The Analyst’s Edge

Memo Book
Fall 2024

1
LEGAL DISCLAIMER

NOT INVESTMENT ADVICE

The information contained herein is provided for informational and educational purposes only and
should not be construed as investment advice or a recommendation to buy or sell any security. The
opinions expressed are those of the authors as of the date of publication (December 4, 2024) and
are subject to change without notice. There is no guarantee that any investment strategy discussed
will be successful. Past performance is not indicative of future results. The investment ideas and
strategies discussed herein may not be suitable for all investors.

NON-RELIANCE
The information has been obtained from sources believed to be reliable, but its accuracy and
completeness are not guaranteed. Investing involves risks, including the potential loss of principal.
This material should not be regarded as a research report, and you should conduct your own due
diligence before making any investment decisions. The authors and publishers are not engaged in
rendering legal, tax, accounting or other professional services. If such advice is required, the
services of a competent professional should be sought. The authors and publishers make no
representations or warranties with respect to the accuracy, applicability, fitness or completeness
of the contents herein. The author and publisher shall not be liable for any damages arising from
the use of this material. All content is provided "as is" without any warranties, expressed or implied.
By accessing this material, you agree to keep the information contained herein confidential and not
reproduce or redistribute it, in whole or in part, to any other person without the prior written
consent of the author and publisher.

2
Table of Contents
Arch Capital Group Ltd. (ACGL) / Recommendation: Long ............................................................................ 4
First Service Corporation (FSV) / Recommendation: Long........................................................................... 17
MercadoLibre, Inc. (MELI) / Recommendation: Long .................................................................................... 39
Otis Worldwide Corp (OTIS) / Recommendation: Long ................................................................................ 50
SBA Communications Corp (SBAC US) / Recommendation: Short ............................................................. 71
Sirius XM Holdings Inc (SIRI) / Recommendation: Long ............................................................................... 90
Tesla, Inc. (TSLA) / Recommendation: Long ............................................................................................... 103
Ubiquiti Inc. (UI) / Recommendation: Long .................................................................................................. 115

3
Arch Capital Group Ltd. (ACGL) / Recommendation: Long
Analyst: Andrew Meylan
Email: [email protected]

4
 Arch Capital Group, Long Equity Memo, November 2024

“Another Season of Severe Southeastern Hurricanes and Western Wildfires

Further Constrains Insurance Availability for US Businesses and Homeowners”

5
 Arch Capital Group, Long Equity Memo, November 2024
Recommendation: Multi-Year LONG ACGL / SHORT SPSIINS index to capture ACGL alpha without insurance cycle risk.
Financial Summary + Base Case Forecast
Capital Structure Financial Summary Forecast & Implied Valuation Multiples →
Target Price $129.99 FY2021 FY2022 FY2023 FY2024 FY2025 FY2026
Share price $95.69 GWP 12,469 15,334 18,411 21,912 25,391 29,488
52W High $116.47 Insurance 5,868 6,931 7,911 8,812 9,958 11,253
% of 52W High 82% Reinsurance 5,094 6,948 9,113 11,733 14,080 16,896
52W Low $72.85 Mortgage 1,508 1,455 1,387 1,367 1,353 1,339
NWP 8,664 11,077 13,468 15,917 19,649 22,786
% y/y 26% 28% 22% 18% 23% 16%
Consensus NWP 15,918 19,159 20,467
Diluted S/O 374.7 % ∆ 0% 3% 11%
Market Cap $35,856.7 NEP 7,750 9,678 12,440 14,782 18,678 21,613
(+) Net Debt $1,702.0 % y/y 21% 25% 29% 19% 26% 16%
(+) Pref / Other $830.0 % Combined Ratio 84.3% 81.6% 79.3% 81.5% 81.9% 82.4%
Enterprise Value $38,388.7 Consensus CR 81.5% 84.2% 82.8%
%∆ 0% 2% 0%
Underwriting Income 1,218 1,783 2,581 2,733 3,386 3,807
Net Invest. Inc. + Gains 769 (166) 858 1,886 2,070 2,479
Consensus NII + Gains 1,795 1,551 1,343
Current Valuation / Liquidity %∆ 5% 33% 85%
T90D Daily Volume 1.77 NOPAT 1,859 1,537 4,312 4,219 4,965 5,720
P/E 7.29 x Net Income 2,093 1,436 4,403 3,604 4,450 5,204
Fwd P/E 12.80 x EPS 3.58 4.87 8.45 9.44 11.62 13.58
P/B 1.93 x y/y Growth 164% 36% 73% 12% 23% 17%
Total Debt / Capital 10.9% Consensus EPS 9.33 9.08 10.19
Net Debt / EBITDA 0.50 x % ∆ 1% 28% 33%
EBIT / Interest 26.30 x BVPS 31.76 31.99 46.26 53.62 64.94 79.78
Short Interest % Float 1.39% y/y Growth 6% 1% 45% 16% 21% 23%
Common Dividend Yield n/a ROE 11% 15% 18% 18% 18% 17%
P/E 8.55 x 16.78 x 11.59 x 10.71 x 8.71 x 7.44 x
P/B 1.31 x 1.85 x 2.13 x 1.89 x 1.56 x 1.27 x
Return Profile (FY 2026) BVPS P/B Multiple Mkt Cap Discount Rate PV Per Share Upside/(Downside) % Expected Upside/Downside
Bull $87.24 2.30 x $75,185.3 8% $64,459.3 $172.0 80% 36%
Base $79.78 1.95 x $58,289.1 8% $49,973.5 $133.4 39%
Bear $65.76 1.50 x $36,962.3 8% $31,689.2 $84.6 -12%
Big Picture Thesis
We are currently 7 years into a hard P&C market. A normal hard cycle is 2-4 years. The fundamental driver of the hard market – elevated
catastrophe losses – remains intact and thus the hard market should persist. Specialty E&S insurers are taking share within P&C insurance as
standard players tighten underwriting and E&S players price on freedom of rate. The reinsurance cycle has lagged the insurance cycle and
has more runway. Given ACGL’s exposure to both insurance and reinsurance markets, the Company is best positioned for outperformance.

Why the Opportunity Exists / What the Bears (Incorrectly) Believe

Based on prior cycles’ durations, the hard market is nearing its end and will soon turn soft. Insurance and reinsurance are commodities;
ACGL’s valuation is unattractive given its long-term EPS growth potential is muted and ROE should converge back to cost of equity.

Key Investment Factors / What We Believe

Will the hard P&C insurance market persist, and will E&S players continue to gain share and outperform?
• In 2023, insured losses from CAT reached $108B, the fourth consecutive year losses exceeded $100B. In 1H2024, insured CAT
losses reached $60B, which is 62% higher than 10Yavg. From 2017 to 2022 E&S share grew from 7% to 12% of total US P&C
premiums and accounts for 20%+ of commercial lines premium. Climate change is recognized to be a key driver of elevated CAT
losses and 2024 is on track to be the hottest year on record as warming hits 1.5C above pre-industrial levels.
Will ACGL widen coverage and increase rates in reinsurance to drive continued growth?
• P&C Reinsurance premium growth has under paced P&C insurance premiums. ACGL’s property facultative reinsurance group and
other specialty P&C lines are well positioned to take rate and share as its insurers need its offering to maintain their own profitability.
Will ACGL maintain structurally better margins?
• Scrubbing the book during the hard market has left ACGL with a cleaner risk profile that is more adequately priced to sustain the
inevitable losses that continue to drive the hard market. Additionally, higher rates are a durable tailwind to net investment income.
Will the Market reward ACGL with a higher valuation if market conditions and performance persist?
• My case studies and trading comps indicate that premium growth and combined ratios are rewarded with premium valuations.
However, ACGL may be awarded a slight discount due to reinsurance mix, which trades at a discount to E&S insurance comps.

6
 Arch Capital Group, Long Equity Memo, November 2024
Company Snapshot: Reinsurance & Insurance dominate mix, tilted toward Property, Property Cat, Marine, & Other Niche

• Arch Capital Group Ltd. is a global leader in specialty insurance, reinsurance, & mortgage insurance with $13.5B 2023 NWP.
• Arch is Bermuda exempted S&P 500 constituent with $23B in capital and a $43B investment portfolio as of 3Q2024.
• Arch focuses on SMB commercial segments and goes to market primarily via an independent broker network.

Industry Snapshot & Competitive Landscape: ACGL is a top player with broker GTM aligned to large market opportunity

• Specialty insurance is taking share within the overall P&C market as standard lines trim coverage with higher loss rates from
catastrophe events, from 4% of P&C DWP in 2001 to 12% in 2022
• 60% of 2023 specialty insurance revenue was generated through broker channels, where ACGL generates majority of GWP.
• 59% of 2023 specialty insurance revenue was generated from business customers (by end user count, dollar figure even higher)
o Arch focuses on SMBs, a dislocated and inefficient niche within commercial accounts. This supports pricing and book
granularity as small specialty accounts drive broad-based growth

7
 Arch Capital Group, Long Equity Memo, November 2024
Key Investment Factors

1. Will the hard P&C insurance market persist, and will E&S players continue to gain share and outperform?

• Our view is that the hard market will persist, driven mainly by continued elevated catastrophe losses with a further boost
to results from other “hard-to-place” niche areas like cyber and a rebounding casualty market.
1. Natural CATs are becoming more frequent, severe, and costly
o Of the top 10 costliest hurricanes in the US, 5 were in the current hard cycle and 2 of the top 3 were in the 2020s.
o Of the top 10 costliest wildfires, 9 were in the current hard cycle and 4 were in the 2020s.

2. Accordingly, standard carriers are tightening underwriting, paving the way for E&S to take market share

On a blended basis, E&S pricing is expected to be up MSD in 2025. The overall E&S market (units) is growing 11% CAGR. The
base case contemplates a modest 13% y/y growth rate for Insurance GWP. The bull case contemplates achievable 20% growth.

8
 Arch Capital Group, Long Equity Memo, November 2024
2. Will ACGL widen coverage and increase rates in reinsurance to drive continued growth?

• Our view is that ACGL’s Reinsurance business will capture on the dislocation of growing catastrophes and continue to
outperform in its niches of Property CAT, Property Ex-CAT, and “Other” (which includes cyber).
• LT premium growth for a representative composite of specialty P&C insurance and reinsurance [intuitively] is an equivalent ~10%
over the last 10Y. Reinsurance premium growth is materially below LT trend and on an upward trajectory, while Specialty P&C
growth is reverting to LT trend. An outsized 2024 CAT year will drive growth after a muted 2023 CAT year drove modest gains.
• Reinsurance has systematically underpriced CAT risk in the last 12-24 months. With its clients’ (insurers) premium growth,
reinsurers have strong pricing power and rationale to increase rates – you are already seeing the positive inflection in pricing. Our
view is that it will return to long-term trend.
o New company formation (additional supply) is depressed, and demand remains strong
▪ Management says the company has a “big play” in property reinsurance and is also especially excited about
casualty, as noted on the 3Q24 call
▪ Reinsurance NWP growth surprised 10% to the upside in 3Q24. Similar trend seen at WRB, a firm with much
less business mix / focus on reinsurance

Qtrly TTM Specialty P&C Insurance Premium % y/y

(ACGL, WRB, KNSL, AFG, AXS, MKL, RLI, PLMR, SKWD)
25%

20%

15%

10%

5%

0%
9/1/2016
12/1/2015
3/1/2016
6/1/2016

12/1/2016
3/1/2017
6/1/2017
9/1/2017
12/1/2017
3/1/2018
6/1/2018
9/1/2018
12/1/2018
3/1/2019
6/1/2019
9/1/2019
12/1/2019
3/1/2020
6/1/2020
9/1/2020
12/1/2020
3/1/2021
6/1/2021
9/1/2021
12/1/2021
3/1/2022
6/1/2022
9/1/2022
12/1/2022
3/1/2023
6/1/2023
9/1/2023
12/1/2023
3/1/2024
6/1/2024
9/1/2024
TTM Total % y/y Average

Qtrly TTM Specialty P&C Reinsurance Premium % y/y

(AXS, BRK, CB, EG, HVR, MKL, MURGY, RNR, SCR, SREN, WRB)
30%
25%
20%
15%
10%
5%
0%
12/1/2015
3/1/2016
6/1/2016
9/1/2016
12/1/2016
3/1/2017
6/1/2017
9/1/2017
12/1/2017
3/1/2018
6/1/2018
9/1/2018
12/1/2018
3/1/2019
6/1/2019
9/1/2019
12/1/2019
3/1/2020
6/1/2020
9/1/2020
12/1/2020
3/1/2021
6/1/2021
9/1/2021
12/1/2021
3/1/2022
6/1/2022
9/1/2022
12/1/2022
3/1/2023
6/1/2023
9/1/2023
12/1/2023
3/1/2024
6/1/2024
9/1/2024

-5%

TTM Total % y/y Average

9
 Arch Capital Group, Long Equity Memo, November 2024

CATALYST: Increases take place in the first quarter of the year at 1/1 renewal.

• Management is guiding to 5% market growth in Property CAT. Pricing should hold, with management – who is typically
very conservative on guidance - noting price will likely surprise to the upside. Research indicates surprise to upside likely
• For Casualty, management says rate is above trend and they are constructive on the market, indicating they will lean in
on growth in 2025 and 2026 to bolster growth. Pricing is up DD% currently with management indicating a unit growth
opportunity on top of that
• The base case contemplates a 20% growth rate in Reinsurance GWP with a 25% growth rate in the bull case
o Note, since 2019, Reinsurance GWP has grown an average 34% y/y including a 29% y/y increase in 3Q2024 –
surprising analysts and indicating the Company still has an attractive growth opportunity in Reinsurance as it
is messaging

3. Will ACGL maintain structurally better margins?

1. Combined Ratio Stays Low with Better Pricing and Risk Selection in Hard Market
• Research suggests the composition and rate adequacy has improved in ACGL’s insurance underwriting approach since the 2017-
2020 period where ACGL’s combined ratio exceeded 100%
o Note this was in the insurance segment only and was likely due to soft market “hangover”
o Since that time, ACGL has increased its use of data and analytics in supporting underwriting efforts. Today, 80% of North
American submissions go through ML triage models before reaching employees (90% in the UK).
o Experts note that ACGL takes the hard market opportunity to “scrub the book” so the book today is much cleaner and
more adequately priced

Combined Ratio by BU
120%

100%

80%

60%

40%

20%

0%
FY2014 FY2015 FY2016 FY2017 FY2018 FY2019 FY2020 FY2021 FY2022 FY2023
-20%
Insurance combined ratio, % Reinsurance combined ratio, % Mortgage combined ratio, % Total Combined Ratio, % Bad

10
 Arch Capital Group, Long Equity Memo, November 2024
Investment Income Uplift Boosts EPS

• ACGL’s investment team is best in class with strong leadership and has demonstrated outperformance versus peers. Despite this,
consensus confusingly forecasts net investment performance declining. This does not math and helps drive upside in my view
• NMY 4.5% above 4.3% book yield with expectations for normalizing yield curve to push duration beyond 2.9 yrs to “lock in” rate
• All cases assume that cash flow from operations is reinvested in the investment portfolio with a 88% / 12% fixed income / equity
method split, in line with current allocation.
• Base and bull cases both assume 4.5% NMY on FI investments, bear case assumes 4.25% NMY. All cases assume 5% return on
equity portfolio, below 7% LT average.

Yield Curve as of 11/8/2024

4.8

4.6
ppts yield

4.4

4.2

3.8
1 2 3 4 5 12 24 36 60 84 120 240 360
months maturity

4. Will the Market reward ACGL with a higher valuation if market conditions and performance persist?

• Our view is, “Probably…”

o ACGL has put up great numbers (great premium growth and great combined ratios). That should be rewarded – see comps
below.
o BUT – reinsurers trade at a discount to insurers. Investors using a SOTP valuation approach would likely discount a large
part of ACGL’s revenues
o For this reason, in the Base Case, we cannot assume any multiple expansion. ACGL’s results will have to speak for
themselves (and carry the Base Case upside).

11
 Arch Capital Group, Long Equity Memo, November 2024

Specialty Insurance
Ticker LTM Rev Growth LTM CR % LTM ROE L5Y Rev Growth P/B P/E NTM P/E
KNSL 36% 79% 35% 40% 7.96 x 27.49 x 27.35 x
WRB 11% 90% 21% 11% 2.81 x 15.28 x 14.31 x
AMSF 3% 91% 19% -3% 3.30 x 17.19 x 23.83 x
RLI 23% 84% 28% 14% 19.48 x 28.09 x 4.42 x
MKL 13% 98% 19% 17% 1.31 x 9.10 x 17.23 x
JRVR 19% 97% 3% -2% 0.43 x 6.61 x 4.75 x
GBLI -23% 6% -4% 0.70 x 12.97 x 12.03 x
AXS 6% 101% 12% 3% 1.30 x 11.31 x 7.35 x
EG 16% 91% 21% 16% 1.12 x 5.72 x 5.98 x
CB 13% 88% 16% 11% 1.84 x 11.95 x 12.77 x
PLMR 40% 76% 19% 40% 4.22 x 24.55 x 18.09 x
AFG 8% 91% 21% 1% 2.54 x 12.71 x 11.84 x

Median 13% 91% 19% 11% 2.19 x 12.84 x 12.40 x

Average 14% 89% 18% 12% 3.92 x 15.25 x 13.33 x
ACGL 33% 93% 30% 21% 1.93 x 7.29 x 11.97 x

Pureplay Reinsurance
Ticker LTM Rev Growth LTM CR % LTM ROE L5Y Rev Growth P/B P/E NTM P/E
RNR 59% 80% 32% 34% 1.46 x 4.95 x 7.64 x
SREN -6% 90% 16% 0% 1.84 x 11.64 x 11.43 x
MURGY 6% 19% 2% 2.07 x 10.96 x 10.81 x
HVR 6% 20% 6% 2.77 x 14.40 x 12.57 x

Median 6% 85% 20% 4% 1.96 x 11.30 x 11.12 x

Average 16% 85% 22% 10% 2.04 x 10.49 x 10.61 x
ACGL 33% 82% 30% 21% 1.93 x 7.29 x 11.97 x

12
 Arch Capital Group, Long Equity Memo, November 2024
Competitive Advantages

• Customer Captivity through broker network

o Brokers appreciate ACGL’s best in class claims group and recommend ACGL coverage to clients at slightly higher cost
of coverage, according to expert commentary from formers. Corroborated by management commentary: “People want to
deal with us,” CEO, 1Q23
▪ Insurance group is organized regionally to align with broker & producer relationships. McNeil is a captive MGA.
o Lloyd’s presence gives ACGL exposure to that fast-growing market in an efficient way. Improved relationships with
Lloyd’s brokers has been driving upside.

Management Evaluation

• Nonpromotional – ACGL has not surprised down the downside on EPS since 2019. Avg. ann. surprise upside to EPS of 10.2%
• Conservative – ACGL has had negative (favorable) reserve PYD in all 3 segments every year, averaging (1%), (10%), (14%) in
Insurance, Reinsurance, Mortgage, respectively, over L15Y.
o YTD 3Q24 PYD was (1%), (2%), (26%), respectively
o E&S comps like EG, JRVR are by contrast seeing ~25%-40% PYD
• Incentivized – CEO pay is 75% performance based, 13% time-restricted shares, and 12% fixed. Other NEOs have similar mix.
KPIs for performance comp are ROE and 3-year TBVPS growth with a TSR modifier
• Experienced – New CEO & President has been with ACGL since founding in 2001, joining initially as an underwriter. He currently
also serves as CUO, a position held since 2021. He headed the Insurance division 2017-2021 and was CEO of Arch Reinsurance
Group 2014-2017. He is an actuary. Both Co-Presidents Gansberg & Rajeh have been with ACGL since 2001

Risk & Pre-Mortem

• 1/1/2025 renewal for reinsurance is not a big improvement over 2024 rates
• New CEO Papadopoulo is unable to guide the company through cycles as effectively as outgoing CEO Grandisson
o Papadopoulo was CEO of the Insurance division from 2017-2020 when the Insurance division CR was 100%+
• Insurance & Reinsurance markets soften as competition enters – in line with consensus
• Government steps in to do more with catastrophe losses, limiting TAM for future unit growth and rate increases for E&S players
• Mortgage originations remain depressed and inflationary pressures under DJT administration keep mortgage rates high and
household wealth stretched.

Maintenance Plan / Monitoring / Signposts

• Exploratory position before 1/1/2025 renewal – if renewal is muted, thesis is broken

• Carefully track combined ratio. Increased combined ratio indicates book is not as clean / adequately priced as expected
• Carefully track pricing
o Stamping data from CA & FL gives leading indicator on insurance pricing
• Track mortgage originations
o This is non-modelled upside to the thesis. Add to position on mortgage originations, especially at high LTV (>80%)

13
 Arch Capital Group, Long Equity Memo, November 2024
Model Exhibits
Active Case: Base Forecast →
Period FY2021 FY2022 FY2023 Q1-2024 Q2-2024 Q3-2024 Q4-2024 FY2024 Q1-2025 Q2-2025 Q3-2025 Q4-2025 FY2025 FY2026
Income Statement
GWP 12,469 15,334 18,411 5,934 5,383 5,443 5,152 21,912 6,900 6,241 6,297 5,953 25,391 29,488
Insurance 5,868 6,931 7,911 2,126 2,102 2,341 2,243 8,812 2,402 2,375 2,645 2,535 9,958 11,253
Reinsurance 5,094 6,948 9,113 3,467 2,941 2,763 2,562 11,733 4,160 3,529 3,316 3,075 14,080 16,896
Mortgage 1,508 1,455 1,387 341 340 339 347 1,367 338 337 336 343 1,353 1,339
NWP 8,664 11,077 13,468 4,085 3,781 4,047 4,004 15,917 5,322 4,826 4,882 4,619 19,649 22,786
% y/y 26% 28% 22% 19% 10% 21% 23% 18% 30% 28% 21% 15% 23% 16%
NEP 7,750 9,678 12,440 3,422 3,565 3,970 3,825 14,782 5,043 4,586 4,647 4,402 18,678 21,613
% y/y 21% 25% 29% 19% 20% 22% 14% 19% 47% 29% 17% 15% 26% 16%

Acquisition Cost 1,240 1,740 2,312 607 633 681 669 2,590 908 818 829 780 3,335 3,901
% NWP 14% 16% 17% 15% 17% 17% 17% 16% 17% 17% 17% 17% 17% 17%
% NEP 16% 18% 19% 18% 18% 17% 17% 18% 18% 18% 18% 18% 18% 18%
Claims Cost 4,326 5,028 6,246 1,728 1,827 2,403 2,042 8,000 2,749 2,486 2,524 2,378 10,138 11,847
% NWP 50% 45% 46% 42% 48% 59% 51% 50% 52% 52% 52% 51% 52% 52%
% NEP 56% 52% 50% 50% 51% 61% 53% 54% 55% 54% 54% 54% 54% 55%
Ops Cost 966 1,128 1,301 363 346 353 398 1,460 464 441 467 448 1,819 2,057
% NWP 11% 10% 10% 9% 9% 9% 10% 9% 9% 9% 10% 10% 9% 9%
% NEP 12% 12% 10% 11% 10% 9% 10% 10% 9% 10% 10% 10% 10% 10%
Underwriting Cost 6,532 7,895 9,859 2,698 2,806 3,437 3,108 12,049 4,120 3,746 3,820 3,606 15,292 17,806
% Combined Ratio 84% 82% 79% 79% 79% 87% 81% 82% 82% 82% 82% 82% 82% 82%

Underwriting Income 1,218 1,783 2,581 724 759 533 717 2,733 923 840 827 796 3,386 3,807
Net Investment Income 389 497 1,023 327 364 399 376 1,466 445 435 449 450 1,780 2,135
Equity Gains (Losses) 380 (663) (165) 67 122 169 62 420 73 71 73 73 290 344
NOP 1,987 1,617 3,439 1,118 1,245 1,101 1,155 4,619 1,440 1,347 1,350 1,319 5,456 6,286

Tax 129 80 (873) 101 97 98 104 400 130 121 121 119 491 566
Tax Rate 6% 5% -25% 9% 8% 9% 9% 9% 9% 9% 9% 9% 9% 9%
NOPAT 1,859 1,537 4,312 1,017 1,148 1,003 1,051 4,219 1,311 1,225 1,228 1,200 4,965 5,720
Other Expense (Income) (235) 100 (91) (93) (111) 25 0 (179) 0 0 0 0 0 0
Non-GAAP Adj 658 (404) 1,202 177 278 216 123 794 138 126 126 126 515 516
Net Income 2,093 1,436 4,403 1,110 1,259 978 928 3,604 1,173 1,100 1,103 1,074 4,450 5,204

EPS 3.58 4.87 8.45 2.45 2.57 1.99 2.43 9.44 3.06 2.87 2.88 2.80 11.62 13.58
y/y Growth 164% 36% 73% 42% 34% -14% -2% 12% 25% 12% 44% 16% 23% 17%
BVPS 31.76 31.99 46.26 48.69 51.98 56.09 53.50 53.62 56.45 59.30 62.16 64.94 64.94 79.78
y/y Growth 6% 1% 45% 40% 42% 48% 16% 16% 16% 14% 11% 21% 21% 23%
ROE 11% 15% 18% 20% 20% 14% 18% 18% 22% 19% 19% 17% 18% 17%

14
 Arch Capital Group, Long Equity Memo, November 2024
Active Case: Bull Forecast →
Period FY2021 FY2022 FY2023 Q1-2024 Q2-2024 Q3-2024 Q4-2024 FY2024 Q1-2025 Q2-2025 Q3-2025 Q4-2025 FY2025 FY2026
Income Statement
GWP 12,469 15,334 18,411 5,934 5,383 5,443 5,152 21,912 7,144 6,458 6,512 6,155 26,269 31,585
Insurance 5,868 6,931 7,911 2,126 2,102 2,341 2,243 8,812 2,466 2,438 2,716 2,602 10,222 11,858
Reinsurance 5,094 6,948 9,113 3,467 2,941 2,763 2,562 11,733 4,334 3,676 3,454 3,203 14,667 18,333
Mortgage 1,508 1,455 1,387 341 340 339 347 1,367 344 343 342 350 1,380 1,394
NWP 8,664 11,077 13,468 4,085 3,781 4,047 4,004 15,917 5,509 4,993 5,047 4,775 20,323 24,393
% y/y 26% 28% 22% 19% 10% 21% 23% 18% 35% 32% 25% 19% 28% 20%
NEP 7,750 9,678 12,440 3,422 3,565 3,970 3,825 14,782 5,218 4,742 4,803 4,549 19,313 23,124
% y/y 21% 25% 29% 19% 20% 22% 14% 19% 52% 33% 21% 19% 31% 20%

Acquisition Cost 1,240 1,740 2,312 607 633 681 669 2,590 839 756 765 720 3,080 3,729
% NWP 14% 16% 17% 15% 17% 17% 17% 16% 15% 15% 15% 15% 15% 15%
% NEP 16% 18% 19% 18% 18% 17% 17% 18% 16% 16% 16% 16% 16% 16%
Claims Cost 4,326 5,028 6,246 1,728 1,827 2,403 2,042 8,000 2,743 2,479 2,516 2,370 10,108 12,230
% NWP 50% 45% 46% 42% 48% 59% 51% 50% 50% 50% 50% 50% 50% 50%
% NEP 56% 52% 50% 50% 51% 61% 53% 54% 53% 52% 52% 52% 52% 53%
Ops Cost 966 1,128 1,301 363 346 353 398 1,460 373 360 385 371 1,489 1,716
% NWP 11% 10% 10% 9% 9% 9% 10% 9% 7% 7% 8% 8% 7% 7%
% NEP 12% 12% 10% 11% 10% 9% 10% 10% 7% 8% 8% 8% 8% 7%
Underwriting Cost 6,532 7,895 9,859 2,698 2,806 3,437 3,108 12,049 3,954 3,595 3,666 3,461 14,677 17,676
% Combined Ratio 84% 82% 79% 79% 79% 87% 81% 82% 76% 76% 76% 76% 76% 76%

Underwriting Income 1,218 1,783 2,581 724 759 533 717 2,733 1,264 1,147 1,137 1,087 4,636 5,449
Net Investment Income 389 497 1,023 327 364 399 376 1,466 456 449 466 468 1,839 2,295
Equity Gains (Losses) 380 (663) (165) 67 122 169 62 420 74 73 76 76 299 368
NOP 1,987 1,617 3,439 1,118 1,245 1,101 1,155 4,619 1,795 1,669 1,678 1,632 6,774 8,111

Tax 129 80 (873) 101 97 98 104 400 162 150 151 147 610 730
Tax Rate 6% 5% -25% 9% 8% 9% 9% 9% 9% 9% 9% 9% 9% 9%
NOPAT 1,859 1,537 4,312 1,017 1,148 1,003 1,051 4,219 1,633 1,519 1,527 1,485 6,164 7,381
Other Expense (Income) (235) 100 (91) (93) (111) 25 0 (179) 0 0 0 0 0 0
Non-GAAP Adj 658 (404) 1,202 177 278 216 123 794 138 126 126 126 515 516
Net Income 2,093 1,436 4,403 1,110 1,259 978 928 3,604 1,495 1,393 1,402 1,359 5,649 6,865

EPS 3.58 4.87 8.45 2.45 2.57 1.99 2.43 9.44 3.90 3.64 3.66 3.55 14.75 17.92
y/y Growth 164% 36% 73% 42% 34% -14% -2% 12% 59% 41% 84% 46% 56% 22%
BVPS 31.76 31.99 46.26 48.69 51.98 56.09 53.50 53.62 57.30 60.91 64.54 68.07 68.07 87.24
y/y Growth 6% 1% 45% 40% 42% 48% 16% 16% 18% 17% 15% 27% 27% 28%
ROE 11% 15% 18% 20% 20% 14% 18% 18% 27% 24% 23% 21% 22% 21%

15
 Arch Capital Group, Long Equity Memo, November 2024
Active Case: Bear Forecast →
Period FY2021 FY2022 FY2023 Q1-2024 Q2-2024 Q3-2024 Q4-2024 FY2024 Q1-2025 Q2-2025 Q3-2025 Q4-2025 FY2025 FY2026
Income Statement
GWP 12,469 15,334 18,411 5,934 5,383 5,443 5,152 21,912 6,377 5,772 5,826 5,510 23,485 25,199
Insurance 5,868 6,931 7,911 2,126 2,102 2,341 2,243 8,812 2,232 2,207 2,458 2,356 9,253 9,716
Reinsurance 5,094 6,948 9,113 3,467 2,941 2,763 2,562 11,733 3,814 3,235 3,039 2,819 12,907 14,197
Mortgage 1,508 1,455 1,387 341 340 339 347 1,367 331 330 329 336 1,326 1,286
NWP 8,664 11,077 13,468 4,085 3,781 4,047 4,004 15,917 4,921 4,466 4,519 4,277 18,183 19,488
% y/y 26% 28% 22% 19% 10% 21% 23% 18% 20% 18% 12% 7% 14% 7%
NEP 7,750 9,678 12,440 3,422 3,565 3,970 3,825 14,782 4,666 4,246 4,305 4,080 17,296 18,509
% y/y 21% 25% 29% 19% 20% 22% 14% 19% 36% 19% 8% 7% 17% 7%

Acquisition Cost 1,240 1,740 2,312 607 633 681 669 2,590 1,022 922 934 880 3,758 4,053
% NWP 14% 16% 17% 15% 17% 17% 17% 16% 21% 21% 21% 21% 21% 21%
% NEP 16% 18% 19% 18% 18% 17% 17% 18% 22% 22% 22% 22% 22% 22%
Claims Cost 4,326 5,028 6,246 1,728 1,827 2,403 2,042 8,000 2,791 2,531 2,577 2,430 10,329 11,122
% NWP 50% 45% 46% 42% 48% 59% 51% 50% 57% 57% 57% 57% 57% 57%
% NEP 56% 52% 50% 50% 51% 61% 53% 54% 60% 60% 60% 60% 60% 60%
Ops Cost 966 1,128 1,301 363 346 353 398 1,460 600 561 585 559 2,305 2,443
% NWP 11% 10% 10% 9% 9% 9% 10% 9% 12% 13% 13% 13% 13% 13%
% NEP 12% 12% 10% 11% 10% 9% 10% 10% 13% 13% 14% 14% 13% 13%
Underwriting Cost 6,532 7,895 9,859 2,698 2,806 3,437 3,108 12,049 4,413 4,014 4,097 3,868 16,392 17,617
% Combined Ratio 84% 82% 79% 79% 79% 87% 81% 82% 95% 95% 95% 95% 95% 95%

Underwriting Income 1,218 1,783 2,581 724 759 533 717 2,733 253 232 208 212 904 892
Net Investment Income 389 497 1,023 327 364 399 376 1,466 422 408 416 411 1,656 1,822
Equity Gains (Losses) 380 (663) (165) 67 122 169 62 420 69 67 68 67 271 296
NOP 1,987 1,617 3,439 1,118 1,245 1,101 1,155 4,619 743 707 692 690 2,832 3,011

Tax 129 80 (873) 101 97 98 104 400 67 64 62 62 255 271

Tax Rate 6% 5% -25% 9% 8% 9% 9% 9% 9% 9% 9% 9% 9% 9%
NOPAT 1,859 1,537 4,312 1,017 1,148 1,003 1,051 4,219 676 643 629 628 2,577 2,740
Other Expense (Income) (235) 100 (91) (93) (111) 25 0 (179) 0 0 0 0 0 0
Non-GAAP Adj 658 (404) 1,202 177 278 216 123 794 138 126 126 126 515 516
Net Income 2,093 1,436 4,403 1,110 1,259 978 928 3,604 538 517 504 502 2,062 2,224

EPS 3.58 4.87 8.45 2.45 2.57 1.99 2.43 9.44 1.41 1.35 1.32 1.31 5.38 5.81
y/y Growth 164% 36% 73% 42% 34% -14% -2% 12% -43% -47% -34% -46% -43% 8%
BVPS 31.76 31.99 46.26 48.69 51.98 56.09 53.50 53.62 54.80 56.12 57.42 58.70 58.70 65.76
y/y Growth 6% 1% 45% 40% 42% 48% 16% 16% 13% 8% 2% 10% 9% 12%
ROE 11% 15% 18% 20% 20% 14% 18% 18% 10% 10% 9% 9% 9% 9%

16
First Service Corporation (FSV) / Recommendation: Long
Analyst: Jack Ran
Email: [email protected]

17
Jack Ran

First Service Corp

Consolidating industries whilst growing the TAM – homeowners win, condo boards win, and
most importantly FSV shareholders win!

