertainties.

-3: Competition is intense

Sea faces intense competition from TikTok, Lazada, Tokopedia and others. However, the growing 50%+ market share proves it can compete. The US and Latin America have also shown that dominant players can be profitable even with less market share.

+4: Moats & barriers to entry

Sea has scale/cost advantages and network effects moats, which widen as it takes more shares. Thanks to its investment in logistics and fintech products (loans and BNPL) and focus on the long-tail e-commerce category, where SKUs are broad and change quickly, competitors will find it challenging to replicate what Sea has built.

-2: Moderate to strong risks

Sea has had some execution risks, ‘buying revenue’ through subsidizing shipping costs and charging low commissions. Still, in the end, they pulled it off as more than 1 out of 2 Southeast Asian e-commerce users trust them over other platforms. Today, that trust has resulted in the most extensive user base, which has met with successful and sustainable monetization. However, the white space remains significant, and the competition in TikTok is only starting to work around SEA. Meanwhile, Garena is still looking for the next Free Fire.

2: Reasonable valuation

Sea’s valuation shows that the market hasn’t appreciated the return of Garena, Shopee’s operating leverage, and SeaMoney’s high-margin and expandable business. In my view, Sea’s stock is undervalued, with improved fundamentals and margin expansion at play.

Sea scores 14/20 points and earns a place in the Sleep Well Portfolio at the current $72/share price or $40B market cap.

7. What to track

I will be tracking the following:

+Garena’s continued growth in MAU, Bookings, paying users, and the impact of India relaunch.

+Shopee’s EBITDA progress and investments in logistics.

+SeaMoney’s 20% growth and profit margin.

Conclusion

I am adding Sea to the Sleep Well Portfolio and will post a separate note summarising the reason and providing updates in the future. The funding comes from my trimming of CrowdStrike (CRWD), the biggest position in the PA, as I grow more uncomfortable with its recent exploding multiple (1.5% free cash flow yield).

If my content has had a positive impact, please help me grow by spreading the word. Thank you

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Resources to help your further due diligence

Sea Limited annual reports

Hayden Capital thesis 2019

Forrest Li’s self-sufficient Letter 2022

’s Q1’24 review

Tickers mentioned:

Build your Sleep Well Portfolio today

Insurance is a binding business with risks and unpredictability. It’s also highly competitive. However, the business can be exceptionally resilient and rewarding if one has clear scale/cost advantages.

Today's sleep-well pick is Kinsale Capital Group (KNSL)—a US founder-led $9B market cap Excess and Surplus insurer.

Its revenue has increased at a 36% compounded annual growth rate, net income and free cash flow have increased by 30% CAGR, and the share price has increased by 50% CAGR.

After the recent drop in share price, I feel the valuation makes it more reasonable to start a position for the Sleep Well Portfolio.

Here is what you can expect from this writeup:

1. $5T Insurance Market

2. $100B E&S Market and Key Players

3. Kinsale’s Defensible Advantages

4. Other Sleep Well Qualities

5. What Can Go Wrong

6. Simple Valuation

7. Sleep Well Scores

*Kinsale came to my attention last month from , author of Fundasy (link to his write-up), and Longriver’s interview with Shree Viswanathan, founder of SVN Capital. Thank you!

1. $5Tr Insurance Market

First, a 10-second overview of how an insurance business works.

Insurers (via brokers) sell insurance products to individuals and businesses to reduce the cost of adverse events, such as poor health, natural disasters, and auto breakdowns.

Insurers profit if the premiums collected (revenue) exceed the combined claims costs (losses to insurers) and business expenses.

The premium collected / float can also be reinvested (treasury bonds, equity), adding reliable income. Fundasyinvestor did a phenomenal chart explaining the insurance business model below. 👏

In 2023, over $5 trillion of gross insurance premiums were written annually, 5% of the global GDP, split into 65% property and casualty and 35% life and annuity.

Key players

Read more

I am adding Dino Polska to the Sleep Well Portfolio, ticker DNP.WA or WSE.DNP. Please do your due diligence and consider becoming a premium member for wealth-creating content.

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Why?

• Executive summary

• Sleep well ingredients

• What can go wrong

• Key competitors

• Sleep well scores

• Valuation

• What to track

To check out all of my research, click the link below.

Executive summary

If Walmart and Alimentation Couche-Tard had a baby, it would be Dino Polska. One can recognize Dino’s frugality and expansion strategy in the suburbs in Walmart’s early days and the focus on the smaller convenience store model in Alimentation Couche-Tard (owner of Circle K). In the first 20 years on the stock market, $1 invested in Walmart would have returned $250 or 31% compounded annual growth rate (CAGR), and Alimentation Couch-Tard would have returned $155 or 28% CAGR. Dino is in the 7th year and has already returned $70 or 38% CAGR.

I didn’t expect to learn that wealth can be created in a hypercompetitive and capital-intensive sector like food retailing. What’s more intriguing is Dino’s success, built entirely in Poland, an economy with $700B GPD, 40x smaller than the US. Moreover, Dino is thriving despite being 5x smaller than Biedronka, the current market leader.

Digging deeper, I noticed three reasons why Dino fits my sleep-well requirements.

