The Berkshire Hathaway of software companies

Bryce: [00:00:15] Welcome to another episode of Equity Mates, a podcast that follows our journey of investing, whether you're an absolute beginner or approaching Warren Buffett status. Our aim is to help break down your barriers from beginning to dividend. My name is Bryce, and as always, I'm joined by my equity buddy Ren. How are you going? 

Alec: [00:00:30] I'm very good. Bryce Great to be back with you for another Monday episode. Yes, very excited to talk a variety of things. 

Bryce: [00:00:39] Yes, we had a big week last week of renewable conversation. Mary Manning did a Deep Dive on the solar industry, so we're back today with conversations around SPACs seed. We're going to have a look at what's going on in venture capital and then Ren, you're going to pitch the Berkshire Hathaway of software. Yeah, wow. That's big. It's a big call. It is a big call, but very much looking forward to that. So big episode of EM chat today. Before we get stuck in the bit of housekeeping. A journalist. 

Alec: [00:01:10] Yeah, we are on the hunt for another team member to join the Equity Mates family here. Yeah, we've got to show that we want to create in-house and to do that, we're looking for one of Australia's best journalists or financial writers. So if that's you or someone you know or someone you could be hit us up careers at Equity Mates dot com. Passion for markets is more important than experience, and the experience also helps. But yeah, hit us up. It's we're pretty excited about this show. It's been on our pipeline for a while and we've never quite had the ability to execute on it. But we think now is the right time. So come join us if you're intrigued. 

Bryce: [00:01:55] It is a full time role. We're looking for people who are passionate about markets and can write really, really well. Yeah, that's it. That's the reason. Equity Mates dot com. Any other housekeeping

Alec: [00:02:04] Ren? Yeah, I want to give Dylan from Broken Hill a shout out. My sister just moved to Broken Hill and moved in with someone who was an Equity Mates fan, so I said I'd give him a shout out. So, Dylan, thanks for listening and thanks for making my sister feel welcome in Broken Hill. 

Bryce: [00:02:21] Nice. Well, yeah, and shout out to the random guy we bumped into at Rushcutter's Park two weeks ago as well. 

Alec: [00:02:29] Bryce has a diary where he keeps every interaction with someone who recognises him, so we can't quite afford the dollar offer that Hamish and Andy do. We don't have that kind of cash on. But Bryce will record you in his journal 

Bryce: [00:02:44] and shout out as well to all of the other shows in the Equity Mates media network. If you have just joined this podcast for the very first time, welcome. This is our flagship show, but we do have plenty of other shows in the network that really help you, depending on which stage of the journey you are at. So we've got to get started investing. Another show hosted by Alex and I, which covers all the fundamentals of investing, really goes back to basics. So head over there if you're still feeling a little overwhelmed, you're in good. Company is hosted by Maddie and SoFi down in Melbourne, and they are also tracking their investing journey, trying to improve the conversation amongst women and encourage their friends and everyone else in the community to get started investing. We also have Canadian economist, the two two boys chatting all things macro and talk money to me, Candace and Felicity, two financial advisors at Sean Partners, helping you understand more about personal finance and of course, meet pay, love Carmel and Zoe breaking down their current conversations you should be having with money and your partner. So a lot going on in the Equity Mates network in a new show on the horizon. 

Alec: [00:03:54] Yeah, that's six shows, but we're not done yet. Seventh Show is crypto curious in partnership with the team over at Bamboo, the micro investing app to help you get started in Bitcoin and Ethereum. They're going to be breaking down the world of cryptocurrencies, NFTs, Bitcoin and really focussed on helping those that may be curious about cryptocurrency really understand it and understand what's going on in the news. What these digital assets are and what they might be in the future. So first three episodes launch on the 8th of November, so next week, but the feed is up searcher. Wherever you get your podcasts. Subscribe, listen to the trailer. Give it a review. Get ready. Number seven launches in a week. 

Bryce: [00:04:40] Yeah, it's going to be big, so head to Equity Mates dot com to find out more information on all of those shows. So SPAC City. We Saw a couple of big SPAC deals in the last couple of weeks Ren, one with WeWork and one with Trump. So we're going to go through both of them in a little bit of detail because it's pretty fascinating. What's happening over in SPAC land? Yeah, SPAC city. 