18
Jack Ran
FSV Investment Memo
Price: $187.17 Mkt Cap: $ 8,447 FYE Dec FY21 FY22 FY23 FY24E FY25E FY26E
52 Wk High: $192.75 Debt: 1,265 Revenue $3,249 $3,746 $4,335 $5,095 $5,633 $6,217
52 Wk Low: $141.34 Leases 30 YoY % Chg 15.3% 15.7% 17.5% 10.6% 10.4%
FD Shrs OS: 45.1 Min. Int.: 427 Adj. EBITDA $327 $352 $416 $505 $557 $631
Float Shrs: 37.1 Cash: 218 Margin 10.1% 9.4% 9.6% 9.9% 9.9% 10.1%
Daily Vol ($mils): $ 15 Ent. Val.: $ 9,951 Consensus Revenue $4,335 $5,141 $5,517 $5,826
YoY % Chg 18.6% 7.3% 5.6%
Consensus EBITDA $509 $549 $584
Shrt Int (%Float): 0.3% Margin 9.9% 10.0% 10.0%
Dividend Yld: 0.5% Debt/EBITDA: 2.1x EV/EBITDA (JR View) 19.7x 17.9x 15.8x

Business Description: First Service Corporation (“FSV”) operates in two core segments: First Service Residential (“FSR”)
and First Service Brands (“FSB”). FSR is the largest provider of residential property management services in the United
States (42% of revenue). FSB provides essential property services such as restoration (27% of revenue), fire safety (11%
of revenue), roofing (8% of revenue), and other services to residential and commercial customers. FSV’s long stated goal
has been to become a “global provider of diversified real estate services” and it has been pursuing this goal for over the
past 30 years. It has a sticky and captive customer base in its FSR segment that it can then cross-sell services from its FSB
segment, which has led the Company to generate an organic revenue CAGR of 7.4% over the last 9 years.
Framing: Compounder + Consolidator
Investment Thesis: FSV is a long because:
• Jay Hennick is an entrepreneurial genius – his track record of compounding capital is incredible, and he has
created not one but two publicly traded multi-billion-dollar companies. He empowers the people he manages,
gives them autonomy to be entrepreneurial, and incentivizes them to think like owners. The result is a
management team that has stayed within the FSV ecosystem for decades and embodies the values that Hennick
built FirstService on
o Expertise: managing and developing leaders, growing service businesses, value creating M&A
o End game: FSV will leverage its captive property management relationships and cross sell its FSB
essential services and take a greater % of the homeowner association’s budget
o Expectations: FSV has beaten revenue estimates every quarter for the past 5 years and missed quarterly
EBITDA estimates only twice (n = 20)
o Incentives: Jay owns 6% of FSV which is ~$500M of shares
• Organic growth potential continues to be attractive – FSV grown consolidated organic revenue at a 7.1% CAGR
from 2014 – 2023. Its operating prospects remain more attractive than ever, which will allow FSV to continue to
be a strong organic compounder
o FSR will continue to benefit from rising assessments levied on homeowner associations, the continued
increase in new homes being built into associations (from 50% to 85% in last 6 years), and taking share
from less sophisticated mom-and-pop operators (~50% of organic growth has been driven by
competitive wins)
o Fire inspection is one of FSV’s oldest platform acquisitions (closed in April 2016) and has since generated
industry leading organic growth rates since acquisition close. The business has generated double digit
organic increases every year except for 2020 and 2021 whereas commercial market studies indicate the
industry is only growing at 5-6%. There remains continued runway for FSV to cross-sell Century Fire to its
FSR properties along with cross-sell different services to the tuck-in acquisitions it acquires

19
Jack Ran
o Restoration and Roofing are newer platform acquisitions which FSV expanded into and have similar
characteristics to fire safety; these are essential real restate service businesses that are non-deferrable.
Competition is on a local/regional level and primarily against less sophisticated mom-and-pop operators
• Inorganic whitespace is increasing with each platform acquisition – unlike other industries that become more
mature as the roll-up thesis plays out and the market consolidates, FSV has consistently expanded its whitespace
potential by acquiring into new verticals. Most recently it did this with its acquisition of Roofing Corp of America.
The market is extremely fragmented with an estimated total # of businesses in the U.S. between 100k – 110k,
generating industry revenues of $51 billion. The top 10 companies have a total market share of 11% which
means there is significant runway for FSV to use its acquisition playbook and consolidate the industry
o Our analysis shows that FSV has stayed disciplined and bought all its tuck-in acquisitions at an average
multiple of 6.7x with 13.5% of consideration coming from earnouts contingent on hitting predefined
metrics and 11.5% of the EV coming from the selling shareholder rolling into minority interest
How this plays out?
FSV continues to grow and compound both organically and inorganically. Over the next 1-2 years as PE backed peers face
financial distress and are near the end of their fund lives, they become forced sellers. FSV is the best positioned strategic
acquirer and has amply debt capacity to fund these acquisitions. FSV will continue to consolidate the industries they
already compete in along with expanding into tangential industries that are attractive (i.e. essential non-deferrable
business services, with reoccurring revenue, in fragmented industries).
Why does the opportunity exist?
• Dual listed company but is headquarter in Canada and only has $15M of volume traded a day (one of the lowest
for companies of that size) and zero U.S. bulge bracket coverage
• FSV competes in many different industries so it is hard to know which analyst should cover this business and who
has the expertise to do so – the analysts that do cover FSV have limited experience analyzing roll-ups
• Looking at each individual analysts’ research reports, they all under-forecast inorganic growth with figures
ranging from 0 – 2% per year even though historically FSV has generated mid to high single digit inorganic growth
rates (excluding platform acquisitions)
Signposts for sizing up:
• FSV acquires large distressed private equity backed platforms
• FSV accelerates spend on tuck-in opportunities
• FSV continues to consistently grow organically, demonstrating the industrial logic of consolidation
Signposts for trimming or exiting:
• Purchase multiples go up because of increased PE bidding activity, dragging down ROICs
• Organic growth rates slow down as competition intensifies
Key risks:
• FSV overpays for a platform acquisition, and it is dilutive to shareholders
• FSV acquires a business outside its circle of competence

20
Jack Ran
VAR Sheet

Contact Description Notes / Commentary

PE Investor in Call • Multiples have been very stable for the last 5 years. Aim for 8x blended
one of the multiple based on a mix of tuck-ins and larger platforms
largest PE • Most of the synergies come from cross-selling revenue synergies as opposed to
backed fire & cost synergies. It was uncommon in the industry for a site (location) to use one
life safety provider for all three of the services (extinguishers, suppression systems, and
platform sprinklers)
• Market studies that everyone commissioned indicates the perpetual organic
growth rate is 5-6%. 2-3% on price. 3-4% on volume. That is before cross-selling
operational improvements
• Leading platforms such as theirs are ahead of that because are taking share
from mom-and-pop competitors
Senior Call • YTD have acquired or signed under LOI $90M of EBITDA at an average multiple
Executive in of 8.2x. This is lower than multiples paid in years past of ~9x
leading PE • Acquisition multiples of big deals close to 10-11x. Smaller tuck-ins 4-5x. Does
backed fire & not include PF adjustments in that multiple
life safety • Smaller businesses generally have higher margins because they have no
platform corporate overhead costs. A small $5-$10M inspection business can be
operated with the owner, an admin, and a few technicians on staff. Much less
room for a platform to improve margins in a small well-operated business
• In larger businesses, they typically see EBITDA margins of 9-12% pre-acquisition
increasing to 17-20% post. (Note: assuming a 10x purchase multiple and
margins at the midpoint of these ranges, this means the platform increases
EBITDA 85% and brings down the purchase multiple to 5.4x)
• Long-term organic growth: pricing of 200-300 bps above inflation, market
growth of 1-2% from new buildings increasing the existing installed base, if you
are good, you get an extra 200 – 300 bps from market share gains. Double digit
organic growth rates for a leading platform is not unreasonable
Former Tegus (May 22, • “In terms of market positioning, they certainly positioned themselves as more
National Vice 2024) of a premium provider within the market. And their reputation was known for
President, managing those more complex, higher-end luxury type communities with lots
Strategy & of services available. I would say that the community type that FirstService
Operations at managed was sort of the average household and above, and they tried to stay
FirstService away the low end stuff like”
Corporation • “Land is getting more expensive, developers are getting bigger. They're trying to
develop more as many units as possible to get the most value out of that piece
of land. People want a lifestyle. They want to have amenities. They want to be
able to lock the door and travel and come back, and not have to worry about
cutting the grass and all that stuff. So I think a long-term trend for this industry
is strong. I think there's a lot of upside potential. And then all the ancillary
services that will come with that as time goes on”
Former Tegus (May 5, • “In terms of market positioning, they certainly positioned themselves as more
National Vice 2024) of a premium provider within the market. And their reputation was known for
President, managing those more complex, higher-end luxury type communities with lots
Strategy & of services available. I would say that the community type that FirstService
Operations at managed was sort of the average household and above, and they tried to stay
FirstService away the low end stuff like”
Corporation • “Land is getting more expensive, developers are getting bigger. They're trying to
develop more as many units as possible to get the most value out of that piece

21
Jack Ran
of land. People want a lifestyle. They want to have amenities. They want to be
able to lock the door and travel and come back, and not have to worry about
cutting the grass and all that stuff. So I think a long-term trend for this industry
is strong. I think there's a lot of upside potential. And then all the ancillary
services that will come with that as time goes on”
• “Generally, the larger the community with the more amenities that it has, the
better the margins. Higher margins and $ because you're bringing a higher level
of value-add service to the client. In the small communities where there's no
amenities and it's just a basic like we're doing your financials and we manage a
couple of vendors, and it's very commodity. It's like race to the bottom.”
Former Tegus (January • “I mean from just a pure management fee, we're all the same, give or take 1%
Executive 11, 2023) or 2%. You can't charge them all because they won't pay it. When a building
Managing goes out to RFP, for management, they will solicit three of four proposals, and
Director at the management fee. Everybody is basically within the same, then it comes
FirstService down to reputation and who do you know, but the fees are pretty much
Corporation standard”
• “If you have 20,000 units in Texas and you have a Paul Davis restoration
company that FirstService owns, they'll be able to feed leads to Paul Davis
because they have a captive audience. It's all part of their marketing and
branding strategy”
Associate Tegus • “If pricing is pretty similar across the board, maybe 5% variance here and there,
Property (February 2, it doesn't really matter if we go with someone who maybe is 5% more, if we
Manager at 2024) feel that they're better qualified to work on the building, but definitely if
Rubenstein someone's way out of left field with their pricing, we might throw out that bid”
Partners • “I'd say it's less than 5% of the overall operating budget of the property… It's
one of our most important services because the city requires us to inspect our
systems on an annual basis, and we are also required to have our vendors
submit evidence that we've inspected our systems to the city. So, I'd say it's
something we think about all the time”
Chief Executive Tegus (March • “Most companies, the standalones are one or the other [sprinkler, alarm, or
Officer at Altus 21, 2024) suppression]. Very few do both. However, from a market perspective,
Fire & Life customers would love to have one provider for both the alarm and sprinkler
Safety aspect of the business. So that's the first thing that I'd say. Second thing is that
as you start to look at consolidation and what's going on in the industry, that is
definitely something that is taking place. And that's why the Altus', the Pye-
Barkers, the Summits, the Sciens' and others”
• “There's still a lot of small mom-and-pop sub-30 million operators out there. If
you have something that's a 50-50 install/service, those multiples from what
I'm seeing and hearing, those are in the 5x to 7x range”
Chief Executive Tegus • “There's probably 70% of those companies are in the $1 million to $3 million
Officer at Altus (November 25, range. So then, you've got another 10% to 15% that are in the probably that $3
Fire & Life 2023) million to like $7 million range. And then, the air gets really thin when you get
Safety to $10 million and above. And then, it starts to get more and more narrow with
a very small percentage, north of $100 million”
• “Growth is 6-8% aka GDP plus. Driven by regulatory demands”
Vice President Tegus (June • “From a synergy perspective, when I'm looking at a lot of acquisitions, targets,
of Business 30, 2023) things of that nature, density is always key. And density, you get a lot of synergy
Development benefits from tech time and from what I will consider just overall market
at Marmic Fire awareness allows for just faster growth”
& Safety Co

22
Jack Ran
• “So, there is a lot of synergies from a revenue perspective if you are able to
expand the service offering because of the wallet share with existing
customers”
• “Typically, customer churn is very low with a price increase. Because they just
want to stick with whomever they know, and it's not an egregious amount.
They don't typically see any problem with it”
Former VP of Tegus (May 18, • “Typically they were doing 5x of EBITDA for the companies they were acquiring.
Global 2024) And the guy who was their head of strategy, and I had a lot of conversations…
Marketing at so I remember this guy telling me 5x was the sweet spot for them”
First Onsite • “I can't remember the exact numbers, but if you just combine like Servpro,
Property BELFOUR, ServiceMaster, like BluSky, like the top five or ten guys are still a very
Restoration small portion of the market, which would imply that there's just a ton of these
independents”
Former Tegus (October • “Most property management firms because of the people that they're
Director of 31, 2024) representing are required by the insurance companies to do two inspections a
Service at year and maintenance. They have to. It's part of the portfolio requirements.
Tecta America These are standard requirements. You have to do these inspections because
okay, every year, every building is worth x amount of dollars. And one of the
most major drawbacks to that pool of money is the roof”
Director and Tegus • “It is going to sound insane, but over 500,000 roofing contractors in the U.S.,
President at (September right now. If you look at that, there's a distribution. The vast majority of those
Northpoint 11, 2024) are going to be not even mom-and-pop, I would call them just mom, and just
Roofing pops. Just single one-man bands. But still, if you look at like roofing contractor
Systems magazine, for example, which aggregates this data, the top 30 largest roofing
consolidators own less than probably 5% of the market”
• “The good news is valuations have not correct up yet in part, they stepped up a
little bit. So like when we first started doing this, you could easily get them one
under ROI for 4x EBITDA. That's going to be really, really hard now. But 5x to 6x
is still very reasonable for a small business with $1 million of EBITDA. Very, very
reasonable. You can do that. And even that starts to pop up in size is going to
be 6x, 7x or 8x multiple on EBITDA”
• “The bigger you are, the more you buy, the bigger percentage off you get. So I'll
give you like an example, a little tiny guy, will get 0% off. We get eight points off
because we're buying millions of dollars deals. That's material. Like that's a big
spread. That's the difference between the 31% and a 39% gross margin that's a
lot”
Restoration Takeaway: Restoration competitors are financially distressed and cannot pursue
Comps Credit tuck-in acquisitions as aggressively as FSV can. PE firms are also near the end of
Ratings and their hold period and will need to exit soon, which positions FSV well as an ideal
Reports strategic bidder.
• Belfor is a restoration business backed by American Securities in 2019.
According to S&P, “pro forma for the transaction, we forecast S&P Global
Ratings-adjusted debt to EBITDA of 9.2x in 2024, (6.5x excluding the preferred
equity) from 5.5x as of Dec. 31, 2023”
• ServPro is a restoration business backed by Blackstone in 2019. According to
S&P, “the series 2024-1 note issuance will increase leverage to approximately
7.3x (total debt to adjusted EBITDA as of the trailing 12 months (TTM) ended
Sept. 30, 2023) if the series 2024-1 class A-1 variable funding note is fully
drawn (or to approximately 6.9x if it is not drawn)”

23
Jack Ran
• ServiceMaster is a restoration business backed by Roark in 2020. According to a
September 2024 S&P Review (rated BBB-), ServiceMaster had leverage of 8.7x
Century Fire Takeaway: Century Fire has realized DD organic growth rates in every year except
Performance for 2 since its acquisition by FSV. This has drastically outpaced the industry wide
post- expected growth rates of 5-6%, indicating that Century Fire is taking share from
acquisition others. Century would only be able to do this if they are a sophisticated operator
and can successfully cross-sell service offerings between the branches they
acquire. On top of being able to grow organically, the industry remains extremely
fragmented and ripe for consolidation.

Note: FSV does not report detailed segmented information nor consistent
commentary on its individual brands, so this information is not readily available or
appreciated by the street. We were only able to compile this information by going
through the notes to filings and earning transcripts over time.
• MD&A FY2017 – double digit organic revenue growth
• MD&A FY2018 – double digit organic revenue growth
• MD&A FY2019 – double digit organic revenue growth
• MD&A FY2020 – no commentary
• MD&A FY2021 – no commentary
• MD&A FY2022 – double digit organic revenue growth
• MD&A FY2023 – double digit organic revenue growth
• MD&A Q1 – Q3 2024 – double digit organic revenue growth in Q1 and Q2. No
commentary Q3

24
Jack Ran
Appendix 1: Model Outputs
Base Case (60% probability)
2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034
Sales 5,092 5,673 6,369 7,302 8,086 9,213 10,469 11,851 13,356 14,995 16,770
EBITDA 503 559 633 730 834 977 1,135 1,312 1,504 1,715 1,943
Margin 9.9% 9.8% 9.9% 10.0% 10.3% 10.6% 10.8% 11.1% 11.3% 11.4% 11.6%

Bear Case (20% probability)

2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034
Sales 5,067 5,289 5,562 6,264 6,614 7,264 7,994 8,758 9,641 10,597 11,673
EBITDA 499 508 540 617 662 738 826 920 1,026 1,142 1,271
Margin 9.8% 9.6% 9.7% 9.9% 10.0% 10.2% 10.3% 10.5% 10.6% 10.8% 10.9%

Bull Case (20% probability)

2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034
Sales 5,115 5,837 6,682 7,781 8,930 10,718 12,696 14,868 17,213 19,744 22,467
EBITDA 508 583 673 795 954 1,188 1,448 1,739 2,058 2,404 2,778
Margin 9.9% 10.0% 10.1% 10.2% 10.7% 11.1% 11.4% 11.7% 12.0% 12.2% 12.4%

Exit Multiple
Live Case 18.3x 18.3x 18.3x 18.3x 18.3x 18.3x 18.3x 18.3x 18.3x 18.3x
Base Case 18.3x 18.3x 18.3x 18.3x 18.3x 18.3x 18.3x 18.3x 18.3x 18.3x
Bear Case 13.0x 13.0x 13.0x 13.0x 13.0x 13.0x 13.0x 13.0x 13.0x 13.0x
Bull Case 20.0x 20.0x 20.0x 20.0x 20.0x 20.0x 20.0x 20.0x 20.0x 20.0x

NTM EBITDA 559 633 730 834 977 1,135 1,312 1,504 1,715 1,943
Enterprise Value 10,214 11,566 13,349 15,251 17,858 20,750 23,980 27,501 31,344 35,514
Current Net Debt (992) (1,490) (1,505) (1,826) (2,174) (2,546) (2,875) (3,212) (3,491) (3,763)
Minority Interest (448) (508) (522) (581) (641) (708) (775) (848) (922) (1,002)
Equity Value 8,773 9,569 11,322 12,844 15,043 17,495 20,331 23,441 26,931 30,748

Shares O/S 45.0 45.0 45.0 45.0 45.0 45.0 45.0 45.0 45.0 45.0
Target Price $195 $212 $251 $285 $334 $388 $451 $520 $598 $683
Risk / Reward 4.1% 13.5% 34.3% 52.3% 78.4% 107.5% 141.1% 178.0% 219.4% 264.7%

Active Base Bear Bull Exp. Value

IRR 15.7% 15.7% 6.3% 21.5% 15.0%
2033 Target Price $683 $683 $309 $1,068 $685

25
Jack Ran
Appendix 2: Key Assumptions Across Cases

Base Bear Bull

FSB Organic Sales 24 - 34 CAGR 5.0% 3.0% 6.8%
FSR Organic Sales 24 - 34 CAGR 3.9% 3.4% 4.0%

EBITDA Margin Improvement (2034 - 2023) 2.0% 1.3% 2.8%

Peak Leverage 2.5x 2.0x 2.8x

2024 - 2034 Acquired Platform EBITDA 360 160 640

2024 - 2034 Acquired Tuck-in EBITDA 324 212 420
Total Acquired EBITDA 684 372 1,060

Modelling Methodology: I forecast out the existing base business using assumed organic growth rates and margin improvements based on my industry analyses
and VAR research.

I then assume a simple P&L for tuck-in acquisitions and platform acquisitions. I assume FSV can acquire tuck-ins at 6x and platforms at 10x EBITDA. I assume a
higher level of revenue growth and margin improvement in the first few years under FSV’s ownership because of revenue and cost synergies. After this point, I
assume revenue growth hits a terminal growth rate of 4% and margin improvements is capped at 200 bps.

Note: my growth and margin assumptions for acquisitions do not change across cases. The only change across the different cases is the pace of acquisition. In the
bear case, I assume M&A slows down because FSV will remain disciplined in the face of increased PE activity bidding multiples up. In the base case, I assume FSV
levers up slightly and hits a peak leverage ratio of 2.5x. In the bull case, I assume FSV acquires more platform acquisitions because PE backed companies are
facing distress and need to return capital to LPs.

26
Jack Ran
Appendix 3: Jay Hennick’s Track Record of Capital Allocation

Hennick’s vision for FSV was very clearly laid out in FSV’s early annual letters. In 2001, he wrote: “In total, we manage more than 1,800 private residential
communities, including 350,000 residential units, and we administer more than $600 million per year in service purchases by our clients. Of this amount,
FirstService companies capture only about $110 million per year, or about 18% of the overall budget. Our strategy is to continue expanding our resources so
that we can capture a higher percentage of these expenditures internally. We estimate that, over time, we will be able to capture about 35% of the total. Our
influence over how these budgets are spent puts us in an excellent position to cross-sell our other services, including landscaping and maintenance, painting and
restoration, swimming pool services, and security, to our existing management clients.”
This vision drove Hennick’s acquisition strategy. His track record in building services platforms is phenomenal and shareholders have been rewarded handsomely.
Hennick is not out to build an empire, and he is more than willing to divest or split off businesses when it makes strategic sense to do so.
• In 2004, FirstService divests Chemlawn Canada, the Canadian leader in residential lawn care, to ServiceMaster generating a 24% annualized after-tax
return on invested capital over 13 years
o “The rationale for the sale was simple: our business was mature in our markets and we were not prepared to invest the capital necessary to
expand it into new markets” – 2004 Annual Letter
• In 2006, FirstService divests Resolve Corporation, FSV’s business services segment, through IPO of trust units of Resolve Business Outsourcing Income
Fund generating an 18% annualized after-tax return on invested capital over 11 years
o “The decision to spin off Resolve as an independent public company was made to sharpen our focus on property services and redeploy capital to
drive growth in our other business platforms” – 2006 Annual Letter
• In 2008, FirstService divests its Integrated Security segment, provider of security installation, maintenance, and monitoring, generating a 22% annualized
after-tax return on invested capital over 15 years
o “We sold our Integrated Security business to intensify our focus on global real estate services. Security was a good business with a solid
management team, but we felt we had taken the business as far as we could” – 2008 Annual Letter
Hennick and the FSV team are also willing to be bold during an economic crisis. They made their first acquisition into Commercial Real estate in 2005 with the
acquisition of Colliers Macaulay Nicolls International. They continued to acquire regional players through the Great Financial Crisis before establishing control
of the Colliers global brand by 2009 “well ahead of schedule” as per their 2009 Annual Letter.
By 2015, Hennick and his team realized Colliers would be better managed as a standalone entity and spun-it off from FirstService.
• “Colliers had different needs than FirstService—different capital needs and different human needs... We wanted to make sure that the focus of the
individual companies didn’t get messed up” – Jay Hennick 2016 Interview

From 1993 to 2015 (pre-split off) FSV generated annualized TSR of 17.6%. From 2015 (post-split off) to today, FSV generated annualized TSR of 24.8%. Over the
same period, Colliers generated a 15.7% return. Hennick deserves an A+ for compounding capital and generating high teens+ returns for over 30 years.

27
Jack Ran
Appendix 4: Jay Hennick’s Stake in FirstService and Colliers Over Time

$1,200

$1,000 $990

$800

$600

$490
$400

$200

–
Mar-16

Mar-17

Mar-18

Mar-19

Mar-20

Mar-21

Mar-22

Mar-23

Mar-24
Jun-23
Jun-15

Dec-15

Jun-16

Dec-16

Jun-17

Dec-17

Jun-18

Dec-18

Jun-19

Dec-19

Jun-20

Dec-20

Jun-21

Dec-21

Jun-22

Dec-22

Dec-23

Jun-24
Sep-15

Sep-16

Sep-17

Sep-18

Sep-19

Sep-20

Sep-21

Sep-22

Sep-23

Sep-24
FSV Stake in US$M CIGI Stake in US$M

Jay Hennick is now a billionaire from his holdings in FSV and Colliers (CIGI).
He is the second largest shareholder at FSV and the largest shareholder at Colliers.

28
Jack Ran
Appendix 5: FSR Operating Metrics

2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 CAGR

Organic Growth 7.0% 8.0% 6.0% 4.0% 4.0% 7.0% – 8.0% 8.0% 10.0% 6.1%

Communities 7,000 7,400 7,900 8,000 8,500 8,500 8,500 8,600 9,000 9,000 2.8%
5.7% 6.8% 1.3% 6.3% – – 1.2% 4.7% –
% Breakdown by Property Type
High-Rise Condo 35% 35% 36% 38% 38% 38% 38% 38% 38%
Master Planned Single Family HOA 34% 34% 34% 34% 34% 34% 34% 34% 34%
Mid-Low Rise Condo 23% 23% 23% 21% 21% 21% 21% 21% 21%
Life-Style 4% 4% 4% 4% 4% 4% 4% 4% 4%
Other 4% 4% 3% 3% 3% 3% 3% 3% 3%

# Breakdown by Property Type

High-Rise Condo 2,450 2,765 2,880 3,230 3,230 3,230 3,268 3,420 3,420 3.8%
Master Planned Single Family HOA 2,380 2,686 2,720 2,890 2,890 2,890 2,924 3,060 3,060 2.8%
Mid-Low Rise Condo 1,610 1,817 1,840 1,785 1,785 1,785 1,806 1,890 1,890 1.8%
Life-Style 280 316 320 340 340 340 344 360 360 2.8%
Other 280 316 240 255 255 255 258 270 270 (0.4%)

% Breakdown by Service
Ancillary On-Site Services 50% 51% 52% 54% 55% 58% 55% 56% 57%
Property Management Fees 24% 22% 21% 20% 19% 19% 18% 16% 17%
Pool Management 11% 14% 15% 16% 16% 13% 17% 19% 17%
Transaction Services 10% 9% 9% 9% 10% 10% 10% 9% 9%
Landscaping 5% 4% 3% Non-Core / Divested. FSV No Longer Reports

Between 2014 – 2023, FSR has grown total communities managed by 2.8%. This is an aggregate number which means it includes the effect of M&A. Note
however, FSR has grown organic revenue by a 6.1% CAGR over the same time period. This means that FSR is able to take these acquired properties and cross-
sell significantly more services which is what is driving the increase in organic growth rates. This is why we see ancillary on-site services revenue increase from
50% of FSR revenue in 2014 to 57% in 2023. We see a similar increase in Pool Management revenue from 11% to 17% over the same time period.