(i) Dino’s growth to 2406 stores has been entirely organic, with no debts, equity raises, complex franchise models, or M&As. Dino built internally and owns 90% of the real estate, which means -

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Build a Sleep Well Portfolio

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Build your Sleep Well Portfolio today

Hi, sleep well, investors,

Enjoy a comprehensive deep dive on Fortinet (FTNT), the ‘safest’ bet in cyber security.

1. Executive Summary [Part 1]

2. Simplifying the Business and Cybersecurity Industry

3. Why is it a Sleep Well business? [Part 2]

   1. Purpose-built hardware and OS combo on a unified console

   2. Predictable, diversified, and enduring business model

   3. Favorable position to grow to adjacent areas

   4. Stable competitive advantages

   5. Founder led management

   6. Anti-fragile attributes

4. What can go wrong?

5. Fair price to own

6. Sleep Well Score

7. What to track

Executive summary

Key sleep-well ingredients

FTNT’s core offerings combine essential networking hardware (switches, routers, firewalls) and sticky software-as-a-service ‘SaaS’ (network security) to help enterprises build, manage, and secure their IT infrastructure. The superior performance and cost benefits vs peers drove the company to the leader position in network security from a challenger position a decade ago (Gartner 2011 vs. 2023).

In my opinion, Fortinet’s core offerings face the least disruptions and are more future-proof than other cybersecurity areas. First, no matter how enterprises organize their IT infrastructure, they always need networking hardware, especially the best-of-class ones. In 2022, IDC reported that 50% of global shipments of networking firewall appliances were Fortinet’s. Next, organizations will always prefer to keep key assets, applications, and workloads on-premise. This is especially true for regulated, data-sensitive, and latency-sensitive industries, supporting a respectable 10-year growth rate between 5% and 15%. Moreover, when employees work in the office, accessing data and applications in a local network system is safer and faster.

Fortinet’s core offering is also future-proof because there is no ‘one’ way to protect an enterprise’s infrastructure. All solutions have security gaps, and adversaries evolve in real time. What’s more, Gartner reports little desire for an organization to be protected by just one vendor. Thus, it’s unlikely Fortinet’s offerings will be obsolete.

FTNT also has room to grow. Its expansion to SASE Cloud Security and Security Operations has been successful for five years and is positioned to maintain 15-20% growth for the next 5-10 years. It’s a hyper-competitive market, but Fortinet has a good pathway to maintain/gain market share.

Management is founder-led and measured in capital allocation - focusing on organic growth in high-probability avenues, preferring to acquire lands and buildings to house its data centers (vs. renting), and returning capital to shareholders with an 11.4% buyback yield ($5.3B) since FY2020, 3%+ a year.

FTNT boasts the best business model with the highest margin profile in the industry, at 77% gross and 28% operating margin. It has been free cash flow positive since its IPO in 2009. As we advance, its moats and market share are well protected by integrated hardware and software offerings, which are centrally managed and have a consistent leadership ranking on Gartner for network security.

The current market expectation implies a 9% growth over the next decade, which I believe is low given the broad industry growth rate is already 15% in the next five years. FTNT stock will not rocket one’s portfolio but will help one sleep well.

Key risks

Palo Alto is a formidable competitor in the broader cybersecurity landscape. Its aggressive ‘platformization’ strategy may cause pricing pressure.

Meanwhile, Microsoft and CrowdStrike's rapid growth, albeit from a different angle, will pressure Fortinet to take more risks.

Nevertheless, the market is vast and unfragmented, with over 3500 companies; network appliances and firewalls are permanent real estate in enterprise networks, and there is no one sure way to secure the entire IT system. It’s not winner-takes-all. Conservative investors can own multiple winners to diversify the risk. I own CrowdStrike (my largest position) and plan to own FTNT and (maybe) PANW when the price is right.

What is Fortinet

Fortinet (FTNT), with a $48B enterprise value, is a leader in the $68B secure networking market and is venturing successfully into the $81B cloud security market. The combined opportunity is estimated to grow over $200B TAM per annum (TAM) by 2027 (Gartner, 2023).

The market is huge; it has just a 4% market share despite being the second-largest pure-security player behind Palo Alto, which has a 6% market share.

All the players above focus on slightly different security areas with some overlaps; you will see the what and why later. Returning to Fortinet, its business offers a platform called Fortinet Security Fabric, which covers three security areas: Secure Networking, Unified SASE, and Security Ops with a 70/21/10 split, respectively. Below, you can see the offerings under each security category.

Source: Investor presentation Mar 2024

Fortinet Security Fabric takes a holistic approach to security. Through a single console, the network landscape is visible and protected, and all devices are integrated into a centrally managed and automated defense.

In terms of reporting segments, Fortinet categorizes its revenue into Product and Service segments. Product predominately covers secure networking areas, and services cover the SASE and SecOps areas.

Product revenue is the sales of essential networking appliances, such as switches, routers, and firewalls that block malicious traffic before entering private (on-premise) networks.

Before learning about Fortinet, I never knew there were so many types of firewalls. I also never knew there were firewalls for containers (a virtualized operating system run for selective applications) or points of presence (clouds on the edge). However, as the enterprise's perimeter expands, the type of firewalls also expands. By 2025, 60% of organizations will have more than one type of firewall.