Alec: [00:05:01] So for those who are unfamiliar SPACs special purpose acquisition companies, they are basically a blank check. They got to raise a bunch of money from investors. We've basically been a time period to then go and acquire a company, so investors give them money and say, go buy something good with it, rather than the traditional IPO where investors know what they're putting their money in. So We Work merged with Bao X Acquisition Corp. and then Trump's new media business merged with Digital World Acquisition Corp.. Let's go through each of them because they're both pretty interesting. We work. We're actually sitting in a way work recording this, so we better be careful about what we say. Yes, Wework for those who are unfamiliar. Shared office business seven hundred and fifty locations worldwide across a hundred and fifty cities in 38 countries. We're recording in Sydney and I think at last count they have like 14 Weworks in Sydney. 

Bryce: [00:06:00] I don't know about that many, but yeah, it's it's double digits in the tanks. 

Alec: [00:06:03] Yeah, yeah. Two years ago, they tried to go public at a $47 billion valuation. What happened? 

Bryce: [00:06:10] It failed in a big way as they were doing their roadshow. Yeah, it went from one of potentially one of the biggest IPOs in history to an absolute flop didn't even get off the ground. Adam Neumann, the CEO, was kicked out and SoftBank sort of took took charge and started stripping costs out. And it's been bubbling away ever since went 

Alec: [00:06:34] for a $47 billion IPO. They eventually realised there were a whole bunch of problems with the business. The CEO was cleared out. The S.E.C. investigated the New York attorney general, investigated WeWork, went through seven several rounds of layoffs, eventually slashed two thirds of their head headcount, exited or renegotiated hundreds of leases on buildings. Then COVID 19 hit, which obviously decimated the office business. But they've got through it. This merger is a $9 billion merger. So from $47 billion to $9 billion, not great. But, you know, a few years ago, they were probably at zero. 

Bryce: [00:07:15] They'd be taking anything at this point. 

Alec: [00:07:17] Yeah, now they're still losing money. In the first half of 2021, WeWork recorded a net loss of nearly $3 billion. The office business is a tough one, I guess, of obvious reasons with Covid and stuff like that. But they got the IPO done. Good on him. One company that may be a little bit disappointed. SoftBank, Yeah. Invested eighteen point five billion dollars in WeWork, and now the whole company is only worth nine. 

Bryce: [00:07:46] So there's a bit of a long way to run for WeWork, for SoftBank to at least make their money back. That's for sure. We're starting to see it turn here in Sydney anyway. And the office that we're in, certainly a few more people coming back. So you never know the fortunes could be turning for we work. It's certainly not the glory days that it was. I read that Neumann, though he still holds stock in the stock, that he has an hour worth a couple of billion or a billion least.

Alec: [00:08:13] So he'll be cheering. They say, invest in what you know. Are you investing?

Bryce: [00:08:20] Nup. I'm sorry. Sorry, we work. OK, my eye on it. And yeah, but for me personally, I just think there's too many spaces here in Sydney. 

Alec: [00:08:29] So yeah, for me, I just don't I don't see the benefit of scale here. Like some businesses, you can see the benefit of scale. But in every local market, WeWork is competing with local competitors. And you know, here in Sydney, there's spaces, which is like a big Sydney based shared office competitor. Then you go down to Melbourne and there's another one, the Commons, and you've got a number of spaces and like in every city way WeWork operate, they've got these local competitors that are basically competing to offer a commodity products, wools chair and a desk. And you can have all the free beers on taps and coffees that you like. But at the end of the day, 

Bryce: [00:09:06] the Yukon, because I shop at the top. 

Alec: [00:09:07] Yeah, but at the end of the day, like the decision makers at the company are really just going to be driven by price, like the people that enjoy the perks and the people that are making the decisions about where they go are generally not the same people. And so for me, it's just like unless there's one use case where that scale makes a difference, which is if they're trying to sell office space around the world to multinationals, they go to Microsoft and they're like, Don't worry about getting office space in every city. Just do a global contract with us and will house your people in every city. That's the one use case where I can say scale 

Bryce: [00:09:40] is a benefit, which they definitely do. 