29
Jack Ran
Appendix 6: Community Association Industry Data

($Bn) ($Bn)
($Bn) Value of Assessments Assessment
Homes in $ Avg. Value Avg. Home collected from contributed to Assessments / Assessments /
Communities Units (M) Associations / Unit Sold (Fred) homeowners reserve funds Community Unit
2010 311,600 24.8
2011 317,200 25.4
2012 323,600 25.9 4,237 163,591 244,400 51.0 20.0 157,602 1,969.1
2013 328,500 26.3 4,650 176,806 266,225 65.0 20.0 197,869 2,471.5
2014 333,600 26.7 4,950 185,393 285,775 70.0 22.0 209,832 2,621.7
2015 338,000 26.2 5,280 201,527 294,150 85.0 23.0 251,479 3,244.3
2016 342,000 26.3 5,545 210,837 305,125 88.0 25.0 257,310 3,346.0
2017 344,500 26.6 5,880 221,053 322,425 90.0 25.0 261,248 3,383.5
2018 347,000 26.9 6,280 233,457 325,275 95.6 27.3 275,504 3,553.9
2019 351,000 27.2 7,199 264,669 320,250 96.0 27.4 273,504 3,529.4
2020 355,000 27.5 9,200 334,545 328,150 103.2 25.8 290,704 3,752.7
2021 358,000 27.7 11,000 397,112 383,000 106.4 26.6 297,207 3,841.2
2022 362,000 28.0 432,950
2023 365,000 28.2 12,200 432,624 426,525 108.8 27.2 298,082 3,858.2

14 - '23
1.0% 0.6% 10.5% 9.9% 4.6% 5.0% 2.4% 4.0% 4.4%
CAGR

Assessment per community and assessment per unit has increased at a 4% and 4.4% CAGR, respectively from 2014 – 2023. Despite this consistent increase in
monthly assessments, FSV estimates that the % of new homes built into associations have increased from 50% to 85%. These two facts while counterintuitive on
the surface, can best be explained when we look at the CAGR increase in average value per unit in the association – which is an incredible 9.9%. This compares to
an overall average U.S. home price sales CAGR of 4.6% as per the Federal Reserve Bank of St. Louis.

What this means for investors is: home prices for units in associations on average increase significantly more than ones that are not in associations. This is
what is also leading home builders to build and sell more homes into associations. Home prices increasing at a much faster clip than assessments mean
homeowners are fine with the set-up. As long as they continue to believe the community association they are in is spending money on amenities that increase
their home price. A 4.4% CAGR increase in assessments directly benefits FSR because assessments are what drives the communities spending budget on
management fees and other services. It should be a close proxy to the pricing power that FSR will have over its existing customer base.

30
Jack Ran
Appendix 7: Roofing Industry Overview

Including both organic and inorganic growth, the top 10 largest roofing companies in 2023 grew at a 5-year CAGR of 9% to 72%. The entire top 150 companies
grew at a 14% CAGR over the same period.
Rank Company 2023 Sales 2018 Sales CAGR
1 Tecta America $1,400,000,000 $570,000,000 19.7%
2 CentiMark Corporation $1,337,405,956 $670,522,512 14.8%
3 Erie Home $525,334,796 N/A nmf
4 Roofing Corp of America $425,000,000 $28,500,000 71.7% - FSV's platform acquisition
5 Nations Roof $411,000,000 $223,000,000 13.0%
6 Stronghouse Solutions $373,000,000 N/A nmf
7 Baker Roofing Company $320,743,950 $205,783,592 9.3%
8 Infinity Home Services $310,000,000 N/A nmf
9 Best Choice Roofing $277,111,000 N/A nmf
10 Legacy Restoration $258,600,000 $19,650,000 67.4%
Top 150 $12,973,444,891 $6,742,657,757 14.0%
The industry is extremely fragmented. The top 10 companies generate combined revenues of $5.6 billion which only represents 11% market share based on IBIS
latest revenue estimates for the industry.

Appendix 8: Acquisition Multiples Over Time

31
Jack Ran
FY2023 FY2022 FY2021 FY2020 FY2019 FY2018 FY2017 FY2016 FY2015

Full Year Acquired Revenue A 571,727 123,937 238,234 105,548 615,137 108,641 66,398 213,789 42,231
EV / Revenue 1.2x 0.6x 0.9x 1.3x 1.0x 1.0x 0.8x 0.5x 0.4x

Net Earnings Margin (Acquisition) B 6.1% 4.7% 10.3% 8.9% 5.8% 10.5% 4.9% 1.9% 2.0%
Net Earnings Margin (PF) C 3.8% 4.0% 5.0% 4.1% – 4.7% 4.5% 3.6% 3.0%
Margin Delta D=B-C 2.3% 0.7% 5.3% 4.8% 5.8% 5.8% 0.4% (1.8%) (1.0%)

FSV Adj. EBITDA Margin % E 9.6% 9.4% 10.1% 10.2% 9.8% 9.9% 9.2% 8.8% 8.2%
FSV Margin + Margin Delta F=D+E 11.9% 10.1% 15.4% 15.1% 15.6% 15.7% 9.6% 7.0% 7.2%

Full Year Acquired EBITDA G=A*F 67,860 12,527 36,653 15,910 95,916 17,029 6,391 14,971 3,021
EV / Acquired EBITDA 9.7x 6.3x 5.6x 8.4x 6.5x 6.1x 8.3x 7.7x 6.2x

Total EV (ex. Platform Years) 615,821

Total EBITDA (ex. Platform Years) 91,530
Multiple (ex. Platform Years) 6.7x

Methodology: we define EV as total purchase consideration (including contingent consideration) plus NCI. We are given net earnings of the acquisitions and can
see that acquisitions generally are more profitable than consolidated FSV. We apply this margin differential to FSV’s consolidated adj. EBITDA margins to get
acquisition EBITDA margins. These margin figures are in line with what we have been verbally told through VAR calls. Using these margins, we can calculate how
much EBITDA FSV acquires each year and what multiples they pay for acquisitions.

Takeaway: Our analysis shows that even though there has been a significant increase in private equity presence in the industries that FSV competes in, FSV has
remained disciplined with their acquisition strategy and have acquired tuck-ins at an average multiple of 6.7x EBITDA. Our VAR calls have indicated that even
though there has been increased bidding activity in these industries, the markets remain fragmented enough that disciplined acquirers can continue acquiring
tuck-ins at historic multiples.

32
Jack Ran
Appendix 9: Track Record of Aligning Seller Incentives with FSV’s

FY2023 FY2022 FY2021 FY2020 FY2019 FY2018 FY2017 FY2016 FY2015 FY2014

Loans to Minority Shareholders 6,554 2,374 1,774 2,421 2,564 2,064 2,500 2,500 2,300 2,500

NCI On Business Acquisitions 63,859 18,262 18,986 21,293 35,307 19,889 3,360 10,612 1,696 1,676

Cash Consideration 561,807 51,994 163,221 98,559 579,863 73,183 39,573 90,852 12,340 16,686
Contingent Consideration 32,571 8,933 22,537 13,259 10,611 10,611 9,280 9,998 4,544 4,499
Total Purchase Consideration 594,378 60,927 185,758 111,818 590,474 83,794 49,853 104,284 16,884 21,625
Average
% Contingent Consideration 5.5% 14.7% 12.1% 11.9% 1.8% 12.7% 18.6% 9.6% 26.9% 20.8% 13.5%
NCI / (Purchase Consideration + NCI) 9.7% 23.1% 9.3% 16.0% 5.6% 19.2% 6.3% 9.2% 9.1% 7.2% 11.5%

Dating back to 2002, which was early as we could find, FSV’s stated acquisition strategy was: “In many cases, they seek the resources of a larger company but also
want to retain an equity stake and play an important role in building a national network of quality security systems integrators. This is exactly the type of
opportunity we are looking for—strong operators who want to stay and participate in the success of our growth strategy.”

When we analyzed FSV’s track record of acquisitions over time, we see that on average FSV has the selling shareholders roll over 11.5% of their proceeds into
non-controlling interests while another 13.5% of total consideration is tied around performance based earnouts. Combined, this means that the selling
shareholders/management team have ~25% of their total equity value tied up in the future success of their business under FSV’s ownership.

Most notably, these metrics are skewed downwards because all three platform acquisitions FSV has recently bought came from private equity hands who are at
the end of their fund lives and cannot take deferred consideration. Every single year when % contingent consideration is below double digit occurred in the year
that FSV acquired a new services platform (2016 was Century Fire, 2019 was First OnSite, 2023 was Roofing Corp of America). This means the average
percentages for contingent consideration and NCI roll will skew higher for mom-and-pop acquisitions.

Lastly, in the related party transaction footnotes, FSV discloses how much money it lends to senior managers to finance additional purchases of non-controlling
interests in subsidiaries. This amount has most recently increased 170%+ between Q3 2023 and Q4 2023 after the Roofing Corp of America acquisition. Senior
managers are clearly bullish on the business as they borrow money hand over first to invest into FSV subsidiaries.

33
Jack Ran
Appendix 10: Track Record of Retaining Key Management Personnel from Acquisitions

FSV has made three platform acquisitions in its FSB segment with those being Century Fire in April 2016, First Onsite Restoration in May 2019, and Roofing Corp
of America in December 2023. The Roofing Corp of America acquisition has closed too recently for management turnover to be an issue so instead we look at key
personnel changes at Century Fire and First Onsite Restoration.

Based on Century Fire’s leadership page (https://www.centuryfp.com/leadership/) and using LinkedIn to track dates of employment, we can see that FSV has
retained all four of Century Fire’s listed management team from pre-acquisition.

We can do a similar analysis with First OnSite. Even though they don’t have a dedicated leadership team page on their website, we can look at press releases from
the time of the acquisition and compare them to the key executives quoted in the press releases of today. We can additionally look at LinkedIn to see the dates of
employment of other C-Suite executives.

For First OnSite, two of the three referenced key executives in the initial press release are still with FSV (Jeff Johnson and Dave Demos). The third, Stacy Mazur,
left in June 2024, over 5 years after the initial acquisition. Supporting this point, most of First OnSite’s other C-Suite executives have been with the firm since
before the FSV acquisition and continued to stay on long after the acquisition closed.

First OnSite C-Suite Position Source

Chief Admin Officer since 2016 https://www.linkedin.com/in/anthonyagarver/
Chief Strategy Officer there since 2018 https://www.linkedin.com/in/marc-cohen-7a6a4a14/
Chief Legal Officer since 2018 https://www.linkedin.com/in/matthew-kristofco-b1592614/
Chief Information Officer since 2020 https://www.linkedin.com/in/scottbcousins/
Chief Financial Officer since 2022 https://www.linkedin.com/in/abifadeyi/

34
Jack Ran
Appendix 11: Management Tenure and Compensation

Executives Role Time in Role Time at FSV

Scott Patterson CEO FirstService Corp 9.5 Years 29.4 Years
Jeremy Rasukin CFO FirstService Corp 9.5 Years 12.2 Years
David Diestel CEO FirstService Residential 3.3 Years 22.5 Years
Mike Natale CFO FirstService Residential 15.9 Years 19.8 Years
Charlie Chase CEO FirstService Brands 14.9 Years 35.4 Years
Average 10.6 Years 23.9 Years

All of FSV’s key executives have been in the FSV ecosystem for decades. Scott Patterson who leads FSV now has spent 20 years working alongside Jay Hennick and
was featured in many of FSV’s early annual letters dating back to the 2000s. Management is given increasingly more responsibility over time and promoted to
new roles to further their development. In Scott’s case, he officially took over as CEO after the FSV and Colliers split.

Executives Role Time in Role Time at FSV

Rich Wilson CEO/President Paul Davis Restoration 9.8 Years 21.3 Years
Michael Stone CEO/President CertaPro 9.8 Years 21.8 Years
Charles Furlough CEO/President Pillar to Post 1.9 Years 16.7 Years
Tom Wood CEO/President Floor Coverings International 19.9 Years 39.4 Years
Average 10.3 Years 24.8 Years

Average executive tenure across FSB’s operating brands has also been exceptional.

Executives compensation is made up of the following components:

1. Base Salary
2. Annual Performance-Based Bonus Plan
a. Based on the three-year trailing average annual growth rate of adjusted earnings per share (“AEPS”)
i. CEO earned 17% of base salary for each 1% growth in AEPS subject to a maximum of five times the CEO’s base salary
b. Augmented by the three-year average annual organic revenue growth
i. 3% or lower, a participant would receive 80% of the amount of the annual bonus
ii. 4% or 5%, a participant would receive 100% of the amount of the annual bonus
iii. 6% or higher, a participant would receive 120% of the amount of the annual bonus
3. Long-term Incentive Option Plans

35
Jack Ran
Appendix 12: Analyst Coverage
BMO Deutsche Bank Raymond James Scotiabank Stifel TD William Blair
Primary Focus Area
US Business & Information Infrastructure, Construction, Power Diversified Industrials and Special
Consumer Retail REITs and REOCs Aerospace and Defense TMT
Services and Utilities Situations

Gildan Activewear Equifax Badger Infrastructure Solutions Granite REIT Major Drilling Group International Exchange Income Agilysys

Sleep Country Canada Factset Research Systems Atkinsrealis Dream Industrial REIT Geodrill Airboss of America Alarm.com Holdings

Aritzia S&P Global Stantec Summit Industrial ome REIT Colliers International Group Chorus Aviation American Public Education

Roots MSCI Aecon Nexus Industrial REIT FirstService Bombardier AppFolio

Dorel Industries TransUnion Bird Construction PRO REIT Air Canada Magellan Aeospace CBRE Group

North West Company Dun & Bradstreet Holdings WSP Global European Residential REIT Uni-Select Andlauer Healthcare Chegg

Leon’s Furniture ABM Industries Colliers International Flagship Communities REIT Badger Infrastructure Solutions Cargojet Colliers International Group

Rogers Sugar Cintas FirstService BSR REIT Boyd Group Services CAE Coursera

Premium Brands Republic Services Brookfield Infrastructure Partners Morguard REIT dentalcorp Holdings ArcBest CoStar Group

dentalcorp Waste Management Dexterra CT REIT NFI Group Transat Cushman & Wakefield

Altus Group Casella Waste Systems Brookfield Renewable Partners Slate Grocery REIT Westshore Terminals Investment Mullen eXp World Holdings

Colliers International Waste Connections Russel Metals Choice Properties REIT Superior Plus FirstService FirstService

FirstService Advantage Solutions Neo Performance Materials Automotive Properties REIT CCL Industries Heroux Devtek Jones Lang LaSalle

Tricon Residential Bright Horizons Family Solutions North American Construction Chartwell Retirement Residences Stride

CCL Industries Aramark Black Diamond NorthWest Healthcare Properties REIT LegalZoom.com

Intertape Polymer Group Verra Mobility Blackline Safety Colliers International Group Olo

Winpak Fair Isaac Zedcor FirstService PAR Technology

TC Transcontinental Open Lending Parkit Enterprise Redfin

Willscot Holdings Dream Residential REIT The Real Brokerage

Gartner Sienna Senior Living RE/MAX Holdings

Moody's Storagevault Canada Toast

FirstService Udemy

Verisk Analytics

The analysts covering FSV have limited expertise in analyzing and covering roll-up businesses.

36
Jack Ran
Appendix 13: Analysts Struggle to Forecast Inorganic Growth for Roll-up Businesses
M&A Organic Growth
2025 2026 2025 2026
FSR FSB Total FSR FSB Total FSR FSB Total FSR FSB Total
William Blair 2.0% – 5.0% 5.0%
TD 0.2% 2.0% 1.2% – – – 4.3% 5.4% 5.0% 4.6% 5.0% 4.8%
Scotiabank 1.0% 4.0% 3.0% 2.0% 4.0% 3.0% 4.0% 4.0% 4.0% 5.0% 3.0% 4.0%
Deutsche Bank 0.2% 2.4% 1.5% 4.4% 7.3% 6.1%
Raymond James
BMO 1.7% 5.2%
Stifel 2.0% 5.0% 3.7% 1.5% 3.0% 2.4% 4.0% 5.5% 4.9% 4.0% 5.0% 4.6%

Average 0.9% 3.4% 2.2% 1.2% 2.3% 1.4% 4.2% 5.6% 5.0% 4.5% 4.3% 4.6%
Median 0.6% 3.2% 1.9% 1.5% 3.0% 1.2% 4.2% 5.5% 5.0% 4.6% 5.0% 4.7%

We went through every single brokers’ latest research report and pulled in their estimates for organic and inorganic growth on both a segment level basis and
a consolidated basis. As seen above, brokers are forecasting consolidated inorganic growth of 2% and 1% in 2025 and 2026, respectively.

FY2014 FY2015 FY2016 FY2017 FY2018 FY2019 FY2020 FY2021 FY2022 FY2023 CAGR

Prior Period FirstService - Revenue, mm - 1,132.0 1,264.1 1,482.9 1,729.0 1,931.5 2,407.4 2,772.4 3,249.1 3,745.8
FirstService - Organic growth, mm - 94.8 80.9 85.6 104.4 124.5 93.3 287.2 299.7 380.5
Y/Y FirstService - Organic growth, % A 8.4% 6.4% 5.8% 6.0% 6.4% 3.9% 10.4% 9.2% 10.2%
FirstService - Non-organic growth, mm - 37.3 138.0 160.5 98.0 351.4 268.6 189.5 197.1 208.2
Y/Y FirstService - Non-organic growth, % B 3.3% 10.9% 10.8% 5.7% 18.2% 11.2% 6.8% 6.1% 5.6%
Current Period FirstService - Revenue, mm 1,132.0 1,264.1 1,482.9 1,729.0 1,931.5 2,407.4 2,772.4 3,249.1 3,745.8 4,334.5 16.1%
Y/Y Total Revenue growth, % C 11.7% 17.3% 16.6% 11.7% 24.6% 15.2% 17.2% 15.3% 15.7%

Organic Revenue Growth 1 * (1+A) 1.0 1.1 1.2 1.2 1.3 1.4 1.4 1.6 1.7 1.9 7.4%
Inorganic Revenue Growth 1 * (1+B) 1.0 1.0 1.1 1.3 1.3 1.6 1.8 1.9 2.0 2.1 8.6%
Total Revenue Growth 1 * (1+C) 1.0 1.1 1.3 1.5 1.7 2.1 2.4 2.9 3.3 3.8 16.1%

This is despite the fact that FSV has grown inorganic revenue at an 8.6% 9-year CAGR.

37
Jack Ran
Appendix 14: Average $ Trading Volume per Day

We ran a screen for all publicly listed NYSE / Nasdaq companies with market caps between $8B and $10B to see where FSV would stack up in terms of trading
liquidity. This screen produced 109 names and FSV ranks 102nd out of the 109 names in terms of trading liquidity.
In other words, there are only 7 other stocks more illiquid than FSV.
Rank Ticker $M Traded Rank Ticker $M Traded Rank Ticker $M Traded Rank Ticker $M Traded Rank Ticker $M Traded
1 NasdaqGS:AAL $ 435.63 26 NasdaqGS:DBX $ 81.34 51 NasdaqGS:FYBR $ 56.30 76 NYSE:RRC $ 39.49 101 NasdaqGS:DRS $ 17.91
2 NasdaqGS:WYNN $ 302.04 27 NYSE:EDR $ 79.80 52 NasdaqGS:HQY $ 55.85 77 NYSE:SSB $ 36.99 102 NasdaqGS:FSV $ 16.19
3 NYSE:X $ 297.12 28 NYSE:AES $ 79.75 53 NasdaqGS:RVMD $ 55.23 78 NYSE:INGR $ 35.50 103 NYSE:PAAS $ 15.95
4 NYSE:PLNT $ 169.32 29 NYSE:ARMK $ 78.77 54 NYSE:CNM $ 54.35 79 NYSE:CHE $ 34.48 104 NYSE:RLI $ 12.41
5 NYSE:FN $ 168.89 30 NYSE:MOS $ 78.46 55 NYSE:GPK $ 54.22 80 NasdaqGS:ITCI $ 34.26 105 NYSE:STN $ 12.21
6 NYSE:BILL $ 168.74 31 NYSE:CRL $ 77.98 56 NasdaqGS:LKQ $ 53.77 81 NasdaqGS:HLNE $ 33.63 106 NasdaqGS:DSGX $ 8.29
7 NasdaqGM:ENPH $ 131.92 32 NasdaqGS:TEM $ 76.64 57 NYSE:RBRK $ 53.49 82 NYSE:QGEN $ 33.50 107 NasdaqGS:VFS $ 2.47
8 NasdaqGS:AGNC $ 130.55 33 NYSE:EHC $ 72.54 58 NYSE:AYI $ 52.30 83 NYSE:ORI $ 32.11 108 NYSE:BNT $ 0.28
9 NasdaqGS:XP $ 119.26 34 NasdaqGS:HSIC $ 71.70 59 NasdaqGS:SIRI $ 51.60 84 NasdaqGS:LNW $ 30.61 109 NasdaqCM:MRNO $ 0.02
10 NYSE:GLOB $ 111.57 35 NYSE:ADC $ 70.39 60 NasdaqGS:HAS $ 48.30 85 NYSE:KVYO $ 30.57
11 NYSE:PEN $ 99.59 36 NYSE:LAD $ 69.68 61 NYSE:BRBR $ 46.08 86 NYSE:DCI $ 29.80
12 NYSE:CMA $ 97.59 37 NYSE:MHK $ 67.14 62 NYSE:CIEN $ 45.83 87 NYSE:PRI $ 29.49
13 NYSE:FRT $ 96.93 38 NYSE:WAL $ 67.14 63 NYSE:NNN $ 45.17 88 NYSE:CACI $ 27.57
14 NYSE:SKX $ 93.34 39 NYSE:KNX $ 66.66 64 NasdaqGS:MEDP $ 44.72 89 NYSE:SUM $ 26.66
15 NYSE:AR $ 92.89 40 NasdaqGS:CFLT $ 64.22 65 NYSE:SNX $ 44.05 90 NasdaqGS:DOX $ 26.04
16 NYSE:TFX $ 89.58 41 NYSE:CRS $ 63.28 66 NYSE:RYAN $ 43.91 91 NasdaqGM:APPF $ 25.60
17 NasdaqGS:APA $ 87.68 42 NYSE:FLR $ 62.68 67 NYSE:REXR $ 43.81 92 NasdaqGS:MTSI $ 25.06
18 NYSE:GL $ 87.13 43 NasdaqCM:EXAS $ 62.01 68 NYSE:CFR $ 43.42 93 NYSE:BIRK $ 23.58
19 NasdaqGS:WING $ 86.92 44 NasdaqGS:GTLB $ 60.91 69 NasdaqGS:ROIV $ 43.20 94 NYSE:NYT $ 23.40
20 NYSE:DOCS $ 85.54 45 NasdaqGS:MASI $ 60.82 70 NasdaqGS:PNFP $ 42.93 95 NasdaqGS:ALTR $ 22.83
21 NasdaqGS:ZION $ 85.30 46 NYSE:TPX $ 60.01 71 NasdaqGS:WTFC $ 42.09 96 NasdaqGS:ENSG $ 22.41
22 NYSE:ESTC $ 84.74 47 NYSE:BIO.B $ 58.93 72 NYSE:BRX $ 41.86 97 NYSE:EGP $ 21.42
23 NYSE:FBIN $ 84.57 48 NYSE:OGE $ 57.85 73 NasdaqGS:RGLD $ 41.85 98 NYSE:APG $ 20.91
24 NYSE:S $ 83.14 49 NYSE:ONTO $ 57.65 74 NYSE:AXTA $ 40.37 99 NasdaqGS:CBSH $ 20.84
25 NasdaqGS:EXEL $ 82.93 50 NYSE:BIO $ 56.44 75 NYSE:TTC $ 40.09 100 NYSE:ATI $ 20.09

38
MercadoLibre, Inc. (MELI) / Recommendation: Long
Analyst: Chris Zeng
Email: [email protected]

39
 Nov 2024

MercadoLibre (NASDAQ:MELI): LONG

40
 Nov 2024

Summary Financials (20%+ upside potential)

Captial Structure Base Case
Share Price (US$) 1,916.5 Fiscal Period FY2021 FY2022 FY2023 FY2024E FY2025E FY2026E FY2027E FY2028E
Diluted S/O 50.7 Revenue 7,069.4 10,537.0 14,473.0 21,437.3 28,400.1 34,300.3 40,699.9 48,263.9
Market Cap 97,167.1 y/y growth % 49% 37% 48% 32% 21% 19% 19%
Add: Net Debt (333.0) Consensus growth % 42% 25% 22% 21% 18%
Enterprise Value 96,834.1 Gross Profit 3,005.1 5,163.0 7,206.0 9,986.1 13,632.1 16,807.1 20,349.9 24,132.0
Current Valuation/Liquidity margin % 43% 49% 50% 47% 48% 49% 50% 50%
EV/EBIT 46.9x Consensus margin % 46% 47% 48% 48% 49%
P/E 69.7x y/y % 72% 40% 39% 37% 23% 21% 19%
P/NTM E 52.2x EBIT 440.7 1,034.0 1,823.0 2,631.1 3,903.3 5,382.9 7,015.8 8,319.6
EV/Sales 5.4x margin % 6% 10% 13% 12% 14% 16% 17% 17%
EV/NTM Sales 4.1x FCF 2,246.4 3,421.0 4,397.0 6,363.9 3,678.4 4,487.5 6,139.7 7,817.7
52-Week High 2,161.7 margin % 32% 32% 30% 30% 13% 13% 15% 16%
52-Week Low 1,325.0 FCF yield % 2.3% 3.5% 4.5% 6.5% 3.8% 4.6% 6.3% 8.0%
EPS 1.7 9.6 19.6 35.6 46.5 66.7 98.7 128.3
Street Revenue 7,069.4 10,537.0 14,473.0 20,481.0 25,557.5 31,113.3 37,720.0 44,471.3
Street EPS 1.7 9.6 19.6 34.2 46.2 60.2 76.6 99.3
Valuation FY2021 FY2022 FY2023 FY2024E FY2025E FY2026E FY2027E FY2028E
EV/Sales 9.6x 4.1x 5.4x 4.4x 3.2x 2.5x 2.0x 1.5x
EV/NTM Sales 6.4x 3.0x 3.6x 3.3x 2.6x 2.1x 1.6x
NTM Sales EV/NTM Discounut Upside/
Scenario NTM Sales growth% Sales EV Rate PV Share Price Downsid%
Base $ 28,292 21.0% 4.5x $ 127,312.31 8% $ 117,881.77 $ 2,325.08 21%
Bull $ 29,803 26.0% 5.0x $ 149,013.39 8% $ 137,975.36 $ 2,721.41 42%
Bear $ 25,986 16.0% 4.0x $ 103,944.50 8% $ 96,244.91 $ 1,898.32 -1%

Big Picture

Mercadolibre’s commerce business will continue to benefit from strong growth momentum
capitalizing on its leadership as the #1 e-commerce player in Latin America and the significant
untapped market potential in the region, while its Fintech segment, Mercado Pago, continues to
expand as its fintech solutions become increasingly central to the lifestyle and spending habits of
consumers across Latin America. Together, Marketplace and Pago are driving increasing cross-
segment synergies.

Investment Thesis

MELI is a LONG because:

• MELI holds #1 e-commerce position in LatAm as the market consolidates

• Long runway for Latam ecommerce growth - Latam is underpenetrated both in terms of
ecommerce user penetration and ecommerce spending as % of retail sales
• Fintech service became increasingly integral to Latam everyday retail spending as Meli’s
TPV off-platform far surpass TPV on-platform both in volume and speed
• Credit card penetration rate is low in Latam esp., in Mexico. The opportunity to expand such
business will boost GMV and TPV, while increasing user stickiness. Meli has the unique
advantage of leveraging its marketplace and consumer loan data to reduce credit risks
• MELI boasts the strongest logistics network in LatAm, continuously enhanced by new FCs,
further improving delivery speed and efficiency and enhancing customer experience
• Meli+ offers full price and more accessible membership to maximize loyalty and spending
• Potential future revenue growth driver at early stage – Q-commerce, insurance, etc
• stock price reaches near COVID period level high, the 4.0x EV/NTM multiple still attractive

MELI will serve as a key proxy of Latin America’s ecommerce and Fintech growth,
benefiting from being the dominant leader in the underpenetrated market.

41
 Nov 2024

Key Investment Factors

Why Meli is the strongest platform company in Latam and will continue to be so?

Flywheel effect: Meli’s integrated ecosystem – comprising Marketplace, Mercado Envio (logistics),
Mercado Pago (payment), Credito (credit), and Meli+ create a highly sticky and synergistic platform
that drives significant cross-selling opportunities.

• Differentiated logistics edge: The robust logistics and complex distribution network enable
the fastest deliveries in the region, offering a truly differentiated experience, attracting both
customers and vendors.
• Cross-segment growth: Marketplace activity naturally fuels Mercado Pago’s growth,
expanding adoption among both merchants and consumers while increasing transaction
volumes across the ecosystem.
• Optimized credit solution: By combining e-commerce purchase data and historical loan
performance with external data sources, Mercado Crédito enhances its ability to predict and
manage credit risk. Lower-risk customers are rewarded with larger, longer-term loans, further
integrating them into the ecosystem.

Customer Centric Approach: Meli offers the fastest and most reliable delivery, the broadest
product selection, responsive and easy local customer service, and intuitive user interface.

User statements:

- Broad Selection: “On Meli, I can find specific/niche items that I cannot find on Amazon.
e.g., electronic components, or gardening tools.” – Arthur, Brazil
- Delivery speed: “Meli’s delivery is the fastest and most reliable in Chile. They are also the
first Fintech platform that offer 12-month interest free installment”- Felipe, Chile
- Customer service: “Meli would always solve any issue I had with any reseller” - Joacom,
Argentina
- Integrated everyday Lifestyle: “Meli’s navigation/UI is much easier to navigate compared
to Amazon, and I store my cash in digital wallet to earn short-term deposit interest” -
Augusto, Argentina

The Bear would say …

• Logistics and New distribution centers costs weighed on margin: increased expense from
expanding logistics capabilities, slowing profitability growth in the near term

42
 Nov 2024

• Credit card business is a low margin business, its expansion will only cause margin
compression: Credit card business has low Net Interest Margin After Loss (NIMAL) spread, an
aggressive expansion in Mexico over Q3 affect overall profitability
• Heightened competition – with Amazon, Shopee, AliExpress, Temu, Shein entering the
Latam market aggressively, Meli’s market share may get cannibalized
• Hyped valuation - Meli’s 50x forward P/E and 30x EV/NTM EBIT multiples are considered high

Our view:

• Over the long run, the new distribution centers are to expand the supply capacity and improve
efficiency of Meli, improving customer experience and user stickiness – such short-term
margin compression is moat widening
• Investors overreacted to the margin compression by company’s credit card business
expansion plan in Mexico, potentially overlooking the strategic long-term motivation behind it
o The upfront expenses associated with launching credit cards—such as processing,
printing, material, and shipping costs—are significant however one-off.
o Credit card profitability naturally lags, improving over time as delinquency fees, late fees,
annual fees, and a more stable Net Interest Margin After Loss (NIMAL) spread materialize.
These profitability effect become more evident within 18-month time window per
discussion with ex-Meli credit division employee
o Investors may have ignored the credit card's role in boosting GMV and TPV growth.
Designed to enhance CLV, the credit card typically becomes profitable over a longer
horizon commonly around 24 months
o Beyond relying on standard external data, MercadoLibre leverages internal purchase data
from its Marketplace and consumer loan data from Mercado Pago to enhance credit risk
prediction. Prior to the rapid rollout in Q3, the company spent a year slowing growth to
thoroughly analyze this data and develop an accurate predictive model
• Historically, MercadoLibre's stock price has been driven primarily by sales multiples,
reflecting its focus on grab for market share at current stage, and continuously investing and
expanding, rather than stabilized profitability. Metrics such as P/E or EV/EBIT do not
accurately capture the company's value during this phase as profitability is bound to improve
over time after an intense investment phase.