What’s special about Fortinet appliances is that they have purpose-built security ASIC processors and operation systems (FortiOS) to ensure superior stability, performance, and interoperability. Fortinet, IDC, and Gartner's industry report verify some of these claims. For context, Forrester’s Total Economic Impact study reveals 318% ROI and $10.6M in cost benefits achieved with the Fortinet Data Center solutions.

On top of the physical firewalls, Product revenue also includes the sales of Enhanced Platform Technology products, such as email security, cloud security, and endpoint protection.

Service revenue is the higher-growth SaaS subscription revenue (1-5 year contract), mainly serving the newer security services in SASE (secure access service edge) and SecOps (security operations).

SASE enables secure access to applications on any cloud (private, public, hybrid, mixed) with solutions including Firewalls, SD-WAN, Secure Web Gateways, Cloud Access Services Brokers, Data Loss Prevention, Zero-Trust Network Access, and cloud security, including Web Application Firewalls, Virtualized Firewalls, and Cloud-Native Firewalls, among other products. There are many acronyms, but don’t worry; these will make more sense in the industry overview section.

These functions are delivered through the FortiOS operating system and managed through a unified management console.

As Fortinet has visibility of the data and applications on the cloud that flow through Fortinet’s network appliances, it also offers AI-powered (automated) application / data / endpoints detection and response services. Where AI can’t do the job (yet), Fortinet offers expert services such as managed detection and response (MDR), Security Ops (SOC), and security information event management (SIEM).

Fortinet Security Fabric is a broad and holistic platform approach similar to CrowdStrike’s Falcon or Palo Alto’s Prisma and Cortex. It collects security information centrally to design applications that detect, prevent, and respond to threats. All start with a core focus (CrowdStrike—endpoints), then leverage the data to expand to other security areas.

How do they differ, and why have I chosen Fortinet as a preferred business to invest in at the current price?

Let’s examine the $200B security landscape and how Fortinet positions vs. other key players: Palo Alto (PANW), Microsoft (MSFT), Zscaler (ZS), CrowdStrike (CRWD), Datadog (DDOG), Okta (OKTA), Snowflake (SNOW), Oracle (ORCL), Cisco (CSCO) and Sentinel One (S).

The cybersecurity landscape

First, why do we need cybersecurity?

The diagram below shows how the enterprise IT system connects users, devices, networks, and applications. The move to the cloud, widespread mobile adoption, remote work (84% of companies are hybrid), and increasing enterprise software applications have enabled technology innovations and productivity. However, they have also created more access points for bad actors to infiltrate the enterprise.

Strikingly, 90 million people are affected by cybercrime yearly, costing the global economy over 2 trillion dollars (Cybercrime magazine). As we enter the Generative AI stage, new kinds of attacks or even a new model called Ransomware-as-a-Service (RaaS) will sprout, making it even easier and cheaper (only $50/month) for attackers to cause harm to a victim. Meanwhile, it takes 21 days to detect a breach and costs an average of $9.4M each time to remediate.

Despite the substantial damage and disruption, security spending is only at $200B each year, a 10th of the total damage. The budget needs to rise.

Expanding threat surface and ways to protect the enterprise network

Cybersecurity is essentially the protection of data. It is the most valuable asset, whether personal information, trade secrets, or digital money.

However, data flows through everything: the networks (on-premise or on the cloud), applications (from development to deployment and upgrading), devices (endpoints, IoT, OT), and hardware (infrastructure, data center servers) and is used by various actors (people/identities).

As everything is interconnected, a vulnerability in one area is a security risk for the whole system. Hence, protecting the enterprise requires a holistic approach and protection of all areas. CrowdStrike breaks it into six.

Networks

I’ll start with networks. Networks are considered the most critical part of enterprise security. They are akin to the body's nervous system; they facilitate signals/data flow between hardware, software, and people in different locations.

Network security protects users whenever they click on a URL, connect to a hotspot / wifi / wireless, visit a website link, run an application, or access their company’s network. Hence, network security monitors traffic requests from the company’s network to stop threats before they materialize.

Historically, firewalls were sufficient to protect an enterprise, as its data and applications were limited to one location. However, enterprises now have multiple locations and require communication with external networks and on the cloud with little visibility. Attackers have also found new ways to break through this moat around the physical/virtual locations. There have to be better ways.

SASE—Secure Access Service Edge (blue box below)—was born to protect traffic on the edge - a term that describes the people (the left of the diagram below) and the resources they access—applications/data/devices (right) on the cloud.

However, SASE is not sufficient. The protection only works when requests are routed through the firewall, SWG, or VPN. The latency caused by these central choke points was untenable. Additionally, firewalls can not tell if a person identified is who they said they were or if the application is fully secured before entering the network.

As a result, new ways of securing the enterprise network came about to observe and analyze at source, i.e., the people, and continuously learn the deep context of how they use resources such as data, applications, and devices to differentiate between a threat and a secure connection.

Let’s look at them one by one.

Identity/people:

People are the weakest link. Hence, it’s imperative that the people accessing the enterprise network are the right users and that they only access the right resources at the right time for the right reasons.

This approach to tackling security at the source is called a zero-trust network architecture. All users, whether in or outside the organization's network, must be authenticated and authorized before being given appropriate access to the network. It emphasizes trusting no one and continuously validating the person at every stage of their digital interaction.

Identity and Access Management (IAM) is one solution for building a zero-trust architecture. It revolves around verifying human identity and behavior—asking who you are, what company resources you can access, and your typical behavior (vs. fraudulent bad actors with false identities).