Alec: [00:09:42] They do, yeah. But for most businesses who aren't multinational, I don't see why. Having seven hundred and fifty buildings, the unit economics of each building don't get a lot better. There's still some things you might get some economies of scale, like procuring the beers and procuring the coffee. Oh, you know, maybe they get a better deal on chairs than like a local competitor. But yeah, you know, you know where I'm going with this, I don't I don't see the scale benefit. So for me? I'll use the space, but I won't invest in it. 

Bryce: [00:10:13] None. So Ren, let's move on. Trump loves being in the news. And Trump announced a merger with Digital World Acquisition Corp. The ticker is DWAC over on the Nasdaq, and it has been booming up as much as one thousand six hundred and fifty seven per cent since the deal was announced. So what's going on? 

Alec: [00:10:37] Yeah, Trump loves being in the news so much that he's making a news business. Yes. So Trump has said for a while he's going to create his own social media. Yeah, this is his second attempt because his first was that blog that he published a little while ago that, yeah, 

Bryce: [00:10:55] I did, but wasn't there also rumours before he the reason that he ran for politics was to try and pump up his TV. 

Alec: [00:11:01] So he wanted to create like a far right news network, like a conservative. Yeah, that's that was the story in 2016. But now he's doing it. It's called Trump Media and Technology Group, and on the basis of a twenty two slide deck, Trump has created about $3 billion worth of value, which is pretty crazy when you think about it. 

Bryce: [00:11:20] So just to recap that it doesn't exist?

Alec: [00:11:23] No. Yeah, it doesn't exist. 

Bryce: [00:11:24] It's a merger with an idea. 

Alec: [00:11:26] Yeah, yeah. Yeah. So the sparks their share price is a $10. That's like where they start and they trade around that $10 mark until they announce an acquisition. Yeah, the SPAC that acquired this idea from Trump closed last Wednesday or when this is released the Wednesday before at nine point ninety six. So around that $10 mark, the deal was announced by Friday. The share price peaked at $175. So Trump's name, I guess, and the idea skyrocketed that that SPACs share price up. It's come off a fair bit, but it's still up. You know, I think like five times from where it was before the deal was announced. Trump has become this has become the number one meme stock on Wall Street. That's no 

Bryce: [00:12:11] surprise. 

Alec: [00:12:12] More more mentions than GameStop at the moment or AMC or any of those other companies. So. But anyway, let's talk about what the business is because it's pretty funny. And if you flick through the twenty two slide deck, it's pretty funny as well, because about a third of it just talks about how many Twitter followers Trump has classes. 

Bryce: [00:12:29] Well, see, that's 

Alec: [00:12:30] what has had. Yeah, sure, it's true. So Trump media and technology group slide two of the debt talks about their vision. And I just want to read it out to you because he hasn't let bygones be bygones, and I quote to him, T.J. aspires to create a media powerhouse to rival the liberal media consortium and fight back against the big tech companies of Silicon Valley who have used their unilateral power to silence opposing voices in America. 

Bryce: [00:12:57] Unbelievable. Unbelievable. How's he going to do it? 

Alec: [00:13:01] Yeah. So three three answers for the Business Truth Social, which in the Dec says it's going to be taking on Twitter and Facebook and then TMT T.J. Plus, which will be taking on Disney and Netflix, and an untamed news which he says will be taking on CNN and iHeartRadio. Then he mentions longer term, they will build PM T.J. Tech Stack, which will take on Amazon Web Services, Microsoft Azure, Google Cloud and Stripe. Yeah, good 

Bryce: [00:13:32] luck. 

Alec: [00:13:33] So I think combined, I haven't done the maths, but combined those 10 companies they've listed that they're taking on, probably worth about three trillion dollars. 

Bryce: [00:13:43] Yeah, well, they're probably like they literally the top 10 biggest tech, some of the top 10 biggest tech companies in the world. Hmm. Nice. Trump love the ambition. I doubt it's going to get off the ground. Well, it could get off the ground. Whether or not it is as successful as they think it is going to be, that's the next question. 