How big is the Total Addressable Market?

On ecommerce spending, based on user penetration rate of 56% of adult population, the
population of Latam is c. 664 million, and average annual e-commerce spending is $467 per capita
per PCMI, with a CAGR rate of 21% on per capita spending, the total GMV in Latin America is
estimated to be about US$190 billion in 2024.

On the Fintech space, the payment volume market in is the retail market in Latam of $2.35 trillion.
Per PCMI, digital wallet spending % is 8% of the total spending in Brazil, using this ratio gives a total
payment volume for digital payment of 2,350 bn*8% = 188 billion.

43
 Nov 2024

How is Competition likely to impact MELI’s prospects going forward?

MercadoLibre in Argentina and Chile maintained absolute dominance, while markets such as Brazil
and Mexico face more international competitions such as AMZN, Shopee, Alibaba, Temu and Shein.

Monthly web traffic of Meli vs Amazon and other competitors in Brazil (as shown in Exhibit 4)
indicates that Meli maintain best traffic among all, while AMZN had similar # of visits and Shoppe
gained moderately. Although new competitors such as Temu gained a high percentage growth, the #
visit plateaued at c. 10m in recent three months, and is still orders of magnitude below Meli (10m vs
200m+). Similar pattern can be found in Mexico, indicating stable web traffic among competitors as
shown in Exhibit 5.

Valuation

Historically, the EV/NTM Sales multiple has served as a reliable indicator of buy-in opportunities as the
company is at the stage of gaining scale in the underpenetrated ecommerce. When the multiple approaches
or drops below 6.0x, it has often triggered upward movement in the stock price. Currently, the EV/NTM Sales
multiple stands at 4.0x (red), significantly lower than the 19.0x multiple observed at the previous stock price
high in January 2021.

The unit economics will keep improving as 1) commerce take rate may increase due to better logistics
coverage services and higher advertising take rate as more high-end brands advertising on Meli. 2) credit card
business’s NIMAl will improve over time. 3) more operating leverage as the company continues to scale.

EV/NTM Sales (red) 4.0x vs multiple at previous stock price high (Jan 2021) 19.0x

Based on historical EV/Sales vs yearly revenue growth % of Meli and comparable peers, at y/y
revenue growth rate of 40%, historically, a below 6.0x sales multiple would be deemed attractive.

44
 Nov 2024

Historic EV/NTM Sales vs y/y sales growth of MELI, SE and BABA

EV/NTM Sales vs Sales growth %

20.0x

16.0x

12.0x

8.0x

4.0x

0.0x
0.0% 20.0% 40.0% 60.0% 80.0% 100.0%

MELI SE BABA

Sales y/y growth % and EV/NTM Sales Sale of MELI and peers

MELI SE BABA AMAZN

EV/NTM EV/NTM EV/NTM E
FY Sales y/y Sales y/y Sales y/y Sales y/y
Sales Sales Sales S
2016 29.6% 6.6x 18.3% n.a. 32.7% 8.9x 27.1%
2017 44.1% 7.5x 19.8% 7.6x 56.5% 10.1x 30.8%
2018 18.3% 7.4x 99.7% 3.0x 58.1% 5.5x 30.9%
2019 59.5% 9.6x 163.1% 4.6x 50.6% 6.8x 20.5%
2020 73.1% 17.0x 101.1% 15.7x 35.3% 4.9x 37.6%
2021 77.9% 8.4x 127.5% 8.7x 40.7% 2.0x 21.7%
2022 49.1% 3.8x 25.1% 2.1x 18.9% 1.6x 9.4%
2023 37.4% 4.7x 4.9% 1.6x 1.8% 1.2x 11.8%

Source: Capital IQ

VAR Notes

Type Description Notes / Comments

Ex-Meli Business Strategy & Meli’s unique advantage is outside standard external data, its
Ops Credit Fintech data from marketplace and customer loan history.
supervisor, Argentina
(Nov 19th) Initial rollout phase mid-2022 to mid-2023 (1M credit cards in
Mexico) to collect credit card data to build predictive model,
accelerated Q3 expansion to 1.5M customer after data after
better model was trained (700 variables in the model),
offering a unique edge over traditional banks.

Initial roll-out are issued to high-creditworthiness customers

(A tier) to reduce delinquency risks. Meli has 140 million

45
 Nov 2024

registered users in Mexico, so 1M is relatively a small

percentage.

The system aims to target c. 85% high quality customers to

pay on time, while having c. 15% of target customers pay late
to incur late fee.

Credit card relies on late fee to increase profitability, and

highly depends on customer type, some may require 2 years
to breakeven, some may take even longer duration. The
goal is to generate more cross-selling, and increase CLV.

Compared to banks in Mexico, 1.5M new credit cards in a

quarter relative to 14% of Mexican population that hold credit
card (18M) is a huge number, indication Meli’s credit card
business in an acceleration phase.

Ex-Meli InsurTech Supervisor, Insurance is highly profitable due to Mercado Pago acting as
Argentina (Nov 18th) a broker rather than an underwriter.

Leveraged marketplace data (e.g., recent purchases) for

precise targeting, such as life insurance offers after baby
product purchases.

While insurance business being highly profitable, it is still a

smaller contributor compared to credit or payments. Latin
America’s insurance penetration is low, presenting growth
opportunities.

Ex-Meli Senior business Fintech application is Mexico is very early stage. Most people
analyst, Payment and in Mexico still prefer to use cash.
Debit Cards, Mexico
(Nov 19th) QR payment is not quite used in Mexico, certainly nowhere as
prevalent as used in Argentina, and it faces barriers due to
cultural and structural nuances, indicates opportunity if
general population do end up adopting, however it is
probably a long way to go). People prefer physical cards as no
tech savviness/literacy is required.

Competitors identified in Mexico: Stori credit card (with local

senior management) growing exponentially. 2 million
Mexicans applied for Stori credit cards in one year. Another
competitor is Spin, while NuBank is also getting traction.

Ex-Meli Payment, Supervisor About 60% of users in Argentina reportedly use Mercado Pago
(Nov 17th) to hedge against inflation or manage short-term savings, as
the app offer short-term deposit.

Outside big three (Brazil, Argentine and Mexico), Chile and

Columbia with growing e-commerce penetration.

46
 Nov 2024

Insurance is highly profitable, but in early stages, products

like extended warranties for electronics and life insurance are
expected to grow, though they may not match the scale of
credit business in next five years.

Ex-PedidosYa Corp Dev senior Q-commerce may be an area of revenue growth as Meli hired
manager of Latam, Corp strategy managers from Q-commerce companies in
Argentina Argentina
Ex-Meli SVP for strategy, Corp Cash still is the King in Mexico. Only 11% of Mexican
dev, IR and population have credit card, situation is what Brazil was 10
sustainability (Meli’s years. All fintech credit portfolios combined is just 7% of the
Podcast) main banks.

Ex-Shopee Head of product at At Meli, fulfillment by Meli is more popular and more
Shopee, Brazil (Tegus) profitable than fulfillment by merchants.

Shopee’s customer profile are mainly Class C/D/E (mid-to-

lower socio class) + millennial and GenZ.

The minimum basket size for Meli is $10 for free shipping,
whereas $2 dollar for Shopee, thus Shopee’s basket size is
smaller. “Fulfillment by Meli” vendors are promoted while
customers search for additional items to consolidate into
minimum free shipping basket, thus there is extra incentive
for merchants to opt in for Fulfillment by Meli even if it is at a
higher cost.

Appendices

Exhibit 1. Five LatAm markets are among the top 10 fastest growing ecommerce economies in 2024

Source: EMarketer, 2024

47
 Nov 2024

Exhibit 2. Underpenetrated Latam Credit Card Market with Mexico having the most upside potential

Source: EMarketer, 2024

Exhibit 3. Average ecommerce sales per digital buyer in Brazil will > 2x between 2019 and 2027

48
 Nov 2024

Exhibit 4. Platform website traffic data comparison in Brazil

Source: Semrush

Exhibit 5. Platform website traffic data comparison in Mexico

Source: Semrush

49
Otis Worldwide Corp (OTIS) / Recommendation: Long
Analyst: Dimitry Karavaikin
Email: [email protected]

50
 This visual was produced with the assistance of generative AI

Company: Otis Worldwide Corp (NYSE: OTIS)

Recommendation: LONG
Analyst: Dimitry Karavaikin
Email: [email protected]
November 2024

The Analyst’s Edge | Autumn 2024 | Columbia Business School

51
Otis Elevator – OTIS US (NYSE): LONG (+30% upside)
Visualising the thesis through headlines:
“Independent elevator service providers struggle to remain profitable and meet modern customer needs.”
“Major elevator players raise prices once again after monetising predictive maintenance.”

SUMMARY FINANCIALS – Base Case Estimates

Summary Financials - Base Case Estimates FY22A FY23A FY24E FY25E FY26E FY27E FY28E
USD M except per share data Net sales 13,685 14,209 14,277 14,927 15,672 16,464 17,305
Probabilty-weighted TP 130.2 yoy growth % -4% 4% 0% 5% 5% 5% 5%
Current Price (26th Nov 2024 ) 101.97 Cons. sales 14,260 14,728 15,314 15,988 16,529
Shares outstanding 399 yoy growth % 0% 3% 4% 4% 3%
Market Capitalisation 40,733 Organic gr. 3% 4% 1% 5% 6% 6% 6%
Cash & eq. (incl. assets HFS) 838 Cons. org. gr. 1% 3% 4% 4% 3%
Total Debt 7,263 Operating Profit 2,173 2,351 2,436 2,580 2,738 2,908 3,084
Preferred equity 0 OPM 15.9% 16.5% 17.1% 17.3% 17.5% 17.7% 17.8%
NCI 55 Cons. OP 2,243 2,505 2,675 2,857 3,032
Total Enterprise Value (TEV) 47,213 OPM 15.7% 17.0% 17.5% 17.9% 18.3%
Diluted EPS 3.0 3.4 3.8 4.1 4.3 4.6 4.9
Book value of common equity 4,846 Cons. dil. EPS 3.8 4.1 4.5 5.0 5.4
Preferred equity 0 FCFF 1,810 1,863 1,971 2,093 2,197
NCI 55 Cons. FCFF 1,440 1,798 1,902 2,015 2,115
Total Debt 7,263
Total Capital 12,164 P/E 30.1 26.6 25.0 23.5 22.0 20.6
P/E less cash 29.5 26.1 24.5 23.0 21.5 20.2
Short interest (% float) 2.2% FCF/share 4.5 4.7 4.9 5.2 5.5
6M ADV 215 FCF yield 4% 5% 5% 5% 5%
ND/EBITDA 2.4 EV/FCFF 26.1 25.3 24.0 22.6 21.5

INVESTMENT THESIS

Recommend Otis as a LONG because:

➢ “Normal” earnings and cash generation of elevator majors will be based on a different (higher-margin,
higher-growth, more recurring) mix of business than reflected today
➢ Larger elevator companies will be winning back installed base:
o Connected/digital elevators skewing the customer maintenance decision further favour the initial
installer or moderniser
o The average customer is increasingly likely to own a greater number of buildings with a larger
elevator base - more likely to be managed as part of a wider fleet/portfolio
➢ Otis is well positioned among the elevator majors
o Has been recovering revenue share in China, which is the world’s largest new elevator market and
will become the largest servicing and modernisation market
o Has the most credible claim of the three largest companies to improve margins and the push/pull
factors are complicated, not well disclosed and not explicitly considered by the sell-side
➢ Studying the historical setup for elevator companies suggests we are in a favourable environment to
own Otis based on order/China sentiment and starting P/E multiple
o Elevator majors continue to trade on China new orders despite this not being the key earnings driver
➢ Sentiment on elevator majors is weak pricing in just 1.2% growth in FCF for Otis

Our probability-weighted scenarios suggest a target price of $130 with 30% upside.

Key characteristics of the elevator & escalator business

Otis manufacture, sell and service elevators, escalators and moving walkways along with any adjacent
offerings required for these to operate smoothly in a building. As we try to make better use of urban space,
buildings have become taller, so these have the obvious impact of making it feasible to live on a higher floor.
Less obviously, these can be critical infrastructure in certain domains (e.g. hospitals).

The Analyst’s Edge | Autumn 2024 | Columbia Business School

52
Otis is the top elevator business by market share with an installed base of ~2.3 mln elevators (Schindler
~2.1, Kone ~21). In most developed countries, this is a replacement business with reasonably high margins, a
relatively sticky customer and good visibility on cash collection. An elevator (or escalator) is both a relatively
small portion of the total cost of a newly built building and a small portion of the ongoing maintenance cost.
A company like Otis will sell reliability. In the construction phase, the elevator staying in operation is key for
the construction team complete the project and to deliver materials to the top floors. In normal operations,
if the elevator breaks down, “tenants cannot go to work so building managers are conservative and don’t
mind paying a premium”. Furthermore, a customer is incentivised to service more rather than less because
“a well serviced elevator will last you a lifetime but when it breaks it’s going to cost you an arm and a leg”,
there are fines for not complying with regulations.

Servicing is a much more profitable and more recurring business than new build. This is an industry that
trades as though it is more cyclical than the underlying business really is. Thinking like an entrepreneur,
you’d want to invest in the businesses that are well positioned to win the rights to service the installed base
of the future. Today the largest market for new elevators is China, with India also being a fast-growing region.

What else do you need to know?

A. Industry has been going through a land grab to take share of lower margin installed base of elevators
– the new installations today will be the servicing base of the future
B. Quickly increasing number of elevators with >15 years in service, all major companies believe they
could be modernising or replacing a greater proportion of them annually than today
C. Management quality across all three large elevator companies has increased significantly
D. An investment in Otis is a bet on the duration of growth (sooner or later)

BEAR SCENARIO Valn. Summary Base Bear Bull Bull+

Target P/E 29 21 35
A bear case would involve Otis growing a closer organic growth rate EPS FY28 4.9 4.7 5.4
Est. TP 143 98 200189
in modernisation to general replacement/maintenance, as well as Upside 40% -4% 96%86%
a lower than GDP growth in organic new equipment sales growth.
There would be no improvement in modernisation operating margin DCF TP 103 91 123

from group average and the mix effect of sales in China becoming a Combined TP 123 95 156 200
less important driver of new equipment sales, could pull down the Upside 21% -7% 53% 96%

margin in NE and in turn drag down the group. In such an outcome, Probability 45% 25% 20% 10%

predictive maintenance/IoT/digital function becomes a cost of business and Otis is never able to monetise it.

BULL SCENARIO

A bull scenario takes into account an accelerating modernisation opportunity. In this case there is scope to
scale the modernisation business and improve margins within the next decade to be closer to those in
regular repair and maintenance. A further reason to be bullish is that elevator companies have not yet
monetised their connected and predictive maintenance opportunities. This is difficult to quantify but we can
estimate the value add to an average customer. Otis controls the data so could charge the customer directly
for the value added. There is also room for potentially value-accretive M&A if Otis de-levers quickly. In a Bull+
case I have also added a best guess at the NPV accretion of monetising the connected offering.

CAN WE HAVE AN EDGE (& WHY DOES THE OPPORTUNITY EXIST)?

▪ Visceral news flow around China property crisis

▪ Otis has limited operating history as a standalone company
▪ Margin sensitivity is a matrix with many moving parts, which requires back of the envelope
calculations over trend extrapolation
▪ Each elevator company discloses in a different and not easily comparable segmentation
▪ Elevator stock coverage is on a regional basis

1
Latest numbers compiled from company filings and industry research.

The Analyst’s Edge | Autumn 2024 | Columbia Business School

53
WHAT THE BEARS BELIEVE (& WHY THEY ARE WRONG)

Bear 1: Elevator companies face low or unpredictable growth, particularly as a result of China new
installation order impact and a property sector that is under pressure. Elevators are not a high growth
industry so the margin for error before a market reaction is relatively limited2.

Our view:

▪ Kone estimate Europe will add 1.5 M elevators with over 15 years in service and China will add 1.8 M.
Our VAR calls suggest that a hard to quantify number but meaningful number available in India as
well. These elevators are prime for modernisation and this is regardless of potential housing market
weakness. This adds an inevitable leg of growth for a business like Otis.
▪ We could value the major elevator companies like Otis on the value of their business model in a
normal year in the future. Excluding South East Asia’s potential, this business could converge
towards the model in the US, with an even wider majority of sales and profits from servicing.

Bear 2: Elevator majors under threat of disintermediation3 – product is not that technologically differentiated
and can be serviced with partial replacements.

Our view: Our VAR contacts triangulated with GLG transcripts have contested this. Although nuanced, the
quality and quantity of data being aggregated (and hence quality of monitoring, predictive and analytical
capabilities) seems significantly lower for an independent player compared to an elevator major like Otis.

Bear 3: Modernisation opportunity is limited to Europe, average building quality in China is too low for
modular modernisation and might well sooner rebuild the building than modernise the elevator (elevator
outlives building lifespan in Asia). In tandem, modernisation profit pool may be limited (uncertain margin).

Our view: Mitigated by leg of growth in India where building quality is higher. Our VAR research gives some
mixed context on the margin potential and will require continued monitoring. We have two key case studies
for higher margin potential in modernisation, which is the margin Fujitec is making in India and the
margin/success specialist modernisation players are having in Americas (from VAR).

PRE-MORTEM & RISKS

We would be wrong if: a) smaller independent players/pure service firms can develop competitive offerings
despite increasingly connected infrastructure; b) connected elevators and predictive maintenance become
an additional cost of business or are not possible to monetise; c) the modernisation opportunity for majors
is limited; d) if we are in a mid-cycle type of multiple and could have waited for a better entry opportunity as
the stocks still trade cyclically. Point b) would still put the larger players in a stronger position but it would
make the opportunity less attractive from an investment standpoint in the near-to-mid-term.

Signposts for sizing up

• Pricing and margin improvement momentum combined with weak China commentary
• Multiples in lower range of the trading band combined with China or new equipment weakness while
long term opportunities remain intact
• Meaningful growth opportunities in RoW markets outside of China
• Outsized events requiring elevator repair (increased natural disaster events are a hidden boon to
elevator companies through the way service contracts are structured)

Signposts for sizing down

• Proof or comments on modernisation margin being challenged or under pressure

• Evidence for lower normal/potential modernisation and servicing margins in China
• Independents developing credible differentiated connected/modernisation capabilities

2
Ensemble Capital via MBI Elevator deep dive May 2021, https://intrinsicinvesting.com/2019/02/22/the-risk-of-low-growth-stocks/
3
E.g. Bernstein research 2024

The Analyst’s Edge | Autumn 2024 | Columbia Business School

54
Tail risks:

• Previously under investigation for anti-competitive pricing – can make it hard to operate, hire talent
• Any alternative, regulation, environmental or other left-field reason why elevators technologically
become defunct

How our thesis can play out:

2024-25: China market stabilises, reaches peak negativity which is priced into the elevator stocks.
2025-27: China challenges should start to subside. Pessimism starts to dissipate and is reflected in the
elevator multiples.
2028-30: New equipment market should mature in Asia. Elevator companies start to trade on modernisation
orders instead of on new equipment orders.

RESEARCH MAINTENANCE PLAN

Monitoring of connected/IoT developments at ISPs and smaller players: continue VAR outreach.
Track implied underlying margin progression of modernisation across elevator majors.
Keep an eye on development and commentary around monetisation of connected, digital, predictive and
other IoT functionality.

KEY INVESTMENT FACTORS (KIF):

KIF 1: Connected elevators & digital offering are increasing customer retention for larger players

▪ “It's going to make it a little difficult for The ISPs because the OEMs are going to say, if you fire us after
that first five-year contract on this new elevator, you're going to lose all this data we amassed.” 4
▪ “Q: …besides empowering the mechanic, what can it measure or do that REM was unable to do?
A: … it's basically the same information. You're just getting it faster. You're getting it all aggregated…
the ability to begin to run predictive models is greater… [someone may say] we'll put an IoT on your
device, on that Otis equipment. They're not going to get the same information. And it's the same for
all the OEMs. Sure, they might put an IoT device on that will transfer data to a cloud, but it's going
to be a fraction of the data that Otis was able to get off the system. Some technology, somebody
crack the code and come up with some Google translate in the device sure, that can happen. But
right now, it hasn't happened yet.”5

4
Tegus transcript – Former MD/General Manager at Otis – Aug 2024
5
Tegus transcript - Former SVP, Global Modernization, Transformation and Acceleration at Otis – Aug 2024
6
Kone Capital Markets Day 2024
7
Otis Investor Marketing 2022

The Analyst’s Edge | Autumn 2024 | Columbia Business School

55
KIF 2: OTIS is winning back servicing on the installed base in China

▪ When Otis was under the United Technologies (i.e. Raytheon) umbrella, could not go after customers
in China as aggressively
▪ Otis has gained back any China revenue share they lost in the 3 years post-spin off against the other
two larger players
▪ Otis and Kone aim regain service contracts on what was once their own installed base from before
Organic gr. (at cc) 2015 2016 2017 2018 2019 2020 2021 2022 2023 2018-23 2015-20
CAGR CAGR
Otis 1% 1% 2% 3% 5% -2% 9% 3% 6% 4% 2%
Schindler 7% 4% 5% 7% 6% 0% 6% 3% 7% 4% 6%
Kone 8% 4% 4% 6% 8% 1% 5% 2% 5% 4% 6%

China sales (USD M) 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2018-23
Otis 1,919 2,113 2,135 2,877 2,573 2,444 5%
Schindler 1,458 1,590 1,809 2,285 1,952 1,804 4%
Kone 2,843 3,474 2,817 2,476 2,661 3,396 3,493 4,340 3,732 3,096 3%

China sales share 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
Otis 32% 30% 29% 30% 31% 33%
Schindler 24% 22% 24% 24% 24% 25%
Kone 44% 48% 47% 46% 45% 42%

KIF 3: ISPs are struggling to compete and elevator majors are able to acquire them:

▪ “From personal experience, I can tell you why I think it's slowed… you have too much risk, some
technology. And then you have certain owners that just have been with their OEM for 20 years.” 8
▪ “As ISPs would grow historically, they were acquired by OEMs. So The ISPs would get a bunch of
share and the OEMs would end up buying back - basically, they're buying back their old portfolio.”9

KIF 4: Margin improvement and mix add an extra lever to FCF and EPS growth

▪ Using the filings from United Technologies, we can see that Otis has shown us once before what kind
of margin can be achieved when not chasing new equipment installation business
▪ Operating margin opportunity in India and South East Asia of ~16% if apt to compare to Fujitec
▪ Steady state mix and margin matrix trade-off analysis (please refer to appendices)
Operating margin 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
Otis 20% 20% 18% 16% 14% 14% 13% 15% 15% 15%
Schindler 12% 11% 12% 12% 12% 11% 10% 10% 8% 10%
Kone 14% 14% 15% 14% 11% 12% 12% 12% 9% 11%

OP Share (top 3) 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
Otis 51% 49% 46% 44% 42% 41% 39% 43% 49% 45%
Schindler 23% 21% 24% 26% 30% 29% 27% 26% 24% 28%
Kone 26% 30% 30% 30% 28% 30% 34% 31% 27% 27%

Fujitec case study: India can be a very profitable market (in their case more profitable than US – despite
greater sales value and higher proportion of non-installation)

10 11

8
Tegus transcript – Former MD/General Manager at Otis – Aug 2024
9
Tegus transcript – Former MD/General Manager at Otis – Aug 2024
10
Fujitec – Move on 5 – Mid-term business plan 2024-28
11
Otis investor presentation

The Analyst’s Edge | Autumn 2024 | Columbia Business School

56
Case study of growth of modernisation market with a maturing installed base 15 years after peak installation
period and demonstration of increase in projects with larger developers in China (even in a flat market).

12 13

KIF 5: Sentiment on China/floorspace is at a low which is a favourable time to own Otis

▪ Based on our stock case studies the trading history of the stocks and a comparison with the
investment environment today

14 15

16

KIF 6: Opportunity in modernisation is legitimate

▪ Initially there was some cause for scepticism because it seemed like all this was being overhyped
and that people were paying more attention to the wrong parts of the modernisation opportunity
▪ In particular, the constant currency organic growth numbers are weaker than the numbers
highlighted by certain management teams and the proportion of modernisation as a % of sales
hadn’t really grown to be that large of a contributor over time

12
Toshiba Building Solutions IR Day 2019
13
Otis Investor Day 2024
14
ANZ Research, Reuters
15
Schindler investor presentation 2024
16
Barclays Research via Franklin Templeton – Jun 2024

The Analyst’s Edge | Autumn 2024 | Columbia Business School

57
 17

Modernisation % sales 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
Otis 10% 10% 10% 10% 10% 11%
Schindler
Kone 13% 12% 14% 14% 14% 15% 14% 14% 15% 17%
▪ We have good examples from history of remodelling (i.e. basically modernisation) in non-core
geographies
▪ Modernisation does seem to be picking up recently and VAR suggests that the opportunity is credible
▪ VAR, management commentaries and consideration of the scale of the modernisation business,
suggests room for margin improvement could be realistic in the near term as well
▪ Industry is modernising just 300K elevators per year out of ~10M units that are >15 years old 18 (this is
a rate of only ~3%)
▪ Europe expected to have 1.5 million more units that will become 15 years old by 2030 (5M -> ~6.5M),
but China expected to contribute more than 1.8M 15 y/o units (1/1.2 M -> 3M+)

19

20

17
Rothschild Long Run Swiss Small & Mid Cap Fund – Quarterly Letter – Jul 2024. Rothschild calculation using industry, company and broker data. Percentage revenue share per business activity
(i.e. new installation, modernisation, service) as part of total industry revenues across the geography.
18
Kone Capital Markets Day 2024
19
Schindler Results Presentation FY22
20
Kone Capital Markets Day 2024

The Analyst’s Edge | Autumn 2024 | Columbia Business School

58
 21

KEY ASSUMPTIONS & VALUATION SANITY CHECKS:

This is a “boring” business with relatively limited downside risk. Our variant view is that we can get better
margins on reasonable growth sooner than expected by consensus, supported by our analysis of the moving
parts in the mix and the profile of the modernisation profile for Otis.

In our base case we have Otis generating 2.2 B USD in cash by 2028 and almost 3 B by 2033. We assume:

• New equipment: grows organically at ~3% from 2026, margins flat in near term but start to decline
gradually in the long term
• Servicing: grows organically at ~6% rates, with a very slight margin lift
o Modernisation grows faster than maintenance & repair and is lower margin but sees margin
improvement of 0.5% per year after 2025. We guess that modernisation margin today is the
same as group, which triangulates nicely with what traditional service margins should be (in
the 20s).
o Maintenance & repair growing at 6%
o Mild FX drag as service base will increasingly be overseas – so to be conservative and not
take a view that the dollar exchange rate will be favourable.
• Normal capital intensity and working capital needs, or lean on guidance otherwise

On a 10 year reverse DCF today’s price implies only ~1.5% growth in free cashflow. For an industry that has a
long runway to put up mid-single digit type growth or higher in what will be the main business (core
maintenance & repair servicing), combined with credible further opportunities from modernisation,
monetisation of the digital offering, potential for realising more of the pricing power and even new
installation growth in Asia Pacific ex China and MEA, this seems easily achievable.
Otis DCF Model Output 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033

Operating income 2,436 2,580 2,738 2,908 3,084 3,275 3,480 3,701 3,941 4,200
Effective tax rate 26% 26% 26% 26% 26% 26% 26% 26% 26% 26%

NOPAT 1,797 1,903 2,020 2,145 2,275 2,415 2,567 2,730 2,907 3,098

Total capex 175 183 192 202 235 247 260 274 289 304
Total D&A 194 203 213 224 235 247 260 274 289 304
Δ in total NWC -6 -60 -69 -74 -78 -83 -88 -94 -101 -107

Est. FCFF 1,810 1,863 1,971 2,093 2,197 2,332 2,478 2,636 2,806 2,991
FCFF margin 13% 12% 13% 13% 13% 13% 13% 13% 13% 13%

21
Kone Capital Markets Day 2024

The Analyst’s Edge | Autumn 2024 | Columbia Business School

59
SUPPORTING MATERIALS

Description or explanation Key conclusions & visuals

Appendix 1: Elevator majors - business mix

Framing: elevator majors have

become increasingly skewed
towards the recurring
maintenance & repair business
compared to new equipment
installation.

22

Elevators are among assets with

the longest service periods, so
maintenance gives a long-
lasting, visible cashflow
opportunity and over time
means that meeting regulatory
standards (including energy
efficiency) becomes
increasingly important.