Fortinet has developed FortiNAC and FortiAuthenticator applications for its networking appliances to identify devices and users on the network and see how they use these applications. However, Okta (OKTA) is the dominant vendor with the most advanced solution. I wrote about the company and technology in 2021 if you want to know more.

The other solution to tackle the weak link in people is to layer in an additional function called Security Operations (SecOps). SecOps can be applied to other security areas, too (devices / applications / data), because these are security analysts and technologies directly involved with capturing and analyzing security information, correlating security log data to identify security incidents, and responding to cyberattacks within an enterprise. Fortinet offers Security Ops with SOC-as-a-service and SIEM, but Splunk, acquired by Cisco, is the leader in this space.

Devices (endpoints)

The other weak link is devices. That’s mobile, laptops, IoTs, factory sensors, or any devices that send signals to the network. Working from home and higher cloud adoption means more personal devices (unsecured) have access to enterprise networks, creating more gateways for bad actors to exploit.

An anti-virus application is installed on the device to prevent an attack on the endpoints. The application monitors, records, and stores activities, and when malware or threats are detected, a patch is created to deal with the attack. This basic layer of protection is called Endpoint Detection and Response (EDR).

The next evolution is called XDR (Extended Detection and Response), which aims to go beyond the endpoint by integrating, correlating, and contextualizing data from multiple enterprise areas (like email, application, identity, network, etc.) beyond the endpoint to provide advanced detection and response against more sophisticated threats.

This has given birth to adjacent endpoint subsectors such as managed detection and response (MDR), security information event management (SIEM), security orchestration, automation, and response (SOAR), and external attack surface management (EASM). Meanwhile, Operational Technology and Industrial IoT endpoint devices are also gaining traction, increasing the importance of SecOps.

The total market size of these segments is estimated to reach $125B in 2025 (CrowdStrike).

Source: Contrary Research, 2022

Who are the key players?

CrowdStrike is the current leader (top spot on Gartner 2023). It provides a light agent (30MB vs. 1GB+) that is fast and easily installed on devices and runs real-time data threat analysis on the cloud (diverting the heavy workload away from the device), displacing the legacy technology from Trend Micro, McAfee, and Symantec, whose solutions are on-prem, and with the heavy agent on the device, they are slower and less effective. Other key vendors include SentinelOne, Cybereason, and Palo Alto Networks Cortex EDR.

Applications

Applications or software can also be vulnerable to attack, especially when over 90% of codebases and applications utilize open-source software. Bad actors can inject malware into codes, steal data, or make unauthorized changes to penetrate the enterprise network. The recent SolarWinds malware attack is a prime example of how costly it can be when codes are not secured. It infected over 18,000 systems worldwide, causing irreparable damage worth billions of dollars.

Hence, to secure applications, one can apply / test security features throughout the development process (shift-left) and/or after it has been deployed (shift-right) to prevent security vulnerabilities.

Shift-left aims to tackle problems at the root (source code), preventing risks in the earliest stages of software development. Thus, security features such as secure coding, vulnerability scan, and static application security testing (SAST) are implemented during the application's source, design, build, testing, and packaging development. See the flow chart below.

Shifting-right protects applications by testing and monitoring them continuously once deployed in real life (full use) to detect and block common application attacks, like SQL injection and command injection. It features technologies to monitor applications to see how they communicate with others (API/WAF), analyze patterns and behavior, and how the threat landscape changes.

Securing application development on the cloud is becoming more mission-critical. The IDC estimates that 750 million new cloud-native apps will be created globally by 2025, representing 4x growth. However, the challenge is that only one in five companies reports having the tools, security measures, and automation to scale.  This has led to the rise of DevOps to help automate the software delivery workflow from code to deployment. GitHub and GitLab are leaders.  

GitLab allows software developers to automate the steps required to check code, generate code, and automate security testing. You can see the details below:

Data

Essentially, all of the solutions above protect data in one way or another. These security tools protect data through data masking, encryption, and redaction of sensitive information. They also go further by collecting vast amounts of data from websites, applications, sensors, devices, etc., which gives IT teams the ability to aggregate and visualize data and find patterns to understand how breaches happen, how companies stay compliant, and alert potential bad behaviors before they happen.

Data security can be simplified into three categories:

• data

• governance

• vulnerability management and assessment

Data: Solutions aim to prevent the leakage, transmission, or loss of sensitive data from an enterprise. As 40% of ransomware attacks are through email, minimal technologies are required, such as spam filtering, quarantine capabilities, URL rewriting, and antivirus software. Other solutions scan structured and unstructured data to identify, search, index, track, and analyze sensitive data so that if a data breach occurs, they can work out how it was breached/how it happened.

Governance, risk, and compliance (GRC) aims to synchronize risk management into a centralized function to help prevent or respond immediately to a breach or cyber-attack.

Vulnerability management and assessment aims to identify, classify, prioritize, and mitigate data vulnerabilities. This concept also applies to applications, devices, and infrastructure. For example, VM technologies (private) utilize software agents installed across an enterprise’s network appliances, servers, endpoints, and applications to constantly scan and discover security gaps, misconfiguration, and potential vulnerabilities. It can also stress-test corporate environments against popular cyberattacks.