Alec: [00:14:00] So there's so many ironies in this. And Thomas and Adam over at Canadian Economist did a good segment on this. So if you want to hear more about Trump's media business, go check that out. But two things stand out for me. Firstly, Trump in his deck, said that they were building a non-cancer global global community, obviously because Trump feels like he's been cancelled. Then a whole bunch of people signed up to truth social under the name Donald Trump, and they were removed. They were cancelled. But the funny one for me is that in the terms and conditions of truth social, there's something about using excess capital letters is like a violation of the terms and conditions. 

Bryce: [00:14:41] And Trump only used it. 

Alec: [00:14:43] Yeah, yeah, yeah. And so thomas it out and put up something on Instagram comparing the pair. But it's just it's a mess from the start 

Bryce: [00:14:51] mess from the start, but it's worth $3 billion. 

Alec: [00:14:54] So here's a question that I've asked you before, but I want to ask you on the podcast to SPAC mergers. We work $9 billion market cap, losing $3 billion a year. Oh, sorry, three billion dollars half annualised. That's $6 billion a year or Trump's. Three billion dollar idea that isn't losing any money, which would you rather invest yet? 

Bryce: [00:15:19] Well, I mean, you probably have more chance at the moment of making something from the Trump, just given the nature of it now.

Alec: [00:15:26] Bryce Leske once again supporting Donald Trump. 

Bryce: [00:15:28] Everyone I know. But yeah, look to fascinating SPACs coming out of SPAC City. So the trend will continue and we'll see more and more interesting stuff coming out of SPAC land or in. Whoa, we did promise everyone at the start of the show that there's going to be a bit of a stock pitch for the Berkshire Hathaway of software. So let's jump into that after this quick break. OK, so it is watch list time. Just a reminder that if you want to follow along with any of the stocks that we talk about on the watch list or any of the stocks that our experts talk about or any of our other show hosts talk about, head to our website, brand new website and there's a beautiful page with all of the watch stocks in watch list form. So go and check that out and you can listen to the episodes that they're attached to as well. But Ren, you did promise us at the start, a stock pitch, so. It's Constellation Software.

Alec: [00:16:27] It is it is sometimes called the Berkshire Hathaway of software. I want to state from the outset that this obviously is not buy, hold or sell a. Don't take financial advice from a podcast, but also that it trades at a pace of 100. And so it's expensive. And so even if it was a stock pitch, it would be a watch this space and make sure you're comfortable with valuation or wait until valuation comes in a little bit. OK, but I want to talk about this company because I reckon it's one of the coolest companies out. It flies under a lot of people's radar. I asked you before we started recording if you'd heard of it and you hadn't. And so I think a lot of people in the Equity Mates community probably haven't, and it's worth knowing about. But I also want to bring it up because this is a new campaign that I'm starting. Yeah, it's called Give Me Canada, OK? And essentially none of the brokers that I use and I'm going to name checked them all. CommSec, I a stake superhero. None of them have access or give me access to Canada. All of them give me access to America. It's like it's just over the border. It's the same land mass just added. Yeah. 

Bryce: [00:17:45] Surprise. 

Alec: [00:17:45] I doesn't sign. And this company is also listed over the counter in the states, and none of them have have it listed, which is fair. But there's a lot of great opportunity in Canada. And so I'd love to see someone pick up the mantle and get us Canada. I'm sure none of them appreciate us calling them out. But hey, if we got a platform, we've got to use. Sure. This is just one of the many companies in Canada that I think are pretty cold worth paying attention to. Let me give you the founding story. Let me take you back to the 90s. Mark Leonard was a venture capitalist. He was investing in software businesses, and one of the key reasons that software businesses weren't getting investments was because of a small, total addressable market. We think of software businesses, we think of Alaska and we think of Microsoft. We think of these companies that can basically address key markets across the world, you know, software developers and all like businesses or, you know, like something where there's a, you know, hundreds of millions or billions of potential users. But there's all of this software, these software businesses that are niche, that are small, that don't have big total addressable markets. And so when venture capitalists look at them and do the maths and ask, Can we get a 10x or 100x return? The answer is no. So they're not investable from traditional venture capital, but they're great businesses. They create a whole bunch of cash. And so Mark Leonard, I think he started by raising twenty five million Canadian dollars and said, let's roll them up. Although not so, the focus was vertical market software is the term of art here, but it basically is companies that create software for a particular industry or market, as opposed to creating software usable for a wide variety of markets. So these are these really niche small operators, but the important thing here is that they're mission critical businesses. So the things that industries rely on their software platforms that industries rely on. When businesses rely on you, you've got stable earnings that you can grow over time, but you may never get to that sort of multi-billion dollar venture capital exercise. So Constellation has acquired over 500 businesses, and I think that numbers out of date. I think it's a lot higher. The majority of the acquisitions are relatively small, less than sort of five million, although they've scaled up. I think the highest was about three hundred and sixty million. There was another for about 250 million. But a lot of them are very small. So I've got a few examples of the businesses to give you an idea of what we're talking about when we say these sort of mission critical vertical market software businesses. So I'll rip through a few to give you a taste for Envision, where is a provider of technology solutions for public libraries? They have a rich history of providing self-service and efficiency solutions that enhance library services and empower patrons. Library software Small town small town sphere WMC is a leading cloud based warehouse management system for third party logistics distributors, fulfilment, e-commerce and retail warehouses. I mean, warehouses, not small business teams, but 

