Expensive IPOs are coming to market and the Fear & Greed Index is at its highest level of the year. These are the moments when I start to become more cautious. It is beginning to look more and more like madness and everyone is on edge. The moment even a small kink appears in the cable, I expect we will see a correction.

Am I going to sell everything? No, absolutely not. I never do that. I invest for the long term and missing the best days in the market can have enormous consequences for your returns. It is entirely possible that this euphoria continues for years, nobody simply knows. By stepping out of the market you miss a lot of return. What I do is adopt a more patient, wait-and-see stance.

An interesting divide is emerging in markets. AI companies are performing excellently, but many consumer-facing companies, and especially European ones, are feeling the effects of a weak consumer. That is becoming increasingly concerning. The consumer has actually been under pressure since 2023 due to high inflation and rising interest rates. Companies like 3i, Nike, McDonald’s, and other retailers are clearly feeling that weakness and are under pressure, while the AI hype train keeps thundering along from all-time high to all-time high.

Today I am giving an update on the Moats & Margins quality portfolio and my personal portfolio, where I have again made some transactions. There is a lot to discuss.

A note on the two portfolios:

The Moats & Margins quality portfolio is the public portfolio I manage and discuss openly in these updates. All positions, weightings, and transactions are shared here for every subscriber.

My personal portfolio contains my own private investments and is discussed in the second half of this post. Full details of every position and transaction in my personal portfolio are available exclusively for paid members. A membership costs €9.99 per month and also gives you access to all deep dives, valuation models, and my portfolio.

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Performance This Month

Yesterday markets turned sharply red after a strong jobs report was published. Many investors decided to take some profit, especially in riskier stocks that have risen sharply over recent months such as Marvell, AMD, and Micron. For the semiconductor sector it was nonetheless a particularly strong month, while the picture in many other sectors remained mixed.

VWRL rose nearly 3% this month. Without yesterday’s decline that return would have been slightly higher.

The Moats & Margins quality portfolio performed somewhat less well this month. The portfolio declined in value from €31,680 to €30,745, resulting in a clearly negative return this month.

Only €745 remains of our total return, just 2.5% since inception in october. I will explain why when I go through the portfolio overview.

Transactions This Month

This month I did not buy any new company, though I did consider a position in Zoetis after the Q1 update I wrote about the business. I have not been able to make that call yet, because the company is currently dealing with serious challenges. For now I am staying on the sidelines.

I also have not had the time to thoroughly research a new company. That process simply takes a lot of time, and this month I had limited availability due to personal circumstances and work.

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For the coming period there are a number of interesting companies on my list to research.

In terms of actual transactions in the portfolio this month:

The declines at several companies, which I will return to shortly, allowed me to reduce my large cash position somewhat. The goal remains to invest the full cash position, but only when genuinely attractive opportunities arise. I saw those opportunities at EVS, which fell more than 12%, and at Adyen, which also took a significant hit yesterday. In both companies I added a very modest position with the proceeds from the partial sale of Melexis.

Melexis is currently riding the chip hype on the market, while the underlying fundamentals are still lagging. For me the risk-reward ratio at a price-to-earnings ratio of nearly 30 has largely disappeared.

For my exit strategy, which I also use for my personal position in the company, I am using a stop-loss. Normally I never do this, but given the enormous volatility in the stock over the past few months I found this a good way to scale out of the position without actively trying to time the market. It would be a shame to sell winners too early, and this strategy helps me avoid that.

The strategy works as follows:

TP stands for Take Profit. I had a Take Profit order set at €86, which automatically executed when that price was reached.

From this point I raise my stop-loss to €77. Should the price fall below that level, my remaining position will automatically be fully closed. That way I exit the stock at a relatively high price without the risk of selling my winner too early.

This strategy also gives me the ability to re-enter if the price falls further. Should the stock move back toward lower levels, I can rebuild a position at a more attractive valuation. Around €60 my interest in the stock would increase again.

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Wise I have not yet added to despite the significant price decline. I also left my positions in Booking and Chapters untouched this month.

Portfolio Overview

The Moats & Margins quality portfolio currently looks like this:

What stands out compared to last month is again the strong rise of Melexis. Last week the stock accounted for 8% of the portfolio, which has since declined slightly to 7.5% following the partial sale.

The share price rose from €71 to €86, primarily because the company is benefiting from the current semiconductor euphoria on the market. X-FAB, in which it holds a small stake, also had an extraordinary period on the stock exchange. The stock rose a whopping 70% in a single day after Reddit investors began buying the company en masse.

A company that performed less well than last month was Wise. The entire return from last month has now evaporated. That was partly related to the new US listing, which caused many British pension funds to reduce their positions. A lawsuit in Belgium regarding the facilitation of suspicious transactions also played a role.

Such investigations and lawsuits are not uncommon for fintech companies and I do not expect this to cause major long-term problems. However, due to the ongoing selling pressure from pension funds I have not yet bought additional shares. Only once that pressure eases will I take a fresh critical look at the company.

Adyen was also hit again this month. Where the stock nicely recovered toward €1,000 last month, the share price fell nearly 10% on Friday after a research firm raised questions about the company’s pricing strategy. They also concluded that Checkout.com is winning market share at Adyen’s expense. The market reacted clearly negatively to this.

Adyen came out with the message that little has changed. According to the company there is a lot of competition in the sector, but no more than before. I will take their word for it for now.

There are currently doubts about whether the communicated outlook can be achieved. At the same time, the stock is, even if revenue growth comes in lower than expected, not expensively valued in my view. Management continues to communicate passively, which is actually something you could have expected in advance. The announced share buyback program is also still nowhere to be seen. Hopefully there will be clarity on that soon, which could bring some optimism back to the stock.

Adyen also continues to sit in the corner where the blows fall. The CFO departed without a direct successor in place. This kind of sudden departure is an orange flag for me worth keeping an eye on. It can be a signal that important people are leaving the ship. At the same time, it involves an American CFO who can probably earn a much higher salary at an American company. That makes the departure more understandable, but it remains something to monitor.

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Was everything bad? Certainly not. Adyen managed to win the British government as a customer at the expense of Stripe. That contract reportedly represents a payment volume of approximately €9 billion. After yesterday’s price decline I therefore added a small position.

EVS also took a significant hit this month after the company published its quarterly results. The results were not bad, but also not spectacular. Analysts had hoped for a stronger order intake, especially with the World Cup approaching.

That disappointment led to a sharp price decline and thereby finally created an attractive