Rapid7, Tenable, and Qualys are the three players specializing in this space. However, with their vast data visibility, Snowflake (SNOW), Datadog (DDOG), and Databricks are also vying for a path into data security.

Summary

As the enterprise ecosystem grows, so does the security. Hence, there are over 3,500 vendors currently available.

drew up the chart of the key players in each category. Some you will recognize from the overview. How do you decide what business to own?

There are two ways to get exposure to this 15% CAGR growth industry.

1. Own the largest platform (Microsoft, Palo Alto) with the broadest solutions.

2. Own best-in-class solutions (* - my preferred choice)

   1. Network (Fortinet*, Checkpoint, Palo Alto*, Zscaler)

   2. Endpoints (CrowdStrike*, Sentinel One)

   3. Data (Datadog*, Snowflake*, Databricks, Rapid7, Qualys)

   4. Identity (Okta*, CyberArk)

It’s also important to bet on companies exposed to the most durable trends.

According to the recent CISO report (chief information security officer), network security is the top priority in the coming 12 months. Identity (the weakest link of the enterprise) is second, and cloud infrastructure security (data centers) is third. These are also the areas with the largest skills gap.

The result is consistent with a similar study conducted by Battery Ventures, which showed network security, email, cloud, and data as the top priorities.

Meanwhile, most of the security budget goes to data, application, cloud, and endpoint security. CISOs look to prevent threats in the earliest stages of software and data development and at entries (endpoints).

What’s your pick?

My choice is Fortinet, with Palo Alto as a good alternative.

The reasons I pick Fortinet over others are:

1. Networking appliances are must-haves. Meanwhile, Fortinet is the leader, shipping 50% of global firewall appliances, and will remain the customers’ choice.

2. Network security is also a must-have. It’s arguably the most effective area for protecting the enterprise, and Fortinet is also the customers’ choice, next to Palo Alto.

3. Fortinet’s ongoing expansion to SASE and SecOps has yielded good results, and it is planting the seeds in application, data, and endpoint security.

4. Fortinet’s historical growth has been organic, so additional levers in inorganic growth can propel the business further.

5. Fortinet is also founders-led and has been conservative but consistent in delivering strong above-market performance.

Let’s go into detail in Part 2 of the write-up.

*Additional disclosure: I already own CrowdStrike, the best-in-class Endpoint protection provider in the cloud's largest (and most competitive) market. You can follow my Crowdstrike FY2024 update, read my Q2'24 review, first note in 2020, and deep-dive in 2021 (pre-sleep well framework).

Part 2 explains why Fortinet is a Sleep Well business.

1. Executive Summary [Part 1]

2. Simplifying the Business and Cybersecurity Industry

3. Why is it a Sleep Well business? [Part 2]

   1. Purpose-built hardware and OS combo on a unified console

   2. Predictable, diversified, and enduring business model

   3. Favorable position to grow to adjacent areas

   4. Stable competitive advantages

   5. Founder led management

   6. Anti-fragile attributes

4. What can go wrong?

5. Fair price to own

6. Sleep Well Score

7. What to track

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Tickers mentioned:

This is part 2 of the 11th Sleep Well pick. Part 1 is here.

1. What makes it a sleep-well business? [Part 1]

   1. Emerging leader

   2. Outdated alternatives

   3. Gaining market share

   4. Durable growth

   5. Widening moats / High barriers to entry

   6. Management track record and ownership

   7. Anti-fragility

2. Risks [Part 2]

3. Valuation

4. What to track

5. Sleep Well Scorecard

Read more

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Happy 2024 sleep-well investors,

In my 2023 annual review - 100% success rate, I promised quality > quantity.

The first pick of 2024 is one of the best lesser-known global leaders I have encountered. I see a lot of similarities in this business’s platform approach, difficult-to-replicate moats, and barriers to entry with Veeva Systems and CrowdStrike. Both started with one key capability and have now expanded successfully into a full suite of others. They also performed incredibly, returning 48% and 27% CAGR since IPO in 2017 and 2019, respectively.

The first pick of 2024 was founded three decades ago and was profitable from day 1. It has become the backbone of the global supply chain execution market, managing over half of the global manufactured trade flow. Its key product is a unified SaaS platform facilitating the delivery of goods and documents from manufacturers to the consumer and everything in between, such as warehousing, fulfillment, landside logistics, cross-border freight, and customs & compliance. It solves the most complex logistic problems in a highly regulated industry. And the reward for being the pioneer and leader is reflected in its achievements below:

• +25% revenue per share CAGR since IPO

• +48% free cash flow per share CAGR

• 85%+ gross margin and 40%+ EBIT margin

• >90% of the top players in the industry are its customer

• manages over half of the global manufactured trade flow

• close to 0% attrition for the past 12 years

After spending several months understanding the complex logistical problems it solves. I became a believer in the business and think opportunities for further growth are still abundant.

The share price has only returned 31% CAGR in the past five years vs. the 48% FCF CAGR, showing the market still underappreciated the company's future despite the premium valuation.

Then, like Veeva Systems, another global leader in a vertical-specific SaaS market that I deep dived (and bought) into last December 2023, I see a well-protected moat around the business and a heightened barrier to entry due to the complex cross-border nature of the transactions and idiosyncratic custom standards, which should help the business grow at a 20%+ rate over the next 5-10 years.