Bryce: [00:21:02] still larger than 

Alec: [00:21:03] libraries, but still not, uh, not a global. Well, you know we're pretty close. Yeah. All right. What about this one incomm SAS is a French provider of business software solutions for water and energy distributors. 

Bryce: [00:21:20] Okay. Plenty of them around, 

Alec: [00:21:22] plenty of them around. But again, they say, like, don't get me wrong, these can. Still be 

Bryce: [00:21:26] massive big 

Alec: [00:21:26] businesses there just need. What about this one asset into tech is a leading provider of solutions to validate characterised test and debug chips and circuit boards. Nice. Next one This is a bit more consumer facing what sell on an Irish app that connects consumers in real time with beauty salons and hairdressers? 

Bryce: [00:21:49] That's interesting. Yeah. Isn't that just a phone call? Oh, come on, Bryce. 

Alec: [00:21:55] Are you a phone call operator when it comes to like booking appointments? Still? 

Bryce: [00:22:00] Yeah, I called a restaurant two days ago. 

Alec: [00:22:01] Oh, really? You know, they've got like websites for that now. It said, Cole, uh, I must be the and I did these fancy restaurants that you're going to. 

Bryce: [00:22:11] It was a pretty fancy one. Yeah. And they're not and they're not open because there's not enough staff, really, because of Covid. No one's coming back to work this. There's a labour shortage. Know hospitality anyway. They need an app to connect me with them. 

Alec: [00:22:32] All right, so some other software platforms, Common Sense, a leading provider of room service automation, say JJ, a geo software platform for geologists to and I quote, unleash the full power of cloud computing. So there's a bunch more like this, you know, Infinity Enterprise lending provides category leading load management to alternative credit lenders. Yeah, a bunch of other bunch of other ones. But I think I think you get the concept, which is the sort of niche software businesses that I think business. I think constellations minimum like sort of threshold is a million dollars in earnings annually and that the ability to grow that good management team, all that stuff, and then they take a pretty decentralised approach to it. So they they acquire these businesses and then they say, run your business. And I think sometimes they even buy, they will buy businesses that compete with each other. And it's that Berkshire Hathaway fully decentralised idea of we'll give you help if you need it. But otherwise you know you, you do you. So that's that's the business model. That's why they called the Berkshire Hathaway of software because it's a it's a software rollup and roll ups have a bit of a fraught history when it comes to the share market. Some there have been some roll ups that have been incredibly successful and others that have not been successful at all, and they've sort of grown by acquisition. And then the market's realised it's this Frankenstein of businesses that don't really work together. In this case, it seems to have worked. Here's some of the numbers, so the company listed in 2006. Since then, the share price is up eleven thousand three hundred eighty one percent on an annualised basis. Compound annual growth rate of 36 percent. Wow. Yeah. Since 2006. So for 15 years, thirty eight billion US dollar market cap today. Pretty bad, yeah, pretty big. Some of the numbers, so $3.9 billion. These are all U.S. dollars, three point nine billion in revenue and the five year compound growth rate of 17 percent and then four hundred and thirty six million in profit and the five year compound growth rate of 20 percent. 

Bryce: [00:24:54] I can understand why you want to get access to it. Yeah, yeah. Where to from here, though, it feels like it's there is there is the strategy just to keep on bolting things on. 