Toshiba – The Toshiba Next Plan Progress Report – June 2020

Appendix 2: Back of the envelope margin sensitivity comparison

Suggests Otis must be far ahead FY23 Otis Kone V1 Kone V2 Schindler
on servicing profitability. Servicing
Share of sales 59% 55% 55% 55%
Share of OP 85% 90% 90% Majority

Group OPM 15% 11% 11% 10%

Servicing 23% 15% 23% 14%
NE 6% 6% -4% 6%

Appendix 3: Value added research (VAR) calls and key learnings

Former Project Manager at a • Connected/IoT not currently a major factor
construction solutions • “Once you win these contracts quite uncompetitive”
contractor who worked with all • “if Kone somehow won a maintenance contract for the belt
three major listed elevator somehow – they still need to get the belt from Otis who will charge
companies them 10X”
• Huge markups on spare parts
• May well cost the customer the same to modernise an elevator as
to replace entirely
22
Compiled from company filings

The Analyst’s Edge | Autumn 2024 | Columbia Business School

60
 • Modernisation – in the expert’s experience at around 20 years old,
installed in 2000
• Big advantage of larger players is that they are sophisticated
enough to continue meeting regulatory requirements
• For an ISP, in theory, it is possible to bootstrap/replicate a lot of
the elevator components even and be an upstart, but they will be
blacklisted by the major companies for supply of components,
which means unless they can become fully self-sufficient they
may find it hard to complete the maintenance job
Elevator industry consultant/ • Currently all 4 major elevator players sometimes losing out to
inspector with previous local modernisation specialists as it has not been a big focus for
experience across roles the majors until recently (but not all regions have this dynamic) –
involving modernisation and could be good acquisition candidates
repairs at 3 of 4 major elevator • Customer will become more sticky due to connected/predictive
players maintenance but need to prove to them – not quite measurable yet
• Most profitable when breakdowns are outside of the warranty/
normal service agreement – that said most service agreements
tend to be relatively low commitment
“when you have floods like Katrina in NY or Sandy in New Orleans –
the elevator companies make a killing – because it’s all billable,
acts of God – they don’t have enough people to man to service all
the billable work”
• Otis has the highest conversion rate (80-90% vs TKE at 70%)
• Can find a way to maintain anyone’s elevator if needed “Otis did
reverse engineer some of the Thyssen units so they could
incorporate that into their remote monitoring systems but you’re
getting into proprietary software, it’s expensive…”
• Incentive structure can be very different by company (e.g. TKE
“everything is breakeven except the billable repairs”, base salaries
there tend to be the lowest)
• Thyssen “management were more manipulative with their bottom
line in their accounting”
Residential property portfolio • Huge pain point on switching or mixing/matching elevator
manager with 11 years’ providers/servicers
experience and direct • Larger customers with larger portfolios are more attracted to larger
exposure to contracting for elevator companies who can guarantee availability/service time.
elevator maintenance Local company will be more cost effective but can’t guarantee
• Connected elevators reduce the hidden and supervisory costs –
would want proof of the data behind it when having to pay
• Hard for a customer to prevent a proprietary component from
being installed on an elevator in any kind of construction or
renovation process because it can be a third party contractor
making the decision
• On average very tough for customer to switch from whoever
installed to another servicer as they will blame each other and
make the customer pay more
• Elevator modernisation is often essentially the same as an entire
replacement from the perspective of the customer
• Replacement equipment covered by warranty but labour is not
• After 15 years, those items that you need to replace in the event of
a breakdown, stop being readily available – will likely be a very
small company still making those, going to cost you 10x more
• Advantage of certain ISPs is having parts more readily available for
these older elevators

The Analyst’s Edge | Autumn 2024 | Columbia Business School

61
 • Hidden cost/part of decision on digital – in event of breakdown
building manager or superintendent needs to be paid overtime
Former management • Country by country likelihood of having obsolete/unwieldy IT
consultant with project infrastructure to easily monetise connected elevators will vary
exposure to the elevator (Schindler likely to be on older system similar to bahn system)
industry and building • Competing backend IT systems make it harder to harness data
digitalisation • Will need to monetise connectedness because of hidden cost of
data that will one day matter
• Contact suggested potential for a similar challenge/competitive
shift as happening in electric vehicle market with the challenge of
developing afterservice for different (new) kinds of parts given
nature of newer fleet
• Implications: Schindler most likely to struggle with elevator
connectedness based on this conversation. Also if more elevators
are owned by more professional/large entities, more likely to be an
advantage for elevator majors.
Executive Director at a fast- • In India most companies only service their own elevator
growing competitor in India • Get a big advantage with scale as an elevator company in
responsible for introducing negotiating with suppliers for raw materials
machine-room less elevators • India had a big volume increase in installed volume of elevators
15-20 years ago
• Expert estimates that India will require 5x more elevator
installations annually in ~10 years compared to today
• Risk of modernisation margins coming down if that business
becomes more competitive (seems to be happening in India but
only one person and not necessarily something we see in other
regions from previous VAR – some players who dedicate
themselves to mod able to crank up margins, it is a bit of a
specialty but in itself avg project not yet high margin due to big
bespoke requirements)
• When Johnson Lifts (number 1 player in India) first started the only
other elevator company in India was Otis
• Otis has not had that much success in India – Kone, Schindler and
local players tend to be in better positions overall, but Otis is
winning more government business
Implications: Otis has a good runway to grow in India if they make some
changes in strategy, Kone seems best positioned there (this will be the
2nd largest elevator market in the world). Inverting the comments on
positioning in India, suggests that Otis may have the best scale in the
most profitable markets today. Large additional modernisation
opportunity in India, perhaps not really being talked about yet because
it is a less obvious market for the listed players.
Otis former employee (financial • United Technologies were under-investing in the business, using
leadership program) Otis as a cash cow to finance growing the aerospace business
• Historically this was one of the businesses that did well in China -
didn't have IP stolen by Chinese players because elevator safety is
critical so Chinese customers were willing to pay to guarantee the
quality
• Otis is all unionised, many ISPs/smaller competitors non-union
• Thought of themselves as having a higher bar for M&A than others
• IoT/connected relatively new at Otis - were starting to think about it
~2017-18
• Judy Marks perceived as middling in the industry - people don't
think she's a star but don't think she's incompetent. But UTC until
then was very internal promotion heavy
The Analyst’s Edge | Autumn 2024 | Columbia Business School
62
 • Industry is very relationship-based, much more than might seem
• Father has been working on roll-ups of elevator
components/aftermarket businesses for last few years - quite hard
to compete on servicing recently. Private Equity has a big eye on
this space
• Maybe doing more IoT/connected than others, tentative on making
it harder to switch but already enough reasons to stick to Otis
• Otis clearly able to compete better on standalone basis today
• Relationships that allow ISPs to maintain business should likewise
be helpful for Otis and the majors going forward
• Potential for a management upgrade at Otis
Public markets investor with 7 • Margins should be much higher in modernisation eventually
years experience covering one • Not sure customers willing to pay for digital
of the listed elevator • Big differences in how concentrated downtown/elevator centres
companies and team that has are by country/region – US downtown urban areas tend to be
followed elevators for over a highly concentrated and Otis will be highly efficient there
decade • “People always claiming that building quality is low in China, I
don’t think all those buildings will turn out so bad” – positive for
modernisation opportunity
• “When I once spoke to the IR of Otis… now like one and a half
years ago and he quite candidly said because Otis was part of
United Technologies for a very long time and there you had
Raytheon the Military defence contractor - so for a conglomerate
which also owns a military defence contractor, it was actually not
possible to do a lot of business in China”
• Example of ISP acquired by Otis in France that went bankrupt, had
sales pitch of predictive maintenance yet “barely any ISP really
managed to threaten any of the larger organisations”
Sell-side equity research - Head • Management quality at elevator companies improved significantly
of Capital Goods sector having been cross-pollinated from other industrial sectors
• Agreed that “still trade on muscle memory of China news”
• “There is a high degree of paranoia in the space on pricing because
in 2006 all of them got fined for antitrust in Europe… Kone CFO told
me to this data when they interview anyone for a position they have
to have a lawyer chaperone so that everything is recorded if
anyone accuses of them this meeting taking place to collude”
• 2015-16 was the first proper downturn for the elevator market with
some proper dark times
• Schindler seem to be making no money in modernisation
• Kone run professionally and the darling on execution
• Otis had an accident in 2012 they didn’t handle well -> weak China
• “When inflation hit in 2020-21 these guys sat there with their heads
in the sand… Kone Schindler took a 400 bps hit from raw material”
• “There’s no profit pool in new equipment, as soon as you go into
the tallest or latest, your margins go to zero very quickly… problem
with Otis [before spin-off] is they were so focused on margins…
became so focused on standard new equipment, now you are
making your installed base more vanilla, so you don’t have
anymore of these super tall, super complex, hard to take away”
• Definitely give service contract to whoever you pick to modernise
• Installation of a new lift on a construction site much faster than
doing modernisation – would leave all the guides in the shaft
• “Otis should’ve never made 20-22% margins.. over-squeezed and
new equipment was minimised so they were just milking the
installed maintenance base”
The Analyst’s Edge | Autumn 2024 | Columbia Business School
63
 • Schindler currently not strong in South East Asia, more Kone/Otis
• ISPs survive only when OEMs do a bad job “if OEMs did a very good
job these guys would have no results at all, they sell on proximity…
anecdotes that customer is so annoyed with OEM… pay almost
same price or even higher for someone who is down the road”
Appendix 4: China market dynamics

Kone - Capturing the opportunities in China - Sep 2019

Kone Capital Markets Day 2022

Schindler investor presentation 2022

Appendix 5: Potential market evolution and indicative margin sensitivity exercises
Indicative numbers used for the % sales 41% 48% 11%
OPM Total New Equipment Maintenance & Repair Modernisation
margin exercise below based on % sales Otis 15% 6% 25% 15%
Majority Europe - <6% ~25% ?
company filings and industry 28% North America - >6% >25% ?

commentaries. 17% China

Asia
-
-
>6%
-
<25%
-
?
-

Inspired by company materials over time – for example Otis Investor

Day 2022 had some statistics on the industry mix
Possible sales evolution – what may the future look like – for indicative purposes only

The Analyst’s Edge | Autumn 2024 | Columbia Business School

64
 Meanwhile we need to take into account the margin differences as well.
NE in China is higher margin than avg. NE (so negative mix impact of this growing less, but overall positive
impact to NE margins) – overall group impact negative.
Repairs and maintenance higher margin than NE, even in China where it might be subscale could be a
difference by a factor of up to 4x on OPM – overall group margin impact of increased China
replacement is positive.
Modernisation is equal margin to average (and could improve – adding a further boost to OPM in service).
Today/without extra assumptions margin impact is neutral.
Connected/digital currently not in here – would likely be part of repair/mod, perhaps sold with initial
installation. Presumably investment costs already reflected in current margins so could be a further
positive margin impact.
Appendix 6: Management track records in elevators
Judy Marks (Otis) Stabilising growth weakness and margins has happened under her
leadership, regained relative share in China as shown earlier.
Hard to assess track record in the past – main responsibility was at
Dresser Rand in Siemens 2015-17 and government technologies in
Siemens 2011-15.
Philippe Delorme (Kone) Previously worked in the Energy Management and Buildings & IT
segments at Schneider. Some may have expected him to become the
chief executive there given it is the larger part of Schneider’s business.
Tracking a composite of Schneider Buildings and Schneider Energy
Management suggests he delivered a 5% organic growth CAGR from
2013-23 but Schneider EM over the same period relatively weak on a
topline basis.
Silvio Napoli (Schindler) Former CEO of Schindler who was brought back out of retirement.
Understand that previous CEO (in between his two tenures) was taking
some of the right growth and cost initiatives but found it difficult to
manage the two at the same time. A bit of an artificial period to evaluate
him over but Schindler began growing again steadily from 2011 onwards
and improved operating margins from 2008 and prior.
Appendix 7: Unit economics for customer and potential value of connected offering
Otis monetisation of digital, Otis have an installed base of 2.3 million units and is targeting 60%
connected and predictive connected. Suppose the cost base of operating and cost of
maintenance is unclear for development is already included in the margin profile. From our
now. research it seems Otis is not consistently monetising the
digital/predictive maintenance offering today.
Our exercise in assessing the
future value of the opportunity Tegus expert network and others seem hesitant to speak about the
suggested it could be worth exact economics that could be possible but we can do a small
$1.5-30 per share (heavily sensitivity exercise. If Otis meets the target, it will have 1.38 mln
dependent on our connected elevators (even before assuming they get any extra installed
assumptions) but with several base). If Otis charge $300 per month for this connected service
options that would unlock (equivalent roughly from our VAR calls to one hour at the hourly rate of a
much more value. service engineer in the US) this would be adding another 35% to the
sales revenue and >50% to operating profit. I anchored to this initially
as I saw merit in the argument of saving a superintendent’s labour time.

The Analyst’s Edge | Autumn 2024 | Columbia Business School

65
 Otis investor day 2022
Otis digital monetisation Case 1 Case 2 Case 3
Installed elevators M 2.3 2.3 2.3
Connected % 60% 33% 40%
Connected # 1.4 0.8 0.9
Monthly charge USD 300 50 150
Additional sales USD M 4,968 455 1,656
Margin 25% 14% 25%
Additional OP 1,242 64 414
Uplift vs FY23 sales 35% 3% 12%
Uplift vs FY23 OP 53% 3% 18%
NPV (e.g. 10% cap rate) 12,420 638 4,140
Per share 31.09 1.60 10.36
Of course, these are made up numbers and not realistic, there could be
other hidden costs, we ignored working capital. That said, I thought it
was useful to put some numbers around even a very rough idea of what
the opportunity could be.
On the bull side, the amount per month could be much higher, the
margin could be 100% incremental if costs are already sunk and
likewise I think there is a good chance to charge the customer on a
value added basis. The shift to digital gives Otis (and other larger
players with strong capabilities) more control over the data and
information. This will be crucial for convincing the customer what they
are paying for.
I recognise this could also be completely wrong – the labour cost of
supervision or errors could be much lower on average globally, Otis
may not hit their connected targets, perhaps there are hidden costs
(even just working capital). We could also discount the values here and
assume that the real monetisation attempts start in several years’ time.
Appendix 8: Case study & playbook on P/E multiple & return
Immediately after spin-off Otis traded in a different pattern on its multiples to the other two players. In the
last year or two the trading pattern has converged and we can study the history of the ones that were listed
for a longer time. Our analysis on Kone and Schindler suggests the best setups to own them has been
when the PE multiple is troughing, expectations on China and new orders are weak and growth is slowing
down. We see some parallels in the setup today but think the difference is that the margin potential is
becoming more credible and that Otis is still better positioned on aggregate than the other two.

Bloomberg (and based on further analysis – not included)

Appendix 9: Elevator Pricing Indices
One of the bear arguments and
risks in the industry is the
unclear pricing environment
and what is seen as increasing
competition from smaller
players and ISPs who are
pressuring prices downwards.

Although our analysis of the

The Analyst’s Edge | Autumn 2024 | Columbia Business School
66
 competitive position suggests
that elevator companies could
have a stronger case have more
power in the negotiation with
the customer than perhaps
industry commentary suggests,
the realised elevator inflation
seems like it has been relatively
supportive over time regardless
of that.
Appendix 10: There is still runway for further elevator density in China
There are marked regional
differences in the level of
elevator penetration per capita,
but my research suggested
these regional differences are
already well
understood/examined by
investors and the market.

23

Rothschild Long Run Swiss Small & Mid Cap Fund – Quarterly Letter –
Jul 2024

Kone company filings and UN definition (% urban population out of

total)

Schindler investor presentation

Appendix 11: Management (CEO) Assessment
Listened to a series of podcasts Key indicative quotes and recurring topics:
with CEO Judy Marks to get a “This is the company that created the industry and still leads it”
better sense of her 7 mln elevators out of 20-22 mln will be more than 15 years old (has
management and voice been saying this for a while)

Key inferences: “Find loyal irritants”

23
Rothschild calculation using industry, company, broker and UN census data. Number of elevators per 1,000 inhabitants.

The Analyst’s Edge | Autumn 2024 | Columbia Business School

67
 - Otis is highly decentralised “Think about being the disruptor or someone else will…
- Sees role of company as Especially if you’ve been in one industry for a long time”
needing to disrupt/innovate Sees her job as breaking down barriers that prevent others for doing
processes their job better
- Big focus on Asia
“We are part of every culture every country we are in, we are local we
Sources included:
look like the country we are in, we act like the country we are in and we
Judy Marks: Leading in
speak like the country we are in… last we strive to be the best. We we
Revolutionary Times –
strive to be the best, we set big goals, we rise to achieve them and we
Boardroom Beyond Oct 2024;
win together as a team… that’s what makes Otis special in a business
How Otis CEO Judy Marks
where so many of our employees operate autonomously.”
Doubled the Company’s Stock
Price – Leadership Next Mar
“Branch managers… they own a mini business. Now we are not a
2024; Judy Marks, CEO, Otis
franchise. Those are our people, and we train them we develop them,
Elevator -Fortune 500 Daily Sep
they grow up a lot of them through the business. They start as trainees a
2020; Bringing a 165 Year Old
lot of them out of universities and they just have a great opportunity to
Company into the 21st Century:
run their small business.”
Upskilling Employees, utilising
AI & data, and creating a
“China is the single largest market right now for elevators and
meaningful culture – Future
escalators by an order of 10 magnitude over the next largest market
Ready Leadership Nov 2018;
which is India. It’s been a tremendous building boom and even with the
Episode: 91 Otis Worldwide
current controls and constraints, China’s still growing. And we’re
CEO Judy Marks – Thirty Minute
growing there too…”
Mentors Oct 2021
Appendix 12: Historical organic growth comparison
One reason Otis performed well
after its spin-off is that the
market wasn’t willing to give it
credit for growing as fast as the
other companies following a
series of issues and what can be
seen as strategic missteps. We
have gone through these earlier
in this document. HSBC Equity research, company filings (red delineation is Otis spin-off)
Appendix 13: Example of how frequency of inspection/service can be setup and also of how building
codes and regulation can end up driving modernisation

Hyundai Elevator IR Book Q2 2024

Appendix 14: Sell-side coverage – only 1 broker has the same person covering even all 3 majors

The Analyst’s Edge | Autumn 2024 | Columbia Business School

68
 Bank Otis Kone Schindler Fujitec JES Hyundai E Canny
Berenberg - - P. Buller - - - -
Bernstein - N. Green N. Green - - - -
BofA - B. Heelan B. Heelan - - - -
Citi - K. Bergelind S. Banerjee - - - -
DB - J. Kim J. Kim - - - -
DNB - T. Railo - - - - -
Goldman Sachs - D. Costa D. Costa - - - -
HSBC - P. Garg P. Garg - - - D. Wang
Jefferies - R. Maidi R. Maidi - - - -
Morgan Stanley C. Snyder - M. Yates - - - -
Mornginstar - G. Slade D. Molina - - - -
Nordea - M. Doepel - - - - -
RBC Capital - N. Housden N. Housden - - - -
Redburn - J. Moore J. Moore - - - -
SEB - A. Kansanen - - - - -
TD Cowen G. Khanna - - - - - -
Wells Fargo J. O'Dea - - - - - -
UBS A. Mehrotra A. Kukhnin A. Kukhnin - - - -
JPM S. Tusa A. Wilson A. Wilson - - - -
Barclays J. Mitchell V. Sergievskii V. Sergievskii - - - -
Exane BNP M. Borrega M. Borrega M. Borrega - - - -
SMBC Nikko - - - V. Wang V. Wang - -
Astris - - - - Team - -
Tokai Tokyo - - - - K. Hosoi - -
Haitong - - - - H. Terada - -
Storm Research - - - - Team - -
Sample of primary analysts based on Bloomberg data where available, cross-referenced with investor
relations websites
Appendix 15: Relative valuation history

The Analyst’s Edge | Autumn 2024 | Columbia Business School

69
 Bloomberg
Appendix 16: Guidance vs consensus vs our assumptions comment
Consensus is giving Otis a margin decline even
though Q3 margin is 16.9% which is flat vs the
same quarter last year and despite the guidance
continuing to suggest a margin improvement.
This is one of the reasons for a divergence of our
numbers vs consensus in the near term.

Appendix 17: Case study comments in class related to modernisation

Kone Company Filings

Otis investor materials – Analyst’s Edge Case study Oct 2024

The Analyst’s Edge | Autumn 2024 | Columbia Business School

70
SBA Communications Corp (SBAC US) / Recommendation: Short
Analyst: George Macarthur-Stanham
Email: [email protected]

71
 SBA Communications Corp (SBAC US)
November 2024 Short: 35% Downside

72
 SBA Communications Corp (SBAC US)
November 2024 Short: 35% Downside

What the Bulls Believe

● Secular growth story with near guaranteed FCF growth by way of long-term contracted revenue, automatic rent
escalators and parabolic end user demand for data – looking through a short term customer churn impact
Differentiated View
● Core US market flipping to no growth due to; customer consolidation, declining MNO Capex spend, fading tailwinds from
smartphone penetration, and a new competitive threat from direct to cell satellite technology

Business and Industry Overview

SBA Communications (SBAC) is a US based real estate investment trust which develops, owns and operates wireless
infrastructure, primarily macro towers, in the U.S (3rd largest player) and internationally (Canada, Brazil, South Africa,
Tanzania). SBAC’s business is dominated by its US site leasing operations which generate 70% of total revenue and 80% of its
operating profit. These operations are in turn dependent on a highly concentrated customer base, with MNO operators T-
Mobile, AT&T, and Verizon alone representing 88% of segment revenue.

Wireless Towers are simple metal structures that are the key supporting infrastructure housing telecom equipment arrays. Tower
locations are leased by mobile network operators under long-term contracts with automatic annual revenue escalators to enable
them to provide cell service to their underlying customers. Historically, MNOs owned these networks in-house, but over time they
have been overwhelmingly sold off / spun off as pure play vehicles, given independent operators have the advantage of being
able to host multiple MNOs and generate superior economics. Over the last two decades, the strong performance of SBAC has
been driven by;
1. Exploding demand for data and the transition to smartphones, which created ensuing demand for mobile data networks
2. Rolling broadband capex investment cycles (2G, 3G, 4G and now 5G)
3. Low interest rate environment, historically SBAC has been leveraged at 8-9x EBITDA and grown aggressively through
debt-funded acquisitions
In today’s environment, all three of these historical tailwinds are no longer supportive

SBAC Today
As a function of their long-term contracted revenue, and automatic escalators, Tower businesses typically trade in-line with
inverse treasury yields. Today, SBAC trades at 21x EV/EBITDA, a 2 turn premium to its historical multiple despite 10 year
treasury yields trading near 4.5% and at close to post GFC highs. For context, the last time 10 year yields were sustainably
above 5% was in 2002, and SBAC traded at 11x EV/EBITDA, down from >20x in the prior year. At these valuations, you would
assume that SBAC has robust prospects for future growth in FCF generation. Instead its core US market which generates
80% of the businesses’ operating profit has posted its first quarterly decline in leasing revenue (see appendix 3)

The short case for SBAC has three central pillars,

1. Slowing 5G CAPEX spend and near peak smartphone penetration will depress leasing demand in SBAC’s core US
market
2. Industry consolidation from MNOs is leading to massive increases in tower churn which offsets organic revenue growth,
and causes a deterioration in tower unit economics and pricing power
3. Upcoming technological disruption from the 2025 commercial launch of direct to cell satellite coverage from AST
73
Spacemobile
 SBA Communications Corp (SBAC US)
November 2024 Short: 35% Downside

Pillar 1: Slowing 5G CAPEX Spend

5G CAPEX spend from MNO customers (T Mobile, AT&T, Verizon) is
the key determinant of future domestic leasing growth for SBAC. US
MNO CAPEX spend is declining (-12% YoY in FY2023), and forward
guidance is flat or down among 85% of reporting MNOs for FY2024.
Revenue from SBAC’s Site Development segment is a key leading
indicator of MNO leasing demand, and it has continued to decline for
7 consecutive quarters, indicative of weak future leasing demand.

This decline is the result of the low historical returns on 4G CAPEX, with historical ROCE of 2.5% and 5G spend to date tracking
marginally above this. MNOs are seeking to minimise new network CAPEX outlay wherever possible. Additionally, two historic
tailwinds which have driven network expansion - smartphone adoption and transition to video based entertainment - are
reaching saturation. >90% of the US population already has a smartphone, Instagram & TikTok are mainstream products, and
average phone screen time is already at almost 5 hours. Recently management signalled the reducing attractiveness of the US
market with an additional $1Bn acquisition in LATAM, after previous indications that non-core markets would be consolidated.

Pillar 2: Industry Consolidation Causing Deteriorating Pricing Power and Unit Economics
The merger of Sprint (17% of SBAC’s revenue pre-merger) and T-Mobile is resulting in significant location churn (as duplicate
tower sites are removed) estimated at $150m / 11% of FFO. This results in a huge deterioration in the unit economics of
impacted tower sites, noting that a tower with 2 tenants will produce an ROI of ~15%, vs. ~3% for a solo tenant tower.
Additionally, SBAC’s negotiating position and pricing power is significantly weakened by this industry consolidation, with its top 3
customers now representing ~90% of domestic leasing revenue. This shift is already becoming apparent in the numbers with
revenue per tower decreasing 1% in the L12M, despite automatic revenue escalators of >3% (or inflation linked)
contracted in SBAC’s leases. Furthermore, SBAC continues to expand into higher risk international markets which are
assumed to have greater growth potential and superior economics. In reality, revenue per tower for international operations has
increased just 2.4% in the last 10 years, (that’s in total, not annually), and operating profit margins have fallen from 73% to 69%.

Unit Economics Deteriorate with Industry Consolidation

Pillar 3: Technological Disruption Is Here (satellites, this time it’s different…)

SBAC faces additional growth headwinds through the 2025 commercial
launch of direct to cell satellite coverage from Starlink and AST
Spacemobile. Direct to cell satellite is as the name suggests coverage from
a satellite to an unmodified cell phone that obviates the need for a
tower network. The main advantage of this is the capacity for truly global
coverage with no deadzones, while the downside is current bandwidth
limitations, albeit AST has now tested max speeds of 120 mbps which are
more than sufficient for high-data use cases such as video streaming. While
Starlink is likely the more significant longer term threat, ASTS has a material
tech advantage today given Starlink can only offer ~7mbps speeds today. ASTS commercial launch will occur within months,
following the successful launch and unfurling of the first 5 satellites in the cluster, coinciding with an FCC request to begin beta
testing at ~end of year utilising spectrum licensed from MNO providers.

74
 SBA Communications Corp (SBAC US)
November 2024 Short: 35% Downside

ASTS has two of SBAC’s largest customers Verizon and AT&T (70% of the US market) as strategic investors, (not to mention
key competitor American Tower) and partnership agreements in place with MNO operators who have a collective 3Bn people as
customers. This gives ASTS an unparalleled distribution model that will enable the business to scale rapidly as it sells its satellite
coverage as an “add-on” or “day-pack” to complement existing Tower network coverage. Interestingly, Verizon conducted the
largest sale of Tower assets in the US in over a decade ($3Bn) in September, ahead of the launch of Beta testing with ASTS,
expected at end of year. Similarly, major shareholder Vodafone has conducted ~$3Bn of Tower sales in 2024 across two
separate European assets.

Upcoming 2nd Gen satellites launching in 2025 can support up to 3m users per satellite, and the business is expected to have
capacity to support ~200m users by 2026 with a confirmed launch schedule of 60 satellites in 25/26. These satellites are
projected to be cost competitive with Tower networks, with a <2 year payback period assuming a conservative $2/GB data
pricing point. While this technology will not be able to replace tower networks in the foreseeable future due to bandwidth
limitations in high-density environments, it is inconceivable that a successful ramp would not impact CAPEX plans from MNO
operators, who can use D2C as network infill, and will have real-time data to monitor customer take-up. Once scaled, it will be
~25% cheaper on a capex per user base to deploy ASTS’s Block 2 satellites than to develop and maintain a new Tower location.

Bringing on supplemental network capacity for hundreds of millions of people (with Starlink also coming to market in the near
term) will materially inhibit MNO CAPEX spending on network expansion / infill. Particularly exposed is the ~25% of SBAC tower
locations currently located in rural areas per FCC data. Additionally, a major expected driver of the 5G CAPEX cycle was
expanding network coverage to IoT devices and self-driving vehicles, both of which are better served by satellite coverage who
provide sufficient bandwidth and can provide coverage to 100% of the US. Notably, research analysts are completely ignoring
this threat, there is 0 analyst crossover between AST and SBAC, SpaceX is privately listed, and references to satellite to cell
technology in research notes and earnings calls are close to non-existent. Having been briefly considered and dismissed,
without sufficient diligence into the technological breakthroughs that SBAC has achieved over the last 12 months.

ASTS Block 2 Unit Economics Estimate Per User CAPEX Comparison

Valuation
What is the appropriate multiple for a REIT that is no longer a secular growth story and instead faces weakening customer
demand and pricing power in its core market, in addition to meaningful competition from well capitalised new entrants with
superior economics? Sell side coverage is projecting 2.5% EBITDA CAGR out to 2027, but despite this continues to value the
business using 5 year average EV/EBITDA multiple, a period in which SBAC averaged 8% annual EBITDA growth. The last time
SBAC had a period of flat growth was when EBITDA growth fell to 1% in 2016, at this time forward EV/EBITDA compressed to
17x. This was in a period with a superior growth outlook for the core US market, and no threat of technological disruption.

I project that when the market recognises SBAC’s impaired medium term earnings growth (catalysed by a successful AT&T
launch with ASTS in 1H 2025), SBAC will undergo a material rerating to align with offshore Tower peers (given the reduced
attractiveness of the US market) and low-growth infrastructure names (see Appendix 9 for comps table). My bear, base and bull
case scenarios flex three key factors; an interest rate cutting cycle (or otherwise), churn expectations, and a successful
commercial launch from ASTS. Ultimately, I project 35% downside for SBAC under my base case scenario, and would
recommend a long position in ASTS for SBAC investors seeking to hedge without exiting their position. 75
 SBA Communications Corp (SBAC US)
November 2024 Short: 35% Downside

76
 SBA Communications Corp (SBAC US)
November 2024 Short: 35% Downside

Appendix 1 - Key Segment Forecasting

77
 SBA Communications Corp (SBAC US)
November 2024 Short: 35% Downside

Appendix 2 - Consolidated Forecast

Appendix 3 - SBAC Domestic Site Leasing Revenue Growth

78
 SBA Communications Corp (SBAC US)
November 2024 Short: 35% Downside

Appendix 4 - SBAC International Site Leasing Revenue and EBITDA Margins

Appendix 5 - AST CAPEX / Unit Economics Comparison

79
 SBA Communications Corp (SBAC US)
November 2024 Short: 35% Downside

Appendix 6 - SBAC Inverse Correlation with Treasury Yields

Appendix 7 - US Smartphone Penetration

Appendix 8 - SBAC US Tower Distribution

80
 SBA Communications Corp (SBAC US)
November 2024 Short: 35% Downside

Appendix 9 - Comps Table

Comps Table

Appendix 10 - Partnership Announcements

AT&T Investor day announcement tagging ASTS + High Profile Ad Campaign

81
 SBA Communications Corp (SBAC US)
November 2024 Short: 35% Downside

AT&T Customer Care

● Confirmed launch in the near term, and framed pending launch as merely a regulatory matter, not a
technological one.
○ This is clearly not 100% accurate, given significantly more satellite launches need to take place before
the service will be available
● “AST Space Mobile, partnering with AT&T and Verizon, is awaiting FCC regulatory approval for full service.
The deployment strategy includes further launches for continuous coverage by 2025, with a Block 2 series
designed to deliver significantly faster data rates.”