Additionally, like CrowdStrike, the largest customers are expanding to the full arrays of apps available in the platform, underscores that customers are increasingly relying on the company to provide all of the logistics backbone -- as opposed to using disparate products and services from several vendors or building it in-house.

Impressively, the company has proven it can also grow inorganically. In the last five years, all 45+ acquisitions have been accretive and contribute to around 1/3 of total revenue growth.

For such a wonderful business, I am inclined to hit the BUY button today, but I will wait until you have received both parts of my writeup to start DCAing (dollar-cost averaging) into a full position over the next 6-12 months.

Be warned, this is the most expensive stock I will be buying.

Knowing errors of omission due to valuation is my biggest mistake. The last few ‘overvalued’ businesses returned the most since publication - look at CRWD, VAT Group, and NVR below, which produced 42%, 81%, and 21%, respectively. I don’t want to miss owning another winner.

Below are the scores of these businesses and valuations at publication.

Now, let’s dive into the 11th idea of Sleep Well Investments, the first idea for 2024.

This is part 1. [Part 2]

1. What makes it a sleep-well business? [Part 1]

   1. Emerging leader

   2. Outdated alternatives

   3. Gaining market share

   4. Durable growth

   5. Widening moats / High barriers to entry

   6. Management track record and ownership

   7. Anti-fragility

2. Risks [Part 2]

3. Valuation

4. What to track

5. Sleep Well Scorecard

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Hi SWIs,

This is part 2 of my deep dive into Veeva Systems $VEEV (VEEV), a $27B market leader in life science. Please read Part 1 to understand the critical risks to the business.

Here, I show you the key ingredients that can make Veeva a sleep-well investment and attempt to determine an entry price that would offer a sufficient margin of safety in case we get this wrong.

Part 2 begins with:

1. Why is it a sleep-well business?

   1. How critical is the product?

   2. How enduring is the business model?

   3. What is the growth potential and outlook?

   4. What competitive advantages does Veeva have over peers?

   5. How anti-fragile is the business?

   6. Management’s competency and alignment

2. What’s a fair price?

   1. base case

   2. bear case

3. Sleep Well Scorecard

4. How do you track Veeva?

If you missed Part 1, I discussed the following key risks:

1. IQVIA, a $40B elephant, is the most significant risk to Veeva’s Commerical (CRM) and Data Cloud (particularly Compass and Crossix). As Veeva modernizes the data design and application structure, does it have the edge over IQVIA’s offering?

2. IQVIA’s decade-long lawsuit against Veeva for data misuse remains unsettled, restricting Veeva’s customers from integrating IQVIA’s third-party data into Veeva’s multiple applications, including Network Customer Master and Nitro. Which other applications are negatively impacted?

3. Salesforce (CRM), the leader in generic CRM platforms, has created Healthcare to enter life science. But after recruiting Frank Defesche, the former General Manager of Veeva’s Vault, in November 2023, will that change the competition dynamics?

4. Meanwhile, Veeva is migrating its CRM capabilities to Veeva Vault from Salesforce. Management lauded the long-term gains, but the disruption will increase churn.

5. Medidata’s Rave and Oracle’s Phase Forward are formidable competitors in specific applications, namely electronic data capture (EDC) and clinical data management. But can they go beyond these functions to disrupt Veeva?

6. AI - What is Veeva doing to ensure it becomes an opportunity, not a risk?

7. Loss of exclusivity (LoEs) and the biopharma funding cycle are cyclical risks as R&D and CRM funding cuts worsen, reducing drug development activities. But, could it motivate biopharma to improve efficiency and increase investment in R&D solutions?

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Why is Veeva a sleep-well business?

Essential product and a preferred platform

The first criterion of an enduring business is whether it provides essential or mission-critical service to its customers that they can’t easily find a replacement or build themselves.

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We have found in a long life that one competitor is frequently enough to ruin a business.

— Charlie Munger (1924-2023)

Veeva Systems VEEV 0.00%↑ (VEEV), $27B market cap, is a leader in CRM and R&D cloud platforms for Life Sciences with 19 out of 20 top pharma companies as customers and an 80%+ and 30%+ share of the penetrated market, respectively, in terms of seats. Clinical operations from drug study design and manufacturing to commercialization desperately need a unified platform for applications and high-fidelity data, playing into Veeva's architecture strength. Inherent regulatory entry barriers, a slow-moving, risk-averse industry, and high switching costs protect this unique SaaS business. At a $2.2B revenue run rate, plenty of growth is left in a $20B+ total addressable market (TAM).

What’s more, Veeva is

• Founder-led by Peter Gassner, an ex-Salesforce exec who still owns 9% of the company.

• Mission-critical to pharma and biotech as Veeva reduces 25% of the time and cost for new drug/device development. Once integrated into their workflow, most are locked in with a <4% churn rate.

• Durable business model with 80% recurring revenue, 20%+ net margin, 40% free cash low margin, debt-free, and 10%+ forward growth for at least a decade.

• Veeva has compounded free cash flow per share by 38% CAGR since its IPO in 2013, yet the stock has only returned 16% CAGR.

• You will be pleased to see that Veeva’s valuation is also at 25x EV/FCF vs 40x pre-COVID, the lowest level since its IPO. At the $170/share level, Veeva provides a 3.5% FCF yield with 10%+ forward growth.