Alec: [00:25:05] Yeah, yeah. I hate 

Bryce: [00:25:06] buying. 

Alec: [00:25:06] So I was listening to someone and I don't know if this is true. Apparently, Mark Leonard used to write quarterly letters and then his board told him to stop because his competitors were just stealing all of his IP. All right. Wow. But apparently he used to just say there's no upper limit here, like there will constantly be more software businesses. I think it's something like a hundred thousand software businesses in the world or, you know, like the number is just outrageous. 

Bryce: [00:25:33] They brought 100 businesses in 2019 alone. 

Alec: [00:25:37] Yeah, yeah. Just buying the idea is that they will keep growing. The market definitely expects them to keep growing with pricing it at a 100 pay. 

Bryce: [00:25:46] Well, yeah, I only imagine that there's going to be more and more of these. These niche companies evolve as tech improves and like, it's not. It's certainly not a dying industry.

Alec: [00:25:54] Yeah. And I think the key thing is, like a lot of the things that have enabled these businesses are only continuing, you know, back in the day, a lot of these niche businesses wouldn't have been able to get up because they would have had to run their own servers. And, you know, like build their own, you know, backend databases like all that stuff, all that like really technical stuff that made building technology companies difficult. But now that's all been, I guess, automated or, you know, put on the cloud. And so people who want to build a library software platform business can just focus on solving the needs of the library operators and not worrying about like building a proper tech stack and all of that stuff. And I think that has just enabled so many more niche businesses, and it's brought cost down to enable so many more of these niche businesses to be profitable. So I think it's only going to head in one direction in terms of more niche businesses. The key question is, can Constellation be the one to acquire the good ones because more and more companies have realised the play here? Yeah. And so we've seen a number of competitors emerge that do exactly the same thing roll up niche software businesses. We've also seen traditional private equity and hedge funds move into this space a little bit, but also we've seen a new breed of private equity called micro pay that again try and do something similar. They use that private equity playbook of, you know, leveraged buyouts and turnarounds and all of that stuff for private companies. But they do it at a much smaller level and they do it with much smaller companies. And so there's more and more competition for deals. And you know what happens when there's competition for deals, the price of the deal goes up. And then the question is, is the deal still a good deal if you're paying double what you expect to do or whatever? But yeah, for me, I just think this is a coal company. I think this is like an example of someone who for 15 years since listing has just been doing killing it, doing it and has created so much value and so many people don't know about it. 

Bryce: [00:28:06] Unbelievable. Well, I can understand why you want to get access to it. Ren. So shout out to any of the brokers here in Australia who don't have Canada on the platform. Get it on purely just because of this company. 

Alec: [00:28:19] Well, yeah, not purely because of this company. But maybe we'll just keep talking about great Canadian companies until, say, what happened? 

Bryce: [00:28:25] Yeah. Well, it's yeah, pretty amazing company. Massive expectations from the market on a hundred pay, but maybe it will one day get their bid come into that value. Who knows? So we'll put that up on online and we'll link this episode to it. And a reminder that if you want to check, check out any of the other stock pictures that we've done here or that our community members have done, or that any of our experts have done. Head to our website Equity Mates dot com and you can listen to them and have a look at the past performance of them as well, whether or not we've actually done alright. A reminder this is not a buy hold or so I guess we're in. That does bring us to the end of our episode today. Plenty more content coming this week. On Thursday, we are sitting down with the first of our guests to talk through the Sown Hearts and minds conference that's coming up. Don't want to reveal who it is because we've got some exciting guests, but stay tuned for that on Thursday. A bonus episode coming out later in the week and then a big week of ASX Investor Day next week. So plenty happening at Equity Mates Media. We'll pick it up on Thursday. Ren. Hey, thanks for listening to this episode of Equity Mates. We love hearing from you, so drop us a line at contact@equitymates.com or even better, go to your podcast player and leave a five star review. Also, a reminder that the Equity Mates content train doesn't stop when you've run out of episodes to binge. We've got a brand new website, a Facebook discussion group where on Instagram, YouTube and slowly making our way as an influencer on Tik-tok. Well, that's Ren. So come and say hello and join the community. We'd love to welcome you. Until next time.