82
 SBA Communications Corp (SBAC US)
November 2024 Short: 35% Downside

T Mobile Customer Care

● “T-Mobile announced the Coverage Above and Beyond initiative in partnership with SpaceX to bring
connectivity to remote locations using Starlink satellites. The T-Mobile Starlink Direct-to-Cell service is still in
development but has been deployed on a best-effort basis in emergency situations, such as during Hurricane
Milton. Initially, the service will support text messaging, with plans to add voice and data in the future.
Customers can expect intermittent signal coverage depending on the positioning of the satellites.”
○ “The T-Mobile Starlink Direct-to-Cell service is still in development, and specific data speeds for the
broader release next year have not been officially detailed.”

83
 SBA Communications Corp (SBAC US)
November 2024 Short: 35% Downside

Business Deepdive

SBAC’s operations are broken down into three segments;

Domestic Site Leasing (70% of Revenue, 77% of Op. Profit)

Owner and operator of wireless communications infrastructure, predominantly macro tower structures that
it leases to Mobile Network Operators (MNOs) to support antenna equipment used for wireless
communications within the US.

SBAC’s domestic customers are highly concentrated within the major MNOs, with the top 3 customers (T-
Mobile, AT&T, and Verizon) representing 88% of segment revenue. As a result, leasing dynamics are
highly dependent on CAPEX spend from these MNOs, which in turn flows through from increasing
consumer demand for mobile data bandwidth. Lease terms are typically long-term, ranging from 5-10 years
with automatic or inflation linked annual escalators.

SBAC’s domestic segment has been under pressure in recent quarters, with industry consolidation
(particularly between T-Mobile and Sprint) resulting in rationalisation of overlapping tower networks. Similar
to a water utility, there is no sense in having duplicating infrastructure for a single network. The company
guides to ~$150m of revenue impact (8% of domestic revenues annually) from 2024 to 2028 as a result.
Importantly, this industry trend results in reduced pricing power for SBAC, and removes a key driver of unit
economics - hosting multiple tenants on a single tower. SBAC is differentiated by its competitors in that it
owns the land, or has long term (20+ years) ground leases in place for >70% of its tower sites.
Management argues this provides greater resiliency, however it also increases operational leverage to the
downside in the event that demand for tower sites reduces.

International Site Leasing (24% of Revenue, 22% of Op. Profit)

International site leasing is a near-identical business model to domestic site leasing, but distributed
amongst 14 markets throughout South America, Central America, Canada, South Africa, the Philippines,
and Tanzania. Brazil is by far the largest contributor, representing ~30% of the segment’s revenues.
Similar to the US market, Brazils MNOs are also undergoing a period of consolidation, which will have a
~5% negative impact to segment revenue.

Moving forward, international site leasing is expected to be the major growth driver for SBAC, who recently
announced an acquisition of 7,000 sites across South America for $1Bn at a ~9% FCF yield.

Site Development (6% of Revenue, 2% of Op. Profit)

Site development is exclusively a US focused segment, and generates revenues through value-add
services to MNO customers re their tower site locations. Key functions include; tower construction, antenna
installation, permitting, site design, and site maintenance. 84
 SBA Communications Corp (SBAC US)
November 2024 Short: 35% Downside

Key Drivers

Pillar 1 Satellite to Cell

● Consumer expectations for data speed and latency are constantly increasing
● However, 84% of US population lives outside of dense urban environments, investing in these areas
is becoming less and less economical
○ AT&T has 85% coverage with 4G, but 45% coverage with 5G.
● Cost estimated at $2 per Gb which is comparable with existing service from MNOs
● Estimates of >120m subscribers by 2026, and ~500m by 2030
● Rising land costs reduces cost efficiency

Pillar 2 Organic Leasing Slowdown

Continued slowdown in leasing revenue growth despite automatic annual escalators in contract

Further expansion into LATAM through acquisition also a sign that US is now a low / no growth market

International is the growth engine for the business, but fundamentally increases FX risk, and to date growth
has not panned out, as evidenced by revenue per tower over time and eroding EBITDA margin

85
 SBA Communications Corp (SBAC US)
November 2024 Short: 35% Downside

Pillar 3 5G CAPEX Cycle

Site development expenses show decline in CAPEX investment in core US market

86
 SBA Communications Corp (SBAC US)
November 2024 Short: 35% Downside

Rise of direct to cell satellite service from ASTS and Starlink provides an additional disincentive to commit
to additional spend on Macro Towers

Pillar 4 Unit Economics Erosion

Debt / Cashflow Analysis

Calls TO Do
● Call with ASTS engineer?
● Call with MNO leasing person

Others to look into

● Brazil lease risk?

Over the last 20 years, Tower businesses have broadly demonstrated phenomenal returns as a result of
parabolic demand for wireless data, Tower network consolidation which decreased pricing competition and
a highly accommodative interest rate environment. A critical driver has been the rolling broadband CAPEX
cycle, with each new generation spurring a round of capital investment from the MNOs, which flows
through to increased demand for tower leasing space.

87
 SBA Communications Corp (SBAC US)
November 2024 Short: 35% Downside

Notes from AST Earnings

● 60 launches in 2025/2026, ultimately targeting 248 total in its constellation
○ Check ISED comments
● [Feedback, can’t be valuation short, clarify why they could get seriously impaired by Sat to Cell, probably need a longer
term view, ideally how does the dividend get cut]

88
 SBA Communications Corp (SBAC US)
November 2024 Short: 35% Downside

1 Minute Summary

120 WORDS MAX

● SBAC is a tower business, it owns and operates the physical infrastructure that enables cellular data networks, it is
heavily leveraged at 8x EBITDA
● 2025 will see the commercial launch of Direct to Cell satellite coverage from several competitors, this is an innovation
which completely disintermediates tower networks.
● Direct to cell is a superior service to both the consumer given its global coverage with no network gaps, and the Mobile
Network Operators as its cheaper to provide on a CAPEX per user basis
● The leading candidate, AST Spacemobile, confirmed in its Q3 earnings it will provide coverage to at least 200m people
at the low end by 2026, with the US market being its initial focus.
● SBACs key customers are equity investors in AST, and heavily incentivised for it to succeed through a partner revenue
share model which, provides AST with instant distribution to a combined customer base of billions of people
○ SpaceX and Amazon are also launching competing services, which will result in additional $Bns of new CAPEX
entering the space and depressing returns for existing tower businesses
● Currently the market is expecting the impact of this to be a rounding error and is not being factored into earnings
expectations, I think a major rerating will occur when the market catches on.

GoGo case study, when did the rerating occur, shift ahead of the numbers actually hitting

○ Firstly two of its top 5 customers are merging, resulting in a 10% hit to FCF generation, and a major reduction in
pricing power from further concentration within key customers
○ Secondly, multiple companies are launching Direct to Cell satellite alternatives, which provide a major
improvement in service quality through global coverage with no

89
Sirius XM Holdings Inc (SIRI) / Recommendation: Long
Analyst: Tristan van Biema
Email: [email protected]

90
Tristan van Biema Analyst’s Edge: Sirius XM Holdings MEMO November 26, 2024

Sirius XM Holdings Inc. (NASDAQ: SIRI): LONG

SUMMARY FINANCIALS – Base Case EsFmates

Summary Financials - Base Case Estimates
(in $ mm, except per share data) Nov-24 FY 23A FY 24E FY 25E FY 26E FY 27E FY 28E
Current Price 27.14 Revenue 8,953 8,690 8,603 8,721 8,897 9,100
Shares Outstanding 339 YoY Growth % -0.6% -2.9% -1.0% 1.4% 2.0% 2.3%
Market Cap 9,200 Consensus 8,684 8,739 8,824 8,848 8,929
( - ) Cash (127) Adjusted EBITDA 2,789 2,726 2,714 2,900 3,024 3,130
( + ) Long Term Debt 10,726 EBITDA Margin 31.2% 31.4% 31.5% 33.2% 34.0% 34.4%
(+) Minority Interest NA Consensus 2,703 2,679 2,719 2,737 2,775
Enterprise Value 19,799 Cons. Margin 31.1% 30.7% 30.8% 30.9% 31.1%
Unlevered FCF 1,718 1,384 1,736 2,094 2,234 2,297
Short Interest (% of Float) 4.94% FCF Margin 19.2% 15.9% 20.2% 24.0% 25.1% 25.2%
EV/EBITDA 7.10x 7.26x 7.30x 6.83x 6.55x 6.33x
BUSINESS OVERVIEW
SIRIUS XM HOLDINGS operates two complimentary audio entertainment businesses: SiriusXM and Pandora
(and Off-PlaDorm):
• SiriusXM features music, sports, entertainment, comedy, talk, news, traffic and weather channels for a
subscripKon fee. The premier content bundle has live, curated, exclusive, and on demand programming
and is distributed through proprietary satellite radio systems with the radios themselves primarily
distributed through automakers, retailers, and the company’s website. SiriusXM has ~34 mill.
subscribers and derives the bulk of its revenues via subscripKon model.
• Wholly owned subsidiary of Sirius XM, Pandora, operates a music, comedy, and podcast streaming
plaDorm, offering a personalized experience for each listener on mulKple potenKal devices. Pandora
allows listeners to create personalized staKons and playlists. Available as an ad supported radio service
or as a radio subscripKon service (Pandora Plus), and an on-demand subscripKon service (Pandora
Premium). Pandora has 6 mill subscribers and ~46 mill. MAU as of December 2023.

INVESTMENT BACKGROUND
SIRIUS XM HOLDINGS has been challenged recently by fears of disintermediaKon, lower car sales, and falling
conversion. Net addiFons began to slow in early 2022 before turning negaFve in 2023 leaving a stock that
had historically traded at ~15x NTM EBITDA trading under 8x. The market is now waiFng to see if SIRI can
once again return to posiFve net adds. There are a few key points to call out regarding each of SIRI’s
challenges:

WHAT THE BEARS BELIEVE (AND WHY THEY’RE WRONG)

Bear No. 1: SIRI will conKnue to lose customers as the company becomes disintermediated in the car by on-
demand products, CarPlay/Android Auto, and younger demographics move towards other services.
Our View: While the bear view is correct for the legacy radio companies, Sirius XM is a completely different
story. SIRI has maintained the same share of ear in the car since 2018 while radio has fallen from 82% to 70%.
Fear of disintermediaKon is overdone for this subscripKon business as SIRI outperforms in cars where Apple
CarPlay and Android Auto are available (taking share from AM/FM radio), countering arguments that mobile
devices dilute Sirius XMs share.

91
Tristan van Biema Analyst’s Edge: Sirius XM Holdings MEMO November 26, 2024

Bear No. 2: SIRI has an inability to convert and add new customers which means the stock deserves a lower
mulKple as the company has limited other opKons to increase revenue growth due to its already industry
leading ARPU and churn.
Our View: SIRI net adds have been constrained due to the macro car cycle rather than the products appeal to
customers as is highlighted by record low churn and premium ARPU. As the car market stabilizes to historical
levels of ~17 mill. SARS, SIRI’s increased radio penetraKon in new cars will allow it once again see posiKve net
adds for the year beginning in 2026, even if the company is unable to increase conversion rates. This, paired
with a stronger ad market will lead to revenue growth.

PROBABILITY WEIGHTED PRICE TARGET

My research suggests a three-year price target of $41, which represents 58% upside, or an 18% IRR over the
investment period.

SIRI - Probability Weighted 3-Yr Price Target

Investment Case Probability Reference Year NTM EBITDA (in mill) EV/EBITDA Price Target % Return
Bull 5% FY 2027 3,333 11.00 x $ 88.83 241%
Base 55% FY 2027 3,130 8.50x $ 58.89 126%
Bear 40% FY 2027 2,072 5.50 x $ 10.63 -59%
Weighted Average $ 41.08 58%

KEY INVESTMENT FACTORS

1. Listening habits are supporFve of linear programming in the vehicle and satellite radio has more longevity
than assumed: As per Edison Share of Ear Research:

Far more Kme is spent on linear plaDorms in the vehicle than

on demand opKons. According to Edison research, Americans
listen to the most audio in the home followed closely by the
car (74% vs 64%). The car is a unique environment, as linear is
far more preferrable than on demand listening. In fact, 76% of
the Kme spent in the car is listening to linear plaDorms
(including AM/FM radio, radio streams, SiriusXM radio, and
other radio services) while paid streaming services, podcasts
and CDs garner 24% of car listening. This is almost the direct
opposite of all other locaKons.

AddiKonally, one would assume that younger generaKons are

largely listening to streaming in the car, however, 13–24 year-
olds sKll spend 49% of their Kme with AM/FM radio
highlighKng the resilience of these legacy products.

SIRIUS XM is significantly sKckier than AM/FM Radio in the

vehicle and has managed to maintain share of ear above 20%
since 2018 while AM/FM has fallen from 82% to 70%.

92
Tristan van Biema Analyst’s Edge: Sirius XM Holdings MEMO November 26, 2024

Furthermore, Sirius XM has a stronger presence parKcularly in newer vehicles and surprisingly in vehicles
where alternaKves like Apple CarPlay or Android Auto are available: In vehicles made in 2019 or later, 22% of
Kme is spent listening to Sirius XM vs in older vehicles (2009 or older) where that number is under 4%. Sirius
XM also outperforms in vehicles where alternaKve like Apple CarPlay and Android Auto are available (gaining
share from AM/FM radio). Sirius XM strength in newer car models means that as new car sales increase Sirius
XM will benefit.

As per Edison Share of Ear Research:

Yet Sirius XM (a company that has traded historically at a premium to the cyclical, adverKsing driven radio
companies) now trades at the same EV/NTM mulKple as these far more challenged businesses.

RADIO COMPANIES VS SIRIUS Average EV/NTM EBITDA

Year 2018 2019 2020 2021 2022 2023 2024
iHeartMedia, INC BK 8.00x 14.30x 10.49x 6.32x 7.55x 6.86x
Audacy 7.36x 9.95x 10.41x 9.65x 18.76x 11.53x BK
Beasley Broadcast Group 6.87x 7.20x 14.99x 10.42x 9.42x 11.47x 10.00x
Cumulus Media Inc 6.93x 6.34x 11.29x 5.56x 4.46x 7.68x 8.04x
Townsquare 5.92x 6.51x 9.69x 6.85x 5.35x 6.16x 6.30x
Average 7.05x 7.87x 12.14x 8.59x 8.86x 8.88x 7.80x

Sirius XM 14.41x 16.34x 14.32x 12.37x 11.44x 10.87x 7.21x

Difference vs avg Radio Comp 7.36x 8.47x 2.18x 3.78x 2.58x 1.99x -0.59x

93
Tristan van Biema Analyst’s Edge: Sirius XM Holdings MEMO November 26, 2024

Revenue Growth Comparison

Despite, its far more stable revenue as a 30.00%

subscripKon business (with industry leading churn 20.00%

vs radio businesses whose revenues fluctuate 10.00%

significantly due to macro factors), Sirius XM has 0.00%

2018 2019 2020 2021 2022 2023 2024

been punished for a recent slowdown in revenue -10.00%

growth due to self-pay net adds falling in recent -20.00%

years. This will change with the car cycle’s recovery. -30.00%

iHeartMedia, INC Audacy Beasley Broadcast Group Cumulus Media Inc Townsquare Sirius XM Source: Company Financials

2. As the car cycle returns to normalcy, Sirius XMs increasing radio penetraFon in vehicles will lead to
improved net adds:

Vehicle sales are below historical averages due to various factors: In the 5 years before the pandemic the
average SARS in the US was 17.7 mill. Today, SARS stands at 16.1 mill. The car market has been constrained by
low inventories, high financing rates (despite recent Fed cuts), and significant increases in new vehicle prices.

But despite less cars being sold, Sirius XM has been increasing its penetraKon among new vehicles: While SARS
remains constrained, Sirius XM Radio PenetraKon has risen from mid 70% to low 80% and the correlaKon
between Total Vehicle Sales and Sirius XM radio installaKons has increased from ~0.7 (2014 to today) to 0.88
(2022 to today). As the car cycle returns to normalcy Sirius XM is poised to benefit substanKally.
Sirius XM Radio Car Sales Penetration
20,000 100%

18,000 90%

16,000 80%

14,000 70%

12,000 60%

10,000 50%

8,000 40%

6,000 30%

4,000 20%

2,000 10%

- 0%
2005-01-01
2005-05-01
2005-09-01
2006-01-01
2006-05-01
2006-09-01
2007-01-01
2007-05-01
2007-09-01
2008-01-01
2008-05-01
2008-09-01
2009-01-01
2009-05-01
2009-09-01
2010-01-01
2010-05-01
2010-09-01
2011-01-01
2011-05-01
2011-09-01
2012-01-01
2012-05-01
2012-09-01
2013-01-01
2013-05-01
2013-09-01
2014-01-01
2014-05-01
2014-09-01
2015-01-01
2015-05-01
2015-09-01
2016-01-01
2016-05-01
2016-09-01
2017-01-01
2017-05-01
2017-09-01
2018-01-01
2018-05-01
2018-09-01
2019-01-01
2019-05-01
2019-09-01
2020-01-01
2020-05-01
2020-09-01
2021-01-01
2021-05-01
2021-09-01
2022-01-01
2022-05-01
2022-09-01
2023-01-01
2023-05-01
2023-09-01
2024-01-01
2024-05-01

Total Vehicle Sales (000s), Quarterly, SARS % of SARS Receiving Sirius Radio Linear (% of SARS Receiving Sirius Radio) Source: FRED, Company
Financials & our estimates

94
Tristan van Biema Analyst’s Edge: Sirius XM Holdings MEMO November 26, 2024

Conversion issues and potenKal remedies: Sirius XMs radio penetraKon in vehicles is improving but that is only
one factor in new customer addiKons. The second is conversion from trial customers to full Kme customers. To
esKmate this conversion, we have taken gross addiKons in the period and divided it by the number of radios
installed two quarters before (assuming a 6 month trial). The findings below, highlight that the company has
struggled with conversion recently with conversion falling from mid 50% to mid 40% based on our esKmates.
Estimated Conversion - 6 Month Lag
70%

60%

50%

40%

30%

20%

10%

0%
Q2 1 5
Q3 1 5
Q4 1 5
Q1 1 5
Q2 1 6
Q3 1 6
Q4 1 6
Q1 1 6
Q2 1 7
Q3 1 7
Q4 1 7
Q1 1 7
Q2 1 8
Q3 1 8
Q4 1 8
Q1 1 8
Q2 1 9
Q3 1 9
Q4 1 9
Q1 1 9
Q2 2 0
Q3 2 0
Q4 2 0
Q1 2 0
Q2 2 1
Q3 2 1
Q4 2 1
Q1 2 1
Q2 2 2
Q3 2 2
Q4 2 2
Q1 2 2
Q2 2 3
Q3 2 3
Q4 2 3
Q1 2 3
Q2 2 4
Q3 2 4
24
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
Q1

Source: Company Financials &

our estimates

The issues surrounding conversion are being tackled by management in the following ways:
Problem SoluFon
Appeals only to higher end and older customers New price Kers (Build a Plan) with opKon add-ons
with all access plan cosKng $24.98 for Talk, News, and Sports (starts at $9.99);
reducing trial period
Lack of customizaKon 360L revamps the customer experience and
modernizes the product
On demand plaDorms compeKKon in music space Purchasing exclusive spoken word content where
on demand is not as important (set it and forget it)
Key Metric Management is observing is number for days acKve in the first month for new cohorts as
precursor to conversion

While these issues are important, as long as SIRI is able to maintain conversion rates where they currently
stand, the company will return to net subscriber growth once the car cycle normalizes thanks to the improved
radio penetraKon menKoned above. Once this subscriber growth returns, senKment will change around the
company. Below are our projecKons for subscriber addiKons (we see posiKve net adds in 2026).
Subscriber Additions returning to growth in 2026
Subscriber Gross Adds Subscriber Churn Subscriber Net Adds

2,500

2,000

1,500

1,000
KPI 2024 2025 2026 2027 2028
500
Car Sales 16,135 16,662 17,039 17,039 17,039
- Radio Penetration 83% 84% 84% 85% 85%
(500) Conversion 42% 41% 41% 41% 42%
(1,000)
Net adds (348) (304) 10 77 230
Churn 1.60% 1.60% 1.55% 1.55% 1.55%
(1,500)
ARPU 15.20 15.10 15.42 15.87 16.32
(2,000)
Q2 2019

Q3 2019

Q4 2019

Q1 2020

Q2 2020

Q3 2020

Q4 2020

Q1 2021

Q2 2021

Q3 2021

Q4 2021

Q1 2022

Q2 2022

Q3 2022

Q4 2022

Q1 2023

Q2 2023

Q3 2023

Q4 2023

Q1 2024

Q2 2024

Q3 2024

Q4 2024

Q1 2025

Q2 2025

Q3 2025

Q4 2025

Q1 2026

Q2 2026

Q3 2026

Q4 2026

Q1 2027

Q2 2027

Q3 2027

Q4 2027

Q1 2028

Q2 2028

Q3 2028

Q4 2028

Source: Company Financials

& our forecasts

95
Tristan van Biema Analyst’s Edge: Sirius XM Holdings MEMO November 26, 2024

KEY FINANCIAL ASSUMPTIONS AND VALUATION

Revenue Build AssumpKons:

1. Car Sales to return to slightly below historical average of 17 mill. SARS by 2026
2. Radio PenetraAon to grow slightly over the years (from 83% to 85%)
3. Base case assumes no improvement in conversion despite company iniAaAves.
4. Churn improves slightly from 1.60% to 1.55%
5. ARPU to decline 1% in 2025, before returning to growth as the company implements price increases

EBITDA Margin:
Margins to improve with slight reducAons in SG&A, and a return to more historical levels of content spend.

CAPEX:
We have roughly followed management guidance for CAPEX in the coming years.
CAPEX 2024 2025 2026 2027 2028
Our Estimate 803 680 500 460 440
Guidance 800 680 495 445 400
Non Satellite 500 500 400 400 400
Satellite 300 180 95 45 0

PRE-MORTEM / RISKS

DeterioraKon of relaKonships with OEMs visible through decreased radio penetraKon and lack of renewals:
• New models of vehicles (like EV’s) remove features and/or radios for weight reducKon
• OEMs increase their demanded subsidies and revenue shares to include Sirius XM product in vehicles
• New models being released without Sirius XM as an opKon

Car Market takes longer to recover:

• Interest rate declines do not materially impact financing for vehicles and car prices stop their decline
leading to reduced/or stagnant car sales
• Car market suffers macro-economic shock due to supply chain issues related to potenKal tariffs of new
administraKon

Conversion conKnues to decline despite increasing content costs and CAPEX investment:
• Trial period lengthens and company stops invesKng in new content
• Sirius XM ARPU declines significantly highlighKng potenKal promoKons to boost subscriber count
• Subscriber churn starts picking up highlighKng lack of appeKte for product

Content Threats:
• SpoKfy or other large brands begin bidding for Sports assets that have historically been Sirius XM
properKes (NFL deal expires in 2027)
• Howard Stern reKrement leads to churn event

Driverless cars materialize sooner than anKcipated leading to more visual content being consumed in the
vehicle

96
Tristan van Biema Analyst’s Edge: Sirius XM Holdings MEMO November 26, 2024

RESEARCH MAINTENANCE PLAN

• Periodic checks with dealers and auto analysts on the state of the car market
• Tracking monthly SARS as a predicKve indicator of potenKal subscriber net adds in the future
• Tracking Radio installaKons as potenKal predicKve indicator of net adds 6 months later
• ConKnued VAR calls parKcularly to get a sense of number of days acKve in first month of trial period
and how customers are responding to the modernizaKon of the product

97
Tristan van Biema Analyst’s Edge: Sirius XM Holdings MEMO November 26, 2024

APPENDIX:
EXHIBIT A: KEY VAR
Type Contact Notes/Commentary
Role/Context
Former Advance Product Strategy: A media first company. It is all human curated at Sirius XM and they
Intern Management really believe in that. Culture: At Sirius it felt like people still had a lot of passion
Intern - for the product.
Automotive
Business Getting new customers: The earlier you listen and the more you listen at the
beginning of your trial the likely you are to be a customer. Cold Start: what you
land on when the company knows nothing about you, what does the product
look like when they first open the screen is crucial.

Most of the electric vehicle products is IP only. It is a slightly diFerent

product. There was a lot of demand from electric vehicle providers that wanted
the product because customers wanted it.

Exclusive content: Typically, their content is exclusive in the first week to Sirius
XM and then the content moves other places. They license it to Spotify etc. She
believes there are more Sirius XM podcasts on Spotify than Spotify podcasts.

Relationships with OEM: OEMs still want the product and want to maintain
the relationship with Sirius. What will happen with CarPlay next Gen? CarPlay
next gen was announced this summer.
Employee VP, Business What diFers SIRI from the other media companies is churn (at 1.60%)
Development at
SiriusXM/Pandora The app: The flow of customer is from vehicle to app and not vice versa - Sirius
XM is still known for the car first. The Future: They are a cash cow but it is the
growth that is hampering the stock. They have a strong CTO that he believes in
and strong content. A few challenges: He sees a lot of expectations for growth
but not too much investment in the ways to get there. They don’t want to
sacrifice the cash cow for future profits.

Cannibalization: There are minimal concerns around cannibalization. The app

is really to drive the younger generation that want it. There has been no
cannibalization of the satellite side.

Culture is fragmented: There is this wall between the auto and digital side
further complicated by Pandora acquisition. Pandora: Can potentially funnel
the Sirius XM experience into the Pandora experience or vice versa. It has been
a stable business. Very loyal customer base but unclear future.

EV: If Sirius can maintain the same penetration levels in the EV space as it did
in traditional vehicles that would be promising. The dynamic might need to
change to a more streaming in car model. But with streaming now there are
data charges associated with the app vs with satellite. Also, EV’s don’t want the
weight of the Sirius XM transponder.
Market Chief Economist Unusual car market: This is the first time in history that we are in a
Researcher at Cox Automotive positive growing economy and yet have total new light vehicle sales
under 16 mill. a year. His research suggests that the normal number is
98
Tristan van Biema Analyst’s Edge: Sirius XM Holdings MEMO November 26, 2024
closer to ~17 mill. (number prepandemic was on average ~17 mill.) He
believes we will get back to this normal in the next 5 years. If you look at
retail sales, they are only starting to recover. He also believes the real
growth will be on the used vehicle market (he is not sure what that
means for Sirius XM though because he has not seen dealers pushing it).
Regardless, he thinks we are entering a growth period for vehicle sales.

Why has this car market been so unusual: First the issue was supply
and now it is a function of aVordability. Fundamental demand for light
vehicles is 16 mill. a year but historically we always go over that with
sales reaching 17 mill. in positive growth environments. Car aVordability
will keep us from going above 17 mill. in the future unless we have a
breakthrough with vehicles under 35k.

Sirius XM: He doesn’t see Sirius XM being pushed at dealers which is

concerning if they are after the used car market (which he believes will
play an increasingly important role). The used car sales will be the place
where we will see the most growth in the coming years.

EXHIBIT B: CompeKKve Environment

COMPETITOR SUBSCRIBER COUNTS TRADING LIKE A RADIO COMPANY BUT FAR LESS CYCLICAL

iHeartMedia, INC Revenue Breakdown Sirius XM Holdings Revenue Breakdown

23%
29%

71% 77%

Advertising Revenue Other Advertising Subscription Source: Company Financials

Sirius Radio Installations (000s)

4,000

3,500

3,000

2,500

2,000

1,500

1,000

500

-
Q1 2014
Q2 2014
Q3 2014
Q4 2014
Q1 2015
Q2 2015
Q3 2015
Q4 2015
Q1 2016
Q2 2016
Q3 2016
Q4 2016
Q1 2017
Q2 2017
Q3 2017
Q4 2017
Q1 2018
Q2 2018
Q3 2018
Q4 2018
Q1 2019
Q2 2019
Q3 2019
Q4 2019
Q1 2020
Q2 2020
Q3 2020
Q4 2020
Q1 2021
Q2 2021
Q3 2021
Q4 2021
Q1 2022
Q2 2022
Q3 2022
Q4 2022
Q1 2023
Q2 2023
Q3 2023
Q4 2023
Q1 2024
Q2 2024
Q3 2024

Source: Company Financials

99
Tristan van Biema Analyst’s Edge: Sirius XM Holdings MEMO November 26, 2024

EXHIBIT C: Subscriber Analysis

Subscriber Additions returning to growth in 2026
Subscriber Gross Adds Subscriber Churn Subscriber Net Adds

2,500

2,000

1,500

1,000

500

(500)

(1,000)

(1,500)

(2,000)
Q2 2019

Q3 2019

Q4 2019

Q1 2020

Q2 2020

Q3 2020

Q4 2020

Q1 2021

Q2 2021

Q3 2021

Q4 2021

Q1 2022

Q2 2022

Q3 2022

Q4 2022

Q1 2023

Q2 2023

Q3 2023

Q4 2023

Q1 2024

Q2 2024

Q3 2024

Q4 2024

Q1 2025

Q2 2025

Q3 2025

Q4 2025

Q1 2026

Q2 2026

Q3 2026

Q4 2026

Q1 2027

Q2 2027

Q3 2027

Q4 2027

Q1 2028

Q2 2028

Q3 2028

Q4 2028
Source: Company Financials
& our forecasts

SIRIUS XM ARPU
16 10%

16 8%

15
6%

15
4%
14
2%
14

0%
13

13 -2%

12 -4%
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
2019 2019 2019 2019 2020 2020 2020 2020 2021 2021 2021 2021 2022 2022 2022 2022 2023 2023 2023 2023 2024 2024 2024
SIRUS XM ARPU Growth

Source: Company Financials

Pay Back Period (Months)

25

20

15

10

-
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
2019 2019 2019 2019 2020 2020 2020 2020 2021 2021 2021 2021 2022 2022 2022 2022 2023 2023 2023 2023 2024 2024 2024

Source: Company Financials

100
Tristan van Biema Analyst’s Edge: Sirius XM Holdings MEMO November 26, 2024

EXHIBIT D: Full Base Case Income Statement and Drivers

SIRI - Base Case Model
Year 2024E 2025E 2026E 2027E 2028E
Key Drivers
Car Sales 16,135 16,662 17,039 17,039 17,039
Radio Penetration 83% 84% 84% 85% 85%
Conversion 42% 41% 41% 41% 42%
Sirius XM Net adds (348) (304) 10 77 230
Churn 1.60% 1.60% 1.55% 1.55% 1.55%
ARPU 15.20 15.10 15.42 15.87 16.32
Pandora MAU 44,185 42,418 41,145 39,911 38,713
Revenue Breakdown
Sirius XM Revenue 6,598 6,500 6,626 6,816 7,036
YoY Growth -3.5% -1.5% 1.9% 2.9% 3.2%
Pandora Revenue 2,092 2,104 2,095 2,080 2,064
YoY Growth -1% 1% 0% -1% -1%
Total Revenue 8,690 8,603 8,721 8,897 9,100
YoY Growth -2.9% -1.0% 1.4% 2.0% 2.3%
COGS Sirius XM 2,682 2,617 2,591 2,615 2,681
% of Sirius sales 40.7% 40.3% 39.1% 38.4% 38.1%
COGS Pandora 1,424 1,439 1,434 1,425 1,415
% of Pandora sales 68.0% 68.4% 68.4% 68.5% 68.5%
TOTAL COGS 4,106 4,057 4,025 4,039 4,095
% of sales 47.2% 47.2% 46.2% 45.4% 45.0%
Gross Profit 4,584 4,547 4,696 4,857 5,005
Gross margin % 52.8% 52.8% 53.8% 54.6% 55.0%
YoY Change -3.6% -0.8% 3.3% 3.4% 3.0%
Operating Expenses 6,159 2,641 2,616 2,669 2,730
% of sales 70.9% 30.7% 30.0% 30.0% 30.0%
YoY Change 106.5% -57.1% -0.9% 2.0% 2.3%
Depreciation and Amortization 613 602 610 623 637
% of sales 7.1% 7.0% 7.0% 7.0% 7.0%
Adjusted EBITDA 2,726 2,714 2,900 3,024 3,130
Margin 31.4% 31.5% 33.2% 34.0% 34.4%
YoY Change -2.3% -0.4% 6.8% 4.3% 3.5%
Interest Expense (459) (536) (511) (458) (401)
PreTax Income (1,992) 342 346 336 344
Income Tax Expense (201) (72) (73) (71) (72)
Effective Tax Rate -10% 21% 21% 21% 21%
Net Income To Company (2,193) 1,082 1,239 1,367 1,480
Net Margin -25% 13% 14% 15% 16%
Diluted EPS (6.47) 3.19 3.66 4.03 4.37
Free Cash Flow
Unlevered Free Cash Flow 1,384 1,736 2,094 2,234 2,297
Cash Interest (438) (483) (460) (412) (361)
Levered Free Cash Flow 946 1,253 1,633 1,822 1,936
101
Tristan van Biema Analyst’s Edge: Sirius XM Holdings MEMO November 26, 2024

EXHIBIT E: Drivers for Each Scenario

SIRI - Bear Case Model
Year 2023A 2024E 2025E 2026E 2027E 2028E BEAR CASE
Key Drivers
Car Sales 16,010 16,135 16,662 17,039 17,039 17,039
Radio Penetration 85% 83% 83% 80% 78% 77%
Conversion 41% 42% 44% 41% 38% 35%
Sirius XM Net adds (445) (348) (377) (1,006) (1,304) (1,497)
Churn 1.58% 1.60% 1.70% 1.80% 1.80% 1.80%
ARPU 15.60 15.20 14.82 14.38 14.17 13.94
Pandora MAU 46,026 44,185 41,534 39,042 36,699 34,497
Revenue Breakdown
Sirius XM Revenue 6,840 6,598 6,373 6,023 5,716 5,378
YoY Growth -0.9% -3.5% -3.4% -5.5% -5.1% -5.9%
Pandora Revenue 2,113 2,092 2,071 2,011 1,944 1,879
YoY Growth 0.7% -1.0% -1.0% -2.9% -3.3% -3.4%
Total Revenue 8,953 8,690 8,444 8,034 7,660 7,257
YoY Growth -0.6% -2.9% -2.8% -4.9% -4.6% -5.3%
Adjusted EBITDA 2,789 2,726 2,617 2,388 2,237 2,072
Margin 31.2% 31.4% 31.0% 29.7% 29.2% 28.5%
YoY Change -1.5% -2.3% -4.0% -8.7% -6.3% -7.4%
Interest Expense (451) (459) (536) (511) (463) (421)
Free Cash Flow
Unlevered Free Cash Flow 1,719 1,384 1,631 1,587 1,493 1,430
Cash Interest (405) (438) (483) (460) (416) (379)
Levered Free Cash Flow 1,313 946 1,148 1,127 1,077 1,051
SIRI - Base Case Model
Year 2023A 2024E 2025E 2026E 2027E 2028E
Key Drivers BASE CASE
Car Sales 16,010 16,135 16,662 17,039 17,039 17,039
Radio Penetration 85% 83% 84% 84% 85% 85%
Conversion 41% 42% 41% 41% 41% 42%
Sirius XM Self Pay Net adds (445) (348) (304) 10 77 230
Churn 1.58% 1.60% 1.60% 1.55% 1.55% 1.55%
ARPU 15.60 15.20 15.10 15.42 15.87 16.32
Pandora MAU 46,026 44,185 42,418 41,145 39,911 38,713
Revenue Breakdown
Sirius XM Revenue 6,840 6,598 6,500 6,626 6,816 7,036
YoY Growth -0.9% -3.5% -1.5% 1.9% 2.9% 3.2%
Pandora Revenue 2,113 2,092 2,104 2,095 2,080 2,064
YoY Growth 1% -1% 1% 0% -1% -1%
Total Revenue 8,953 8,690 8,603 8,721 8,897 9,100
YoY Growth -0.6% -2.9% -1.0% 1.4% 2.0% 2.3%
Adjusted EBITDA 2,789 2,726 2,714 2,900 3,024 3,130
Margin 31.2% 31.4% 31.5% 33.2% 34.0% 34.4%
YoY Change -1.5% -2.3% -0.4% 6.8% 4.3% 3.5%
Interest Expense (451) (459) (536) (511) (458) (401)
Free Cash Flow
Unlevered Free Cash Flow 1,719 1,384 1,736 2,094 2,234 2,297
Cash Interest (405) (438) (483) (460) (412) (361)
Levered Free Cash Flow 1,313 946 1,253 1,633 1,822 1,936
SIRI - Bull Case Model
Year
Key Drivers
2023A 2024E 2025E 2026E 2027E 2028E BULL CASE
Car Sales 16,010 16,135 16,662 17,039 17,039 17,039
Radio Penetration 85% 83% 83% 84% 85% 85%
Conversion 41% 42% 47% 47% 52% 55%
Sirius XM Net adds (445) (348) 349 610 1,337 1,743
Churn 1.58% 1.60% 1.60% 1.60% 1.55% 1.50%
ARPU 15.60 15.20 14.96 15.21 15.68 16.24
Pandora MAU 46,026 44,185 43,301 42,435 41,587 40,755
Revenue Breakdown
Sirius XM Revenue 6,840 6,598 6,561 6,772 7,212 7,789
YoY Growth -0.9% -3.5% -0.6% 3.2% 6.5% 8.0%
Pandora Revenue 2,113 2,092 2,137 2,149 2,189 2,227
YoY Growth 1% -1% 2% 1% 2% 2%
Total Revenue 8,953 8,690 8,698 8,920 9,401 10,016
YoY Growth -0.6% -2.9% 0.1% 2.6% 5.4% 6.5%
Adjusted EBITDA 2,789 2,726 2,716 2,753 3,056 3,333
Margin 31.2% 31.4% 31.2% 30.9% 32.5% 33.3%
YoY Change -1.5% -2.3% -0.4% 1.4% 11.0% 9.1%
Interest Expense (451) (459) (536) (511) (458) (401)
Free Cash Flow
Unlevered Free Cash Flow 1,719 1,384 1,760 2,006 2,330 2,477
Cash Interest (405) (438) (483) (460) (412) (361)
Levered Free Cash Flow 1,313 946 1,278 1,546 1,918 2,116
102
Tesla, Inc. (TSLA) / Recommendation: Long
Analyst: Landon Clay
Email: [email protected]

103
104
Executive Summary:

Tesla is undervalued due to the transformational nature of autonomous driving and the rapidly growing
energy storage sector. Looking forward to scenarios that account for the rate of FSD adoption, Energy Storage
success, and Optimus potential using 6-year estimates discounted by 15% per year and an EV/EBIT multiple
compression from 116 to 75, Tesla has a probability-weighted 73% upside. Tesla has a real chance of 5x its 2023
EBIT by 2030.

Framing: Innovator + Growth

Investment Thesis
Elon Musk is an innovator with a superpower—he can secure money to complete seemingly impossible
projects, such as SpaceX BFR, Starlink, and Tesla reaching a 2 million car production run rate.
Expertise: Generating publicity, driving innovative teams from first principles, and fund-raising.
Innovation: Tesla consistently reinvests in R&D and capex, driving towards autonomous driving, battery
technology, and new vehicle models.
Minimal Traditional Marketing: The company relies on organic promotion rather than traditional
advertising.
Data-based Network effect: When they pair with WiFi, all Tesla cars upload information from driving in
“shadow mode,” uploading natural driving metrics and camera information to Tesla - ~7 million data
scrapers in action.
Vertical Integration: Lithium refining, battery production, improved efficiency compared to competitors'
factories, and new “unboxed production” (40% efficiency to current production lines) will be attempted.
Long-term Vision: Creating a comprehensive technological product ecosystem, including electric
vehicles, energy storage, and functional robots, potentially the largest consumer-tech product ever, creating
trillions of market value.
Incentives and Ownership: Musk owns 13% of Tesla and has financial incentives to align with further
market appreciation.

How does this play out?

The new Trump administration will view Musk’s business empire favorably and promote a regulatory
framework conducive to the uptake of FSD. Energy Storage will grow 30x in the next ten years, providing a second
main revenue generator for the automotive segment (Tesla is a 20% GWh market leader and only needs to maintain
market share to benefit, currently growing at 26% QoQ CAGR). Once FSD is widely adopted after three to five
years, people will begin to price in Optimus. It’s hard to overstate the market appreciation of a thoroughly successful
Optimus product. A functional humanoid robot manufacturer (let alone the service ecosystem it supports) will be
worth many trillions of enterprise value.

105
Sign Posts for Sizing up:
Widespread adoption of FSD (currently sub-10%). Look to www.teslafsdtracker.com. Currently, above
90%, no Critical Disengagements, 70%+ no Disengagements. Look for Tesla to start reporting FSD uptake, looking
for 90%+ no disengagement. Look for positive results in the rollout of FSD 13, which is currently only available to
Tesla employees and select consumers. Look for announcements of Robotaxis entering production, indicating that
level 4 or 5 SAE is imminent or has arrived, proposed and passed federal regulations on autonomous vehicle travel,
increasing individual state adoption, and continued double-digit growth of the energy storage business.

Sign Posts for Exiting or Trimming:

Elon Musk is incapacitated. Tesla abandons its camera-based autonomous route in favor of LIDAR (resets
behind Waymo; its only advantage is data-based).
Bull case:
Tesla is a leader in the rapidly growing electric vehicle and sustainable energy markets. It has strong brand
loyalty, technological advantages in battery and autonomous driving technology, and significant growth potential in
the automotive and energy storage sectors. It has untapped call options that merit a high valuation.
Bear case:
Tesla faces increasing competition from traditional automakers and new EV startups, has a history of
missed production targets and controversial leadership decisions, and its high valuation may be challenging to
justify, given potential market saturation and margin pressures in the automotive industry.

Probability Weighting

Optimus back-of-envelope calculation for

the Bull+ scenario: for comparison, Apple
sells roughly 225 million iPhones every
year. With 8 billion people in the world
and a new iPhone 16 costing ~$2,000,
estimate that 20 million people can
purchase an Optimus robot yearly. Musk
estimates 100mm sales.
Key Risks:
FSD does not materialize. Key man risk.
Geopolitical risk leads to commodity
prices upset.
Key VAR:
www.teslafsdtracker.com
Drive the FSD with each new update in
urban and exurban areas.
Check forums, Reddit, and YouTube
updates for self-video driving tours.
Speak with former Tesla employees and
AI and automotive experts.

106
Page left blank.

107
 Appendix:

Assumptions, unless otherwise stated for a specific Bear/Base/Bull scenario

Vehicle Sales Growth:

Assumes a 15% year-over-year growth in total cars sold, starting from 1.8 million in 2024 to 4.79 million
by 2030.
Average Price per Car:
Starts at $45,556 in 2024 and decreases by 5% annually, reaching $31,813 by 2030.
This assumes increasing competition and Tesla's strategy to make EVs more affordable.
Automotive Margin:
It starts at 9% in 2024, increases to 13% by 2027, and remains flat.
This reflects potential margin pressure as competition increases.
Energy Storage (Gigawatt Hour):
Assumes 40% year-over-year growth, from 30 GWh in 2024 to 269 GWh in 2030.
Revenue per GWh is constant at $0.3 billion.
The margin is assumed to be 18% in 2024, increasing to 20% from 2025 onwards.
Full Self-Driving (FSD):
The price starts at $1,000 and increases to $1,200 from 2025 onwards.
Usage percentage grows from 4% in 2024 to 90% by 2029.
Assumes a 90% profit margin on FSD revenue.
Total number of cars (installed base) grows by the sales growth, less 10% # cars taken out of service each
year.
Services and Financing:
Modest growth is assumed for both segments.
Valuation:
Uses a 15% discount rate for future earnings.
Assumes a declining EV/EBIT multiple from 80x in 2024 to 75x in later years.
Other Assumptions:
Does not explicitly account for new product lines or significant technological breakthroughs.
Assumes Tesla maintains its market leadership in EVs and energy deployment.
Does not factor in adverse changes or macroeconomic shifts.

Base Case Assumptions

108
Background:

Tesla's product releases have been critical drivers of stock appreciation. Full Self-Driving (FSD)
technology is poised to be the following significant product to boost the company's sales and drive EV market
saturation in the US. FSD is a unique product because it can be applied retroactively to new and existing vehicles
with minimal incremental cost. The company has consistently expanded its product lineup, with recent launches like
Cybertruck, currently scaling production, and plans for future models such as the Semi and Roadster and driverless
RoboTaxis. FSD-enabled taxis and vans at $.05 to $.2 per mile are anticipated to be cheaper than commuter buses.

Competitive Advantages

Tesla's competitive advantages stem from a combination of strategic and operational factors. The company
benefits from dual-sided pricing power (D2C, vertically integrated, and premium model in each price segment),
technological leadership, scaled efficiency, and network advantages. At its core, Tesla embraces a first-principles
culture prioritizing execution and innovation. This approach is exemplified by the company's strategic vision, which
favors long-term success over immediate high margins, a strategy shared by many controversial yet successful
growth companies.

Tesla's commitment to innovation has fostered an exceptionally loyal customer base. A 2024 Bloomberg
survey revealed striking brand loyalty among Tesla owners. Furthermore, Tesla's Net Promoter Score (NPS) of 97
significantly outperforms the auto industry average of 58. The company leverages this grassroots support through its
direct-to-consumer (D2C) sales model, eschewing traditional dealerships. Combined with minimal marketing spend,
these factors contribute to Tesla's bottom line in ways other Original Equipment Manufacturers (OEMs) struggle to
replicate. Tesla's results-driven agility is further evidenced by recent organizational changes, such as Supercharger
team layoffs, which were reportedly burdened by bureaucratic inefficiencies – and subsequent rehiring of a leaner
team.

Tesla's energy storage business, initially developed to vertically integrate the supply of car batteries and
enhance solar panel efficiency, is poised for significant growth. This sector has the potential to evolve from an
internal initiative into a substantial revenue stream, mirroring the trajectory of Amazon Web Services (AWS). Just as
AWS grew beyond Amazon's internal server needs to become a dominant cloud computing platform, Tesla's energy
storage solutions could expand beyond their original purpose.

Tesla operates five major production facilities worldwide, with a combined annual vehicle production
capacity exceeding 2,350,000 units. The Fremont Factory in California can produce up to 650,000 vehicles annually,
including 550,000 Model 3/Y and 100,000 Model S/X. Remarkably, when Toyota/GM initially used this plant, it

109
made only 450,000 cars annually. Gigafactory Shanghai boasts the highest capacity at over 950,000 vehicles per
year, focusing on Model 3 and Model Y production. Gigafactory Berlin-Brandenburg currently produces 375,000
Model Y vehicles annually but plans to expand to 1 million units. Gigafactory Texas has a capacity of over 375,000
cars per year, and it manufactures Model Y and Cybertruck. Gigafactory Nevada primarily produces batteries and
powertrains, along with the Tesla Semi. All these plants are actively scaling or optimizing production, with Berlin-
Brandenburg undergoing significant expansion and Texas ramping up Cybertruck production. Tesla is also planning
new facilities, including a Gigafactory in Monterrey, Mexico, a lithium refinery in Texas, and a Megafactory for
energy storage products in Shanghai. There is a 3,000,000-capacity available or soon-to-be.

Autonomous Driving

Tesla has established itself as a leader in autonomous driving through a unique combination of cost-
effective hardware and innovative software strategies. Unlike competitors such as Waymo, Cruise, and Baidu, who
rely on $7,000-$10,000 per vehicle LIDAR systems and operate only in pre-mapped areas, Tesla utilizes inexpensive
video cameras and radar. This approach allows Tesla to operate beyond pre-mapped locations while crowdsourcing
driving patterns through shadow-data collection from its vast network of over seven million cars. This extensive
dataset, accumulated over several years, gives Tesla a significant advantage in training its AI driving software. Tesla
plans to spend $4 billion on Nvidia chips in fiscal year 2024 by acquiring 50,000 more H100 chips, bringing its total
number of AI training chips to approximately 100,000. This combination of cost-effective hardware, extensive data
collection, and significant investment in AI processing power solidifies Tesla as a frontrunner in the autonomous
driving industry.

Electric vehicle adoption in the United States has steadily grown, with EVs accounting for approximately
10% of new car sales. This adoption rate lags Europe and China, where EVs represent about 20% and 30% of new
car sales. Despite the slower uptake, most Total Cost of Ownership (TCO) analyses indicate that EVs offer cost
savings over their lifetime compared to traditional internal combustion engine vehicles.

The successful roll-out of FSD could increase demand for Tesla vehicles by attracting customers interested
in the convenience and safety features of autonomous driving. Additionally, self-driving cars could redefine urban
living. By eliminating the burden of long commutes, they empower people to live further from city centers,
unlocking value in suburban and exurban housing markets. Imagine commutes as productive or relaxing rather than
stressful and fatiguing. This shift could boost real estate values in previously less accessible areas and further
increase demand for robotaxis by consumers wishing to access this real estate shift, driving higher utilization and
sales of autonomous vehicles.

However, the path to widespread FSD adoption is challenging. Regulatory hurdles and public perception
concerns pose significant obstacles to the rollout of autonomous driving technology. Achieving full autonomy is a
complex technological challenge, and the timeline for developing a fully functional and reliable FSD system
remains uncertain (2024, 2025, or later?). In many rural and suburban areas, the technology is currently effective.
Videos show disengagement in complex merging traffic scenarios with uncertain routes and cones in New York City
despite smooth driving in suburban traffic and parkways.

Additionally, Tesla faces competition from other companies investing in autonomous driving technology,
including traditional automakers and tech giants, like Google’s Waymo, GM’s Cruise, and Amazon’s Zoox.
Additionally, Tesla has almost uniquely chosen to navigate using video cameras and radar rather than most
competitors’ LIDAR hardware. Additionally, Waymo autonomous vehicles are all monitored remotely by control
drivers in communication centers. Tesla still requires a supervisory hand behind the steering wheel. Tesla’s gamble
on low-cost hardware backed by advanced software trained on superior data sets may not pay off. It is worth noting
that several companies are now adopting this camera-based approach, like Seres in the UK in partnership with
Huawei and Xpeng in China. Additionally, Wayve received a billion-dollar investment from Softbank to pursue this
approach, indicating further competition and, more importantly, validation of the strategy.

Although not perfected yet, Tesla’s approach is more scalable. The Tesla FSD model operates on learned
behavior; each car receives indirect benefits from other active vehicles. It is location agnostic, operates on learned
behavior rather than preprogrammed heuristics, and requires complete HD-mapped geo-locked locations.

110
 Despite these challenges, if Tesla can successfully navigate the regulatory landscape, overcome
technological hurdles, and maintain its competitive edge, FSD has the potential to contribute significantly to the
company's market saturation. The enhanced appeal of Tesla vehicles equipped with advanced autonomous
capabilities could help the company capture a larger share of the automotive market, potentially driving its stock
price higher in line with its history of product-driven growth.

Energy Storage

The global energy storage market is experiencing significant growth, with record additions of 45 gigawatts
hours, nearly tripling in 2023 from 2022. Global capacity additions will exceed 100 gigawatt-hours for the first time
in 2024. China will likely be the primary driver of this growth, maintaining its position as the world's largest energy
storage market. The US Energy Information Agency projects a ~10% increase in the share of energy supplied by
renewables in 2025. Renewables like wind and solar are the most productive and cost-effective, with reliable energy
reservoirs. Tesla provides these storage banks for utility and retail consumers.

Tesla holds a substantial 20% market share in the energy storage sector, producing approximately 20
gigawatt-hours of capacity. Bloomberg forecasts a 20% annual growth rate for the market through 2030. A Tegus
expert has projected a remarkable 150-fold increase in worldwide production, from 100 gigawatt-hours to over
3,000 gigawatt-hours by 2040. The rapid growth is already evident, as the market quintupled from 20 gigawatt-hours
to 100 gigawatt-hours in just two years (2022-2024). While long-term projections are inherently uncertain, the
magnitude of these estimates suggests an unmistakable directional trend in the energy storage market.

China will likely be the largest energy storage market globally, followed by the US, and Tesla's substantial
production capacity suggests it will be a leading manufacturer in this field. Tesla is building a new Shanghai factory
for energy storage. The industry shift towards lithium iron phosphate (LFP) batteries due to their cost-effectiveness
aligns with Tesla’s adoption of the compound.

Worldwide gWh Deployed Tesla Energy Storage Deployments

50 16 250%
14 200%
40
12 150%
30 10
100%
8
20 50%
6
4 0%
10
2 -50%
0 0 -100%
2021 2021 2022 2022 2022 2023 2023 2023 2024 2024 2024
Q2 Q3 Q1 Q2 Q3 Q1 Q2 Q3 Q1 Q2 Q3

111
Ex-Google, CEO of analog data gathering start-up, Labyrinth AI
“Can you talk about the prospects of humanoid robots? Allow robots to do more new tasks and work
around the home. What is the software behind these new humanoid companies? The software is not there.
Hardware is there. Allow us to work safely. Bring the power of LLM and ML to the physical world. The
majority of the world’s GDP is here. Huge opportunities to assist with human tasks. There are only rigidly
programmed robots right now. Providing data collection services to make this.

These new robots require data sets that don’t exist. LLm data sets trained on the internet. You can do the
same thing for robotics, but no data sets exist. That’s the problem we are trying to solve. One way is
through teleoperation – robot foundation models and digital learning. You can also do this with VR
headsets or pure remote control. Training AI models and remote control. This is what Tesla’s working on.
Yes, Tesla’s doing this.”

“Boston Dynamic doesn’t have a scale—no robotic brain can do that. The main problem is a software
problem. An AI model has to be created to work, and it needs to work in an unstructured
environment.”

Ex-Tesla Sales and Operations

“The scale at which Tesla has deployed its technology, even if not fully autonomous, provides valuable
data and experience that could be leveraged for future improvements. Look at Wayve. They have
adopted the camera-based model. They are in the UK, just raised a billion dollars.”

Ex-Tesla Global Procurement, Fremont Factory

Fremont, California - finding ways to automate. Create efficiencies in California. Plants building up. It
probably has a capacity scale. They could reduce the footprint of a plant by 50-75%. Maybe we could even
go more. The capex side is deliberate and focused, and how they construct the plants is scalable and able to
change. Fremont has motors, batteries, etc. Fremont is a legacy builder. Tesla does the whole gamut. Tesla
is getting more efficiency out of locations and doing more stuff out of smaller locations. With current
production processes, they can do much more. Look up "unboxed production process." if that works, you
won’t have to add much more capacity (to get to 10mm cars).

On dealer-less model

traditional OEMs, 10+% goes to the dealer. Everyone does this that has dealers. You have your invoice
price. You have your MSRP. You can negotiate on the MSRP. The dealership gets on top of it with other
promotions. You can see a program as a manufacturer with local marketing funds. Dealers use this to
subsidize customers. Low information buyer. They will get had, generally. That's how they pad out their
margin. In the end, it comes out to be a relatively healthy margin. Dealers are capturing value. Traditional
OEMs 10+% goes to the OEM. Everyone does this that has dealers. You have your invoice price. You have
your MSRP. You can negotiate on the MSRP. The dealership gets on top of it with other promotions. You
can see a program as a manufacturer with local marketing funds. Dealers use this to subsidize customers.
Low information buyer. They will get had, generally. That's how they pad out their margin. Ultimately, it
comes out to be some relatively healthy margin. Dealers are capturing value.

Automotive Strategy and Operations at Porsche Consultancy

“When will Autonomous Driving be ready?”

Will there be a street-hitting actual passenger car? It's a whole different goalpost. Chicago has bad weather
and bad roads. If an autonomous car can drive you in a blizzard in Chicago in January, that will be
successful. If you drive in a dense metropolitan area with tough roads.

112
 0
5
10
0
10
20
30
0
10
20
30
40

100

0
50
2010 2010 2010
2010
2011 2011 2011 2011
2012 2012 2012 2012
2013 2013 2013 2013
2014 2014 2014 2014
2015 2015 2015 2015
2016 2016 2016 2016

EV
EV
EV
are EV

2017 2017 2017 2017

2018 2018 2018 2018
2019 2019 2019 2019
2020 2020 2020 2020
2021 2021 2021 2021
% Share of EU cars sold are

% Share of US Cars sold are

% Share Norway cars sold are

2022 2022 2022

% Share of China EV Cars sold

2022
2023 2023 2023 2023

113
Tesla’s lower-middle market models have Total Cost of Ownership (TCO) savings over comparable ICE
German OEM competitors.

114
Ubiquiti Inc. (UI) / Recommendation: Long
Analyst: Vincent Lo
Email: [email protected]

115
Vincent Lo November 2024

116
 Ubiquiti Inc. (NYSE:UI): LONG
The “Apple” of Networking Equipment – The Cult is Ready to Take Off – BITE Now!
Summary Financials – Base Case Estimates
($ in mm, except for share price)
Captial Structure ($ in mm, except for share price) 1Q25 Financial Overview
Target Price $ 500.28 FY2020 FY2021 FY2022 FY2023 FY2024 FY2025E FY2026E FY2027E
Share Price $ 334.85 Revenue 1,285 1,898 1,692 1,941 1,928 2,264 2,662 3,134
Diluted S/O 60 % YoY Growth 11% 48% -11% 15% -1% 17% 18% 18%
Market Cap 20,244 Gross Profit 608 912 670 761 740 939 1,158 1,426
Add: Net Debt 580 % Margin 47% 48% 40% 39% 38% 42% 44% 46%
Add: Minority Interest/Preferred 0 % YoY Growth 11% 48% -11% 15% -1% 17% 18% 18%
Enterprise Value 20,824 EBIT 478 742 462 544 499 677 847 1,054
% Margin 37% 39% 27% 28% 26% 30% 32% 34%
Current Valuation/Liquidity FCF 425 578 342 (135) 532 522 624 785
3month Avg. Daily Volume ($mm) 20.8 % Margin 33% 30% 20% -7% 28% 23% 23% 25%
EV/EBIT 38.9x EPS $ 5.80 $ 9.77 $ 6.13 $ 6.74 $ 5.78 $ 8.98 $ 11.57 $ 14.83
P/E 54.2x Street Revenue 1,269 1,885 1,636 1,933 1,952 2,241 2,453 2,486
P/NTM E 39.3x Street EPS $ 5.83 $ 9.71 $ 5.83 $ 6.98 $ 6.02 $ 8.86 $ 9.43 $ 9.91
EV/Sales 10.4x Capital Efficiency
EV/NTM Sales 9.2x ROTC 169% 274% 166% 66% 80% 109% 121% 132%
Net Debt/EBIT 1.2x ROIC 224% 146% 167% 160% 107% 268% 136% 107%
% Short Interest (S/O) 7.4% Valuation Metrics Implied
Dividend Yield 0.9% P/E 30.1x 31.9x 40.5x 26.1x 25.4x 37.3x 28.9x 22.6x
52-Week High $ 352.90 EV/Sales 9.1x 10.5x 9.2x 6.0x 5.0x 9.2x 7.8x 6.6x
52-Week Low $ 104.24 EV/NTM Sales 6.2x 11.8x 8.4x 6.0x 9.2x 7.7x 6.4x 9.1x
Return Profile NTM Sales Multiple EV Discount Rate PV Per Share Upside/(Downside) % Ratio Proability TP
Bull Case 4,101 11.0x 45,112 8.8% 34,998 $ 646.20 93% 3.2x 50% $ 500.3
Base Case 3,690 9.1x 33,600 8.8% 26,067 $ 472.42 41% 1.4x 25%
Bear Case 2,631 7.0x 18,414 8.8% 14,286 $ 236.29 (29%) 25%

Big Picture Thesis:

• This telco cycle will stay at peak longer than the market expects. Networking equipment providers
are set to benefit from both wireless and wireline expansion, as users upgrade devices to harness
enhanced capabilities. UI is poised to benefit more than peers.

Investment Thesis:
UI is a LONG because:
1. In a commoditized industry, success requires either a strong brand or cost leadership—Ubiquiti has
both.
2. With the U.S. and Europe in the early innings of FTTH penetration and global 5G adoption underway,
UI’s value proposition positions it to capture a disproportionate share of the $246B Total
Addressable Market and the $62B upgrade cycle. Asia is all upside.
3. Consensus estimates appear far too conservative. Growth is poised to double expectations.

Why Does the Opportunity Exist?

• The company offers 0 communication with shareholders or the market.
• UI’s primary offerings appear to consist of commoditized networking equipment.
• Wall Street has virtually no coverage or interest in a business with self-funded growth and high
insider ownership (93% controlled by the Founder CEO).
• Past SEC investigation and short-selling events unnerved investors.
• The market has prematurely priced in an industry downcycle. UI growth is just about to take off.

117

Ubiquiti is Overlooked and Misunderstood, Creating an Opportunity for Those Willing to Dig Deep
Big Picture Thesis
This telco cycle will stay at peak longer than the market expects. Networking
equipment providers are set to benefit from both wireless and wireline
expansion, as users upgrade devices to harness enhanced capabilities. UI is poised
to benefit more than peers.

Why Networking Equipment Providers? Importantly, Why UI is Set to Benefit

more than peers?
• Historically, telco cycle has experienced sharp declines after peak investment.
Consequently, the market has prematurely called a downcycle following a
slight decline in industry capex, overlooking the fact that this cycle is different.
Despite the gradual decline, Global telco spending is poised to remain at peak
through at least 2028, driven by the $42.5B U.S. BEAD Program to increase fiber
access to remote area, fierce competition among cable and telecom companies
to gain shares in the remote greenfield, and continued 5G penetration in
emerging markets. Networking equipment providers are set to gain from both
wireless and wireline infrastructure expansions, as users need to upgrade
their devices to harness enhanced capabilities, such as meeting their increased
streaming needs and supporting Internet of Things (IoT) connectivity.
• UI is uniquely positioned to capitalize disproportionately on market
opportunities by offering affordable, high-performance equipment tailored
to the needs of value-conscious remote users and beyond.

Investment Thesis/Key Investment Factors:

Thesis 1: In a commoditized industry, success requires either a strong brand or
cost leadership—Ubiquiti has both.

How Does UI’s Differentiated Model Create a Virtuous Flywheel to Strengthen

Its Brand Positioning and Achieve Cost Leadership in a Commoditized Industry?
• UI’s direct-to-consumer approach and outsourced model enable it to build a
strong brand and become a low-cost provider that delivers advanced
technology without the overhead typical of larger competitors. UI does not
118
Networking Equipment Providers Are Poised to Gain from Both Wireless and Wireline
Infrastructure Expansion, and UI’s Value Proposition Positions It to Benefit Disproportionately
 employ a traditional direct sales force but instead builds brand awareness
through organic online reviews, publications, its websites, distributors, and
an engaged user community. Notably, the company’s online community is far
bigger and more engaged than its larger competitors. This tie-knit community
enables customers to interact directly with R&D, marketing, and support
teams, providing valuable feedback to ensure products meet expectations. By
outsourcing production to cheap labor countries like China and Vietnam, UI
achieves significantly lower production costs despite using the same high-
end components. The company then reinvests these savings into R&D,
creating a virtuous cycle of high-performance networking products at the
lowest possible cost.
• UI employs tailored go-to-market strategies across geographies, allowing it UI Continues to Gain Share
to establish a brand and gain niche market share. In the East, it is regarded as Company Name CAGR since UI Founded in 09'
Ubiquiti 26%
a premium brand, focusing on high-end 'prosumers' who refer to it as the
Cisco 3%
'Hermès and Ferrari of networking equipment' due to its sleek aesthetics and HPE Decline
design. Although niche and not a price leader, UI has cultivated a strong Netgear Flat
community of enthusiasts, many of whom identify as Ubiquiti 'Fan' or Juniper 2%
'Enthusiast' on social media. In the West, UI is seen as a value brand, offering Xiaomi 17%

as much as a 70-80% discount to comparable products with no hidden cost

(i.e. licensing and annual subscription fees), which often cost more than the
hardware. This positioning is strategic: East is saturated with discounted local
brands like Huawei and Xiaomi, and, in the West, UI competes against premium
brands like Cisco and Aruba (HPE). By avoiding direct competition, UI captures
niche market share effectively and continues to gain shares in a
commoditized industry.

Why is the Brand Getting Stronger?

• We interacted with 149 Ubiquiti customers and distributors and found that
Ubiquiti has built a strong sense of community. Customers rave about its
competitive pricing, low total cost of ownership, sleek design, reliability,
ease of setup, and user-friendly interface—the list goes on. Many called UI the

119
UI Has Built a Differentiating Business in a Commoditized Industry.
Importantly, the Brand is Growing Organically with Strong Network Effects.
 “Apple” of Networking Equipment, thanks to its best-in-class centralized
interface (similar to iOS) and modern aesthetic hardware design.
o Affordability and Capability: “The hardware is cheap and pretty capable.
Get years of software updates. When you have all of that combined, you have
a community full of people who are learning networks, trying to improve their
existing infrastructure, and looking to build something serious.” – Ubiquiti
Redditor
o Lower Cost of Ownership: Ubiquiti's cloud-access dashboards are For the most part, there is a LOT of features &
significantly more modern and comprehensive than those of Cisco and Aruba, power relative to the price, there’s no
and they are offered free of charge, compared to a minimum annual subscriptions, the interface is pretty user
subscription fee of $75 for Aruba and $150 for Cisco. – Online Product Search friendly. I also think they do a really good job
o User-Friendly Interface & Easy Set Up: “My grandma can find their designing the look of their hardware, so people are
products easily, their free with no licenses, you can do whatever you want with more willing to put it in their homes. Besides, look at
the competition. ASUS and Netgear routers are
them, and they have plenty of products. Easily managed from everywhere, if
ugly, the Eero and Google Wi-Fi products have
you are not so knowledgeable you can build a network.” – Ubiquiti Redditor
very little power, most Meraki products have
o Active Community Support: “Cuz we are a cult. If you are in, you can't escape.” subscriptions, MikroTik has a bit of a learning
– Ubiquiti Redditor curve, Firewalla doesn’t have WiFi APs, and Cisco
o Design & Aesthetics: “It is the same reason why people buy Chanel, Ferrari, / Aruba / Palo Alto / Juniper / Fortinet / etc. is not
and Hermes. It is expensive but expensive for a reason. You cannot compare really geared toward home use. For the
it to a normal brand.” – Official Reseller in China enthusiast / higher end home / prosumer / small
o The “Apple” of networking equipment: “Ubiquiti is the Apple of networking. business segments, it’s tough to beat Ubiquiti, so
Focused on design and simplicity of use. Stuff that usually "just works” – Ubiquiti their user base has grown exponentially.” –
Redditor Ubiquiti Redditor

How Does that Impact Operating Efficiency, Capital Allocation, and TSR? Company Name LTM Gross Margin % LTM EBIT Margin %
• Unique business models and value propositions have positioned it as a top Ubiquiti 39.1% 26.8%
operator in the industry, ranking among the highest in operating margins. Over Cisco 64.7% 24.3%
HPE 33.9% 8.0%
the past five years, each UI employee has generated industry-leading $1.5M in Juniper Netw orks 58.6% 6.6%
revenue, comparable to companies like Google. The company also boasts an Xiaomi Corporation 21.7% 6.1%
impressive average ROIC of 140% and ROTC of 256% over the past 5 years. ASUS 17.8% 5.7%
Having earned strong customer mindshare and built a loyal community, much of
UI’s growth has been self-funded and organic, as evidenced by its website
120
Not Only is UI a Great Business, But Also a Company That Puts Out Numbers
 traffic data. The company also has a consistent history of share buybacks,
reducing its share count by 54.7% or 3.3% CAGR since its 2011 IPO, alongside
a fixed quarterly dividend of $0.60 per share. UI has engaged in minimal M&A
activity, with debt issuance primarily to buy back shares, explaining Wall
Street’s limited coverage of the company. Notably, the company’s stock price has
generated a total shareholder return of 2,000%+ since its 2011 IPO.

Thesis 2: With the U.S. and Europe in the early innings of FTTH penetration and
global 5G adoption underway, UI’s value proposition positions it to capture a
disproportionate share of the $246B Total Addressable Market and the $62B
upgrade cycle. Asia is all upside.

Why UI Will Benefit Disproportionately from This Upgrade Cycle?

• Our estimated TAM is 60% higher than consensus, and UI has consistently
gained shares, as evidenced by its above industry growth rate since 2009. The
primary beneficiaries of this cycle are remote households, where UI is positioned
to outperform due to its strong value proposition of offering cost-effective,
high performing equipment, and history as the #1 networking equipment
provider for remote areas.

How Big is the Total Addressable Market? Why is it Much Bigger than What the
Industry Thinks?
• What do customers look like? According to web traffic data, 85% of UI customers
are male and 15% are female and 93%+ are between the ages of 18 and 65 with
the following distribution: 18-24 yrs- 17%, 25-34 yrs– 22%, 35-44 yrs – 20% and
45-54 yrs – 24%, 55-64 yrs – 9%. Small and medium-sized enterprises (SMEs)
are also an integral part of UI’s addressable market.
• How many potential customers are there in the United States and Europe?
According to Statista, there are 331M internet users in the United States and
799M in Europe, with 93% of these users aged between 18 and 64. In addition,
there are 33.2M small and medium-sized enterprises (SMEs) in the United
States and 26.1M in Europea. With an average household size of 2.4 people,

121
The Total Addressable Market is Much Bigger Than Industry Estimates.
Asia is All Upside.
 this translates to a total addressable market of approximately 438M Household
Component Description Price Range Midpoint
households and 59.3M SMEs.
Electrical outlets for network access $10 – $25 per
Wall Plates $17.5
• How much do these customers spend? Taking the midpoint of the average price points plate
Connects multiple devices to the
for network equipment with data from The Network Installers, an average Network Switches
same router
$10 – $100 $50.0
household spends $337.5 and an average SME spends $1,650 on network Connects devices to the local mesh $10 – $25 per
Ethernet Port $17.5
network port
equipment.
Connects multiple network devices
Modem $50 – $100 $75.0
• How big is the total addressable market? Based on the calculations above, UI’s to the wired internet
Allows devices to access the
total addressable market is approximately $148B for households and $98B Router $80 – $120 $100.0
internet connection
for SMEs—nearly 60% larger than the $155B estimated by Gartner and IDC Wi-Fi Extender Expand wireless network coverage $20 – $100 $60.0
for global network equipment spending. The United States and Europe account for Connect multiple devices to a local
Ethernet Splitter $5 – $30 $17.5
area network
just 87% of UI’s sales and TAM, yet Ubiquiti has only penetrated 0.8% of this Total $185-$500 $337.5
market—Asia is all upside! SMEs
Hardware $300 – $3,000 $1,650.0

How Big is the Incremental U.S. and European Upgrade Cycle?

• U.S. telecommunications companies project fiber coverage to expand from 70
million to 140 million households by 2030, while the European Commission
anticipates fiber penetration to grow from 64% to full coverage within the
same timeframe. This is expected to drive a $25B equipment upgrade cycle
in the U.S. and a $37B cycle in Europe. Again, Asia, where UI is underpenetrated
(4.8% of total revenue), is all upside!

Thesis 3: Consensus estimates appear far too conservative. UI is poised to

double expectations.

Why Do We Think UI Will Double Expectations?

• In its only market share disclosure, UI and IDC estimated its market share at
3% in 2017. Assuming UI captures just 3% of the incremental opportunity— Projection
likely a conservative estimate given its history as the #1 Internet Service vs vs
vs 2025E 2026E 2027E Total CAGR
Street Street
Provider (ISP) in U.S. remote areas and its continued market share gains Consensus
since 2017—this upgrade cycle would translate into a $1.9 billion incremental Our Estimate 17.2% 17.5% 17.7% 62.0% 33.1% 17.5% 8.6%
revenue opportunity by 2030, effectively doubling UI’s FY24 firmwide Industry Studies Estimate 8.0% 31.4% 9.0% 54.7% 25.8% 15.7% 6.8%
revenue. Assuming a steady-state growth rate and share gain in existing Consensus Estimate 16.2% 9.4% 1.4% 28.9% N/A 8.8% N/A
business, our Base Case model projects UI to grow at a CAGR of 17.5%, which
122
Incremental Revenue Growth Will More Than Double Current Firmwide Revenue
 doubles the current consensus growth estimate through 2027. Furthermore,
with Asia, particularly China, currently in a recession, the anticipated recovery
between 2025 and 2030 offers additional upside potential as a free option for
growth.
• Why do we think growth has hit an inflection point and Mr. Market will agree
with us? The market often overreacts when a cycle begins to decline,
prematurely pricing in a downcycle. While the 4G cycle did drop sharply after
peaking, the 5G cycle is different. The market has overlooked that this cycle will
stay elevated at peak levels and decline more gradually. Recent shipment
data and monthly revenue from key suppliers and peers indicate that
Ubiquiti's growth is poised for acceleration. We believe the market will
eventually recognize this, especially given that UI historically trades on EV/NTM
Sales. Once the market sees what we see, expectations are likely to be revised
upward. Signs of this shift are already emerging—UI reported an impressive
19% year-over-year growth in 1Q25, leading to a 20% surge in its share price.

Key Events/Stock Behavior:

• Earnings Announcements: Historical price movements are heavily influenced
by earnings reports, with quarterly results often leading to price swings of
±30% or more.
• Macro Events: UI shares are heavily affected by macro events such as global
supply chain constraints, U.S. tariffs, and the COVID-19 pandemic. These sell-offs
often create attractive entry points, as the impact of these overhangs typically
diminishes over time.
• Shipment and Supplier Data: There is a strong correlation between quarterly
results, recent import data, and growth rates of key suppliers. By tracking
monthly import shipments and revenue growth of major Taiwanese publicly
traded suppliers, like Foxconn, which reports revenue monthly per regulatory
mandates, investors can gain insights into UI’s upcoming quarterly results
ahead of time.

Pre-Mortem/Key Debates:

123
Growth is About to Take Off — Set to Double Expectations
• With its pricing advantage rooted in Chinese manufacturing, will tariffs
erode the company’s competitive moat? VAR suggests that the company has
relocated most of its supply chain from China to Vietnam. Recent import data
confirms this shift.
• Are knockoff and emerging brands a concern? UI’s networking equipment, “There really aren't any options except maybe
while commoditized, has built an unassailable flywheel driven by a loyal MikroTik (which has a harder learning curve for
casual users).” – Ubiquiti Redditor
community and strong customer mindshare. VAR suggests brands like
MikroTik are too niche and complex for everyday consumers, Cisco is too big “UI has Apple inside its DNA. People do not buy it just
to focus on the small niche, and knockoff brands have short lifespans, for the price, but also for its reliability and ease of
limiting their ability to gain market share remote users. setup.” – Ubiquiti General Agent/Distributor in Taiwan
• The company offers minimum communication with investors and high
insider ownership is a concern? The company has a history of share buybacks, “The company stopped communicating with
with share count declining by 54.7% since its 2011 IPO. Our VAR suggests the shareholders after the short selling started to
unwind, as investor meetings were draining Robert's
CEO will continue to buyback all the public float. Like many tech founders, the
energy. He prefers to focus on the business and allow
CEO takes no salary; his only compensation is through consistent dividend
the results to speak for themselves, following a
payments, aligning his interests closely with those of shareholders.
model similar to Berkshire Hathaway.”
Interestingly, Ubiquiti’s web traffic began to take off in 2019, when the company – Former Ubiquiti SVP of Investor Relations
stops communicating with shareholders and focuses on its customers.

Maintenance Plan:
• Quarterly Customer Conversations: Engage with customers each quarter to
assess shifts in brand value and competitive offerings.
• Monthly Import Data and Supplier Revenue Tracking: Monitor monthly
import shipments and revenue disclosures from key suppliers.
• Quarterly Supplier Calls: Conduct quarterly calls with major suppliers in Taiwan
for updated insights.

124
Market Worries Are Overblown.
They Will Eventually Agree with Us.
Exhibit 1: Based Case Financial Model
Segmented Results - Geographic Breakdown (FS) FY2020 FY2021 FY2022 FY2023 FY2024 FY2025E FY2026E FY2027E
North America Revenue, mm 571.9 836.0 790.8 922.2 946.4 1,125.0 1,337.2 1,589.4
Growth Rate 15% 46% -5% 17% 3% 19% 19% 19%
South America Revenue, mm 83.3 122.2 90.6 110.4 114.0 120.3 126.9 133.9
Growth Rate 6% 47% -26% 22% 3% 6% 6% 6%
Americas Revenue, mm 655.2 958.3 881.4 1,032.6 1,060.5 1,245.3 1,464.1 1,723.4
Growth Rate 14% 46% -8% 17% 3% 17% 18% 18%
Europe, the Middle East and Africa Revenue, mm 517.1 785.3 675.3 759.4 740.1 884.3 1,056.6 1,262.4
Growth Rate 8% 52% -14% 12% -3% 19% 19% 19%
Asia Pacific Revenue, mm 112.1 154.5 135.0 148.5 127.9 134.2 140.9 148.0
Growth Rate 3% 38% -13% 10% -14% 5% 5% 5%
Total Revenue, mm 1,284.5 1,898.1 1,691.7 1,940.5 1,928.5 2,263.8 2,661.6 3,133.7
Income Statement - As Reported in ($ mm, except for EPS)
Revenues 1,284.5 1,898.1 1,691.7 1,940.5 1,928.5 2,263.8 2,661.6 3,133.7
Growth Rate 11% 48% -11% 15% -1% 17% 18% 18%
Cost of revenues 676.3 985.8 1,021.9 1,179.8 1,188.7 1,324.3 1,503.8 1,707.9
Gross profit 608.2 912.3 669.8 760.7 739.8 939.5 1,157.8 1,425.8
Margin % 47% 48% 40% 39% 38% 42% 44% 46%
Research and development 89.4 116.2 137.7 145.2 159.8 181.1 212.9 250.7
As % of sales 7% 6% 8% 7% 8% 8% 8% 8%
Sales, general and administrative 40.6 53.5 69.9 71.0 81.0 81.3 97.9 120.7
As % of sales 3% 3% 4% 4% 4% 4% 4% 4%
Litigation settlement
fraud loss/(recovery) 0.5 0.5 0.4 0.4 0.4 0.4 0.4 0.4
Total operating expenses 130.4 170.2 207.9 216.6 241.1 262.8 311.3 371.8
EBIT 477.7 742.1 461.9 544.2 498.6 676.6 846.5 1,054.0
Margin % 37% 39% 27% 28% 26% 30% 32% 34%
Interest expense and other, net (28.0) (14.9) (17.8) (58.2) (75.2) (50.8) (63.5) (79.1)

As % of EBIT 6% 2% 4% 11% 15% 8% 8% 8%

Income before provision for income taxes 449.7 727.2 444.1 485.9 423.4 625.9 783.0 975.0
Provision for income taxes 69.9 111.1 65.8 78.7 73.9 99.2 124.6 156.4
As % of EBT 16% 15% 15% 16% 17% 16% 16% 16%
Net income (loss) attributable to common stockholders—diluted 379.8 616.1 378.3 407.2 349.6 526.7 658.4 818.5
Margin % 30% 32% 22% 21% 18% 23% 25% 26%
Shares Outstanding - WAD 65.5 63.1 61.7 60.5 60.5 58.6 56.9 55.2
Growth Rate -9% -4% -2% -2% 0% -3% -3% -3%
EPS - WAD 5.8 9.8 6.1 6.7 5.8 9.0 11.6 14.8
Growth Rate 0.3 69% -37% 10% -14% 55% 29% 28%

125
Exhibit 2: Based Case Key Drivers
Income Statement - Key Drivers FY2020 FY2021 FY2022 FY2023 FY2024 FY2025E FY2026E FY2027E
Revenue Growth % 11% 48% -11% 15% -1% 17% 18% 18%
Gross Profit Margin % 47% 48% 40% 39% 38% 42% 44% 46%
EBIT Margin % 37% 39% 27% 28% 26% 30% 32% 34%
NI Margin % 30% 32% 22% 21% 18% 23% 25% 26%
Share Count 65.5 63.1 61.7 60.5 60.5 58.6 56.9 55.2
Other Metrics
ROTC 169% 274% 166% 66% 80% 109% 121% 132%
ROIC 224% 146% 167% 160% 107% 268% 136% 107%
FTE employees, # of employees 1,021 1,223 1,377 1,535 1,515 1,515 1,515 1,515
Revenue per employee ($) $ 1,258,080 $ 1,551,998 $ 1,228,534 $ 1,264,177 $ 1,272,931 $ 1,494,258 $ 1,756,843 $ 2,068,467
Cash Flow Statement Drivers
Capex as % of sales 2.4% 1.0% 0.8% 1.1% 0.6% 0.8% 0.8% 0.8%
D&A as % of Sales 0.6% 0.6% 0.8% 0.8% 1.0% 0.9% 0.9% 0.9%
FCF 425.2 578.1 341.9 (135.1) 531.8 521.9 624.3 784.7
Margin % 33% 30% 20% -7% 28% 23% 23% 25%
Balance Sheet Drivers
Assets
Accounts receivable 142.2 172.3 119.6 167.8 169.1 199.1 234.1 275.6
DSO 40.5 33.1 25.8 31.6 32.1 32.1 32.1 32.1
Vendor deposits 5.9 20.0 89.7 125.2 123.5 137.0 161.1 189.6
As % sales 0% 1% 5% 6% 6% 6% 6% 6%
Inventories 285.9 233.8 262.4 737.1 462.0 511.8 581.2 660.1
Inventory Days 154.7 86.6 93.7 228.1 142.3 141.1 141.1 141.1
Prepaid expenses and other current assets 9.0 17.3 13.2 22.0 35.0 28.1 33.1 38.9
As % sales 1% 1% 1% 1% 2% 1% 1% 1%
Liabilities
Accounts payable 155.5 112.1 83.7 154.2 51.1 112.8 128.1 145.5
Payable Days 84.2 41.5 29.9 47.7 15.7 31.1 31.1 31.1
Deferred revenues - - - - - 0 0 0
As % sales - - - - - 0 0 0
Cash Conversion Days 111.1 78.2 89.7 211.9 158.6 142.1 142.1 142.1
Debt - short-term 24.1 23.9 23.9 36.5 36.5 36.5 36.5 36.5
Debt - long-term 628.4 467.0 762.6 1,041.4 669.9 829.9 1,159.9 1,317.4
Balance Sheet Summary
Cash 142.6 249.4 136.2 114.8 126.3 39.0 234.3 425.2
ST Debt 24.1 23.9 23.9 36.5 36.5 36.5 36.5 36.5
LT Debt 628.4 467.0 762.6 1,041.4 669.9 829.9 1159.9 1317.4
Debt 652.5 490.9 786.5 1,077.9 706.4 866.4 1196.4 1353.9
Net Debt 509.9 241.5 650.3 963.1 580.0 827.4 962.1 928.7

Net Debt / EBIT 1.1 x 0.3 x 1.4 x 1.8 x 1.2 x 1.2x 1.1x 0.9x

126
VAR Sheet
Type Description Key Takeaway/Implication
Ubiquiti Sub- 140 Takeaway
Reddit Respondents Strengths:
from the Reddit • No Subscription Fees (Mentioned in 15 comments): Users value Ubiquiti’s model of
avoiding subscription and licensing fees, which stands out against many competitors,
community
making the ecosystem attractive for both home and small business users
• Affordability (Mentioned 4 times) and Price-to-Performance Ratio (Mentioned 11
times): Ubiquiti is perceived as an affordable option that provides high performance and
reliability, particularly when compared to larger brands like Cisco or Meraki
• User-Friendly Interface (Mentioned 11 times) & Easy Set Up (Mentioned 6 times): The
simplicity of Ubiquiti’s interface appeals to a wide range of users, from hobbyists to IT
professionals. It allows for both plug-and-play ease and deeper configuration for
advanced needs. It is something that “just works”
• Active Community Support (Mentioned 14 times): Given limited official support, users
rely on a strong community network for troubleshooting and tips, which has fostered a
tight-knit, supportive culture among users
• Reliable Hardware (Mentioned 5 times) and Free Regular Updates (Mentioned 8
times): Users report that Ubiquiti products generally work reliably and receive frequent
software updates, extending product longevity and satisfaction
• Strong Design & Brand: 6 comments highlight UI’s distinctive design and aesthetic
appeal, with 7 users referring to it as the “Apple of networking equipment”
Challenges:
• Support Limitations (Mentioned 13 times): Users find Ubiquiti’s official support lacking,
which pushes them to rely heavily on the community
• Lack of Advanced Features for Enterprise Users (Mentioned 3 times): UI is still working
its way up to become an enterprise grade solution
Implications
UI has truly built a strong brand and community of supporters. Most fans highlight the no-
subscription fees, free lifetime upgrades, and ultimately lower cost of ownership as key
benefits of the equipment. Users consistently praise the products’ reliability, easy setup, and
user-friendly interface, which make device management simple. While support services could
be improved, this is largely offset by the highly engaged community that provides valuable
assistance and support. It seems like UI has really built a strong brand in the space, with many
127
supporters calling it the “Apple of networking equipment,” which we have heard consistently
throughout our VAR process.
---------------
Ubiquiti has a significantly larger presence on online forums like Reddit compared to its
competitors, complemented by an active community on its own UI platform. The UniFi product
subreddit alone has nearly twice the engagement of similar competitor communities.

128
I posted a question on the Ubiquiti subreddit for the first time and received 140 responses in a
day. This really highlights how tight-knit and engaged the Ubiquiti community is.

129
I asked ChatGPT to compile all the keywords that appeared more than twice in the comments.
Here’s what it found:

130
Chinese Social Interview with Key Takeaway
Media 3 Network • There is brand loyalty as many users proclaimed that they are Ubiquiti fans or enthusiasts
(The Red Book Solution on their social media profile
AKA Instagram Installers, 2 • The reseller describes it as the Chanel, Hermes, or Ferrari of networking equipment.
It is more expensive, but expensive for a reason
of China) Enthusiasts, 2
• Product quality, reliability, and user experiences are great compared to competitors.
Consumers, and Stands out in its design such as cooling function and easy to navigate user interface
1 Official that has many functionalities
Reseller • UI places a strong emphasis on price transparency, which benefits users but
discourages resellers and distributors from selling its products, as the company does not
appear to adopt the common practice in “Chinese culture” of offering kickbacks to
vendors
• The company has a price advantage in the U.S.
Implication
• Design, user interface, and brand loyalty are the key strengths.
• Users have no complaints
• Price transparency could be an impediment in Asia market, but at least it shows is an
ethical business
• For users in Asia, price is not the main consideration
• Still a niche product but gaining popularity

131
Customer Conversation Key Takeaway
Service on with customer • The chat is operated by real representatives instead of chatbot and respond to my
Taobao service questions within minutes
representative • The overall experience was great. I asked a simple question, but they laid out their
whole competitive strength with me
• Provides saving to enterprises with minimum upfront expense and additional charge.
• Easy to install and maintain via the interface
• No hidden fee or subscription charge
• Can benefit from fiber upgrades
Implication
• Reliability, ease of use, and an integrated interface are the advantage
• Great customer service with timely response and hit the nail in the head with its
responses
• Confirm our thesis that UI is a FTTH beneficiary
Fromer Call with former Key Takeaway
Employee Engineer of • UI stands out in its design and user experience. It has gathered a group of loyal followers
Access Products in a commoditized business. Brand matters
from Ubiquiti • The company has shifted its supply chain from China to Vietnam
• FTTH and 5G should induce a replacement/upgrade cycle
Taiwan
Implication
• It is still a niche product in Asia, with competitive advantage coming from design and
user experience.
• UI has established a brand in a commoditized business. Users typically have great
experience with their products and do not switch to other vendors. “It is like iOS, once
you get used to the user interface, you do not switch easily”
• It has no cost advantage in Asia
• It should be insulated from the trade war and tariff as most of its products are now
manufactured by Foxconn Vietnam instead of China
• Confirmed our thesis that UI is a 5G/FTTH beneficiary.

132
Internet Traffic Ubiquiti web Key Takeaway
Data traffic data on • Site traffic is healthy and growing
SEMRUSH • Traffic began to take off in 2019, when the company stops communicating with
shareholders and focuses on its customers
• Search traffic is mostly organic
Implication
• The Ubiquiti community is growing organically
• Strategic pivot to focus on customers rather than the shareholder is paying off
immensely
• The model of forgoing sales and marketing spend in favor of building a community is
both sustainable and effective

133
Shipment/Impo Import data Key Takeaway
rt Data from ImportYeti • Shipment took off in September. Coincidentally, UI reported 19% revenue growth in the
quarter. Share surged 20%
• Most shipment are now from Vietnam rather than China
Implication
• Growth has an inflection point; it’s unlikely that UI would increase inventory imports
without anticipating strong demand growth
• Shipment data suggests the company is likely insulated from China trade war and tariff
risks

134
135
Foxconn Monthly Key Takeaway
(Supplier) & Revenue • Monthly and quarterly revenue growth indicate a pattern of consistent expansion
Longwell (Peer) Disclosure per • Foxconn growth over the past quarter averages 21.9%, consistent with UI’s growth in the
Revenue Data Taiwan’s Public quarter
Implication
Company
Regulatory • Growth has bottomed out and hitting an inflection point
Mandate • There is value in tracking supplier and competitor’s monthly revenue disclosure

136
Foxconn Monthly Revenue Growth

137
 Longwell Monthly Revenue Growth

Ben Chen General Takeaway

Agent/Distribut • Ubiquiti is a top 3-4 player in wireless
or in Taiwan • UI use the same high-end component from Qualcomm as Cisco and HPE but able to
offer it at a much cheaper price.
Implication
• The company is doing well in Taiwan, growing at double digit rates and building a strong
community of followers over the past 5-6 years. Given enough time, it should be able
to replicate its success in China and greater Asia.
• Confirmed our thesis that people buy it for the look, reliability, and capability. The
interface is like the iOS of hardware equipment.
• Companies like Cisco would not compete in SME because the market is too niche and
small.
Former Discussion with Takeaways:
Employee the former SVP • The company stopped communicating with shareholders because investor meetings

of IR were draining too much of Robert Pera's energy. He prefers to focus on the business
and let the results speak for themselves, like the Berkshire Hathaway model.
• Banks ceased coverage of the company due to strained relations following the
involvement of five banks in naked short selling, combined with analysts consistently
understating the company’s revenue prospects.
• UI held a 12% market share back then and led in key metrics, including EBIT margin,
revenue per employee, and ROIC — strengths it still maintains today.
Implications:

138
 The company’s decision to limit communication with shareholders was not due to
•
indifference; it was driven by past negative experiences and the CEO’s personality,
favoring a focus on business operations over investor relations.
• This is not the first instance of banks underestimating the company’s growth
potential.
• The company has demonstrated strong fundamentals over time, with a stable market
share of ~12%.
Former Former CFO Takeaways:
Management (2013-2015) • Robert is a personality to work with. (i.e. He would fire an entire team if a meeting

Team and IPO Leading doesn’t go well, or the product does not meet his expectations. Craig described him as
a “Elon Musk” type of a leader)
Banker
• Debt issuance was mainly to buyback shares, not to cover working capital needs. The
company is super profitable
• They began as the #1 ISP provider to remote area households before moving into
adjacent markets
Implications:
• On the plus side, Craig sees the company buying back all the share and continue to
dividend payments because that is how Robert pay himself and how he operates.
He wants nothing to do with Wall Street or the shareholders; he just wants good
product.
• FTTH should help the company expand market share as they have a history of providing
remote households with wireless connectivity.
UI Product Online Product Takeaways:
Search Search • UI’s user interface dashboard is indeed much more detailed and comprehensive than
peers.
• Peer’s dashboards require an annual subscription fee (min $75 for Aruba and $150 for
Cisco).
Implications:
• The total cost of ownership is a lot higher for peer brands than UI, which is free, adding
to its price advantage.
• UI products and operating systems are much better.

139
UI User Interface
Feature: Comprehensive and detailed. Can controll/connect all UI products.
License/Subscription Fee: Free

140
Aruba User Interface
Feature: Basic and Simple. Cannot access individual product like UI.
License/Subscription Fee: $75 minimum annual subscription fee

141
Cisco User Interface
Feature: Basic and Simple. Cannot access individual product like UI.
License/Subscription Fee: $150 minimum annual subscription fee

142