However, diving deeper, I find seven critical risks that can threaten Veeva's future:

1. IQVIA, a $40B elephant, is the most significant risk to Veeva’s Commerical (CRM) and Data Cloud (particularly Compass and Crossix). As Veeva modernizes the data design and application structure, does it have the edge over IQVIA’s offering?

2. IQVIA’s decade-long lawsuit against Veeva for data misuse remains unsettled, restricting Veeva’s customers from integrating IQVIA’s third-party data into Veeva’s multiple applications, including Network Customer Master and Nitro. Which other applications are negatively impacted?

3. Salesforce (CRM), the leader in generic CRM platforms, has created Healthcare to enter life science. But after recruiting Frank Defesche, the former General Manager of Veeva’s Vault, in November 2023, will that change the competition dynamics?

4. Meanwhile, Veeva is migrating its CRM capabilities to Veeva Vault from Salesforce. Management lauded the long-term gains, but the disruption will increase churn.

5. Medidata’s Rave and Oracle’s Phase Forward are formidable competitors in specific applications, namely electronic data capture (EDC) and clinical data management. But can they go beyond these functions to disrupt Veeva?

6. AI - What is Veeva doing to ensure it becomes an opportunity, not a risk?

7. Loss of exclusivity (LoEs) and the biopharma funding cycle are cyclical risks as R&D and CRM funding cuts worsen, reducing drug development activities. But, could it motivate biopharma to improve efficiency and increase investment in R&D solutions?

I intend to look at Veeva with The Bear Cave mentality (extreme skepticism) because Veeva is widely accepted as a high-quality business. I have made mistakes by believing in a good story. Thus, contrarian and objective research is required.

Importantly, I only want to own enduring businesses in my daughter’s Sleep Well Portfolio. If I get Veeva wrong, I’d want plenty of margin of safety.

You can expect a thorough analysis of the following:

1. Veeva Systems business [Part 1]

   1. Who are the customers?

   2. What does Veeva do that others can’t?

2. Seven critical risks

   1. IQVIA vs. Data Cloud

   2. IQVIA vs. Veeva decade-long lawsuit

   3. Salesforce CRM Healthcare

   4. Migration to Vault from Salesforce

   5. Medidata and Oracle

   6. AI - an opportunity or a risk?

   7. Loss of exclusivity (LoEs) and the biopharma funding cycle

3. Why is it a sleep-well business? [Part 2]

   1. How critical is the product?

   2. How enduring is the business model?

   3. What is the growth potential and outlook?

   4. What competitive advantages does Veeva have over peers?

   5. How anti-fragile is the business?

   6. Management’s alignment

4. What’s a fair price?

   1. bear case

   2. base case

5. Sleep Well Scorecard

6. How do you track Veeva?

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If you enjoy my deep analysis, please spread the love, hit the ❤ button, and leave a review. Your kindness fuels my work. Special thanks to , Carl and Alwyn, for your feedback.

I scored all of my Sleep Well Investments (05 Nov 2023)

And I track their thesis here

And I buy for my daughter’s portfolio when the price is right

I also own some of them in my portfolio.

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1. Veeva Systems Overview

Veeva offers software-as-a-service (SaaS) solutions in customer relationship management (CRM) and research and development (R&D) for the life sciences industry. Founded in 2007 by Peter Gassner (ex-Salesforce CRM) and Matt Wallach (ex-Siebel Systems, leading pharm CRM and Clinical Trial Management System, which were sold to Oracle), the duo has led Veeva to become an integral part of drugs and medical devices development processes.

What does it do?

Veeva’s 40+ cloud applications in CRM solutions and R&D solutions help life sciences companies develop and bring products to market faster and more efficiently while maintaining compliance with government regulations.

More specifically, Veeva’s CRM solutions, introduced in 2007 and built on the Salesforce platform, help life sciences companies engage with healthcare professionals and healthcare organizations seamlessly across multiple communication channels and plan and execute more effective media and marketing campaigns. In other words, CRM helps biopharma to navigate the complex healthcare system to sell and market drugs more effectively. According to Veeva, 83% of approved US drugs are launched with Veeva CRM. The core applications are Veeva CRM, Veeva Vault PromoMats (make sure promotional content is compliant), Vault Medical, and Vault Crossix (acquired). The core data offerings are OpenData, Link (platform of deep data), and Compass (patient and prescriber), which were introduced in 2020 and will likely become a new segment - Data Cloud.

Then, Veeva’s R&D solutions, introduced in 2012, focus on the client’s clinical operations, clinical data management, and regulatory, quality, and safety functions. In particular, applications help streamline end-to-end drug/medical device development processes from study startup, data collection, and site design to site inspection. Applications also help collaboration across stakeholders securely and outsource partners/vendors to increase operational efficiency and maintain regulatory compliance from clinical research to manufacturing. The core applications are Vault Clinical (eTMF, CTMS, EDC), Vault RIM (Registration, Submission), Vault Safety, and Vault Quality (QMS).

What are Veeva’s segments?

Currently, there are two reporting segments - Commercial (CRM) and R&D Solutions.

In FY2023, Veeva’s revenue was $2.2B. 80% of Veeva's revenue ($1.7B) was subscription-based (85% gross margin), of which 54% was from CRM solutions. Notice all the 14 functions in the slide below are on the Vault Platform (orange bar) - the technology platform for both CRM and R&D applications. Currently, the CRM applications are mostly run on Salesforce, where it pays a licensing fee per seat. However, Veeva isn’t renewing its contract with Salesforce, which expires in 2025.

The other 46% of subscription revenue comes from R&D solutions, which extends the service's life cycle and relationship with clients from clinical startup (study design) to manufacturing. As of Q2 FY24, it has 26 R&D applications.

Interestingly, six applications (CRM, PromoMats, eTMF, EDC, QualityDocs, and Regulatory Submissions) drive the bulk of revenue with Compass and Link the following applications to contribute substantial revenue in the future.

There are many application names and functions, but it will get easier, and perhaps if you remember anything from this section, it's the next paragraph.

Since 2014, the number of average products per customer has grown to four for CRM and three applications for R&D, and the net dollar-based retention rate (NDBRR) leveled to 120%, which means every year, existing customers spend 20% more on the platform, including churn (c4%). Veeva demonstrates the ability to innovate new products and lock in customers.

The remaining 20% of revenue ($422M) is from consulting and professional services, with a 30% gross margin. It is low but essential as it helps clients maximize the value of Veeva’s technologies and ongoing maintenance.

Geographically, 58% of revenue is from North America, 27% is from Europe, and the remaining is from Asia, MENA, and Latin America.

Who are the customers?

Veeva has over 1388+ customers, including 50+ largest global pharmaceutical and thousands of biotechnology companies such as Bayer AG, Boehringer Ingelheim GmbH, Eli Lilly and Company, Gilead Sciences, Merck Sharp & Dohme Corp., Novartis Pharma AG, and emerging growth pharmaceutical and biotechnology companies, including Alkermes Inc., Alnylam Pharmaceuticals, Inc., bluebird bio, Inc., Idorsia Pharmaceuticals Ltd, and Moderna Therapeutics Inc.

We can break it down to CRM and R&D customers. We can see that the R&D segment has acquired more customers than CRM, despite starting in 2012, five years after CRM. One thing we might see in the future is a third segment for the Data Cloud, which is part of CRM right now, but with two (Compass and Link) out of four applications (other 2: OpenData, and Pulse) touted as the next growth drivers, Veeva may start to break up the sales numbers.

In FY2023, 95% of revenue came from biopharmaceuticals, and the remaining came from medical devices (medtech). As Veeva is migrating from the Salesforce CRM platform to its own Vault Cloud (effective from 2025 for new customers), it can market its CRM solutions to non-life science companies. So Veeva has marketed solutions to consumer packaging and chemical companies - the box on the right.

Within biopharma, 66% of revenue comes from enterprises or the top 50 customers. Small-medium-sized businesses (SMBs) represent 25% of Veeva's revenue across 700+ customers, with less than 1,000 employees and less than $1B of revenue. Contract research organizations, or CROs, represent 5% of revenue. Finally, emerging biotech customers represent 4% of total biopharma revenue across c300 customers.

These customers spend about $20 billion annually (total addressable market - TAM) on industry-specific software and data, growing at 6%. Veeva’s revenue of $2.3B (FY2024 estimates) is still just 12% of the total addressable market despite being the leader with roughly 80% market share of the 500K sales pharma representatives.

More than 50% of Veeva’s TAM is from announced products covering primarily commercial and clinical functions, and the remainder is from areas of future opportunity.

What does Veeva do that others can’t?

Customers have four choices for CRM, R&D, and data analytics applications. They are purpose-built platform solutions for life science on the cloud, on-premise, generic, or application-specific.

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Hi, I am Trung. I write 10+K words deep-dives on market leaders. I also write Thesis Trackers updates to follow up on their performance. When the right price comes, I buy them for the Sleep Well Portfolio, which I am building for my 4-year-old daughter to redeem in 2037. I disclose the reasoning of all BUY and SELL (ideally never) transactions (1st, 2nd, and 3rd). Join me in building generational wealth.

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Let’s jump to it…

I’ll start with a refresher of the key sections and bullet points:

Why is it a Sleep Well Business?

1. Half-century product

   1. Evergreen product needs

   2. Limited alternatives

   3. Secular runway for growth

   4. M&A platform

2. Market leader today and likely tomorrow

   1. Market share

   2. Direct and future competitors [End of Part 1]

   3. Moats [Part 2 starts]

      1. No-frill products

      2. Scale/cost advantage

      3. M&A platform

3. Easy to understand and predictable business model

   1. Simple operation

   2. Flexible capex profile

   3. A clear path to growth

   4. Mid-term targets

   5. Aligned capital allocation framework

4. Anti-fragile attributes

5. Reasonable valuation

   1. Base case

   2. Bear case

6. Sleep Well Scorecard

7. What to track?

Part 1 ended with a question:

What defensible attributes does the business have to protect its market leading position and longevity?

Part 2 continues by analyzing the

• business moats, then

• the adaptive business model by design,

• the attractive unit economics of its assets over the 20-30-year life,

• anti-fragility attributes to help the business weather a major recession,

• capital allocation framework and management attitude and execution, then

• valuation - what’s the right buy price for a healthy dose of margin of safety?

Finally, we will see how the business performs under my Sleep Well Investments Checklist compared to my previous picks, and I plan to track the business in the future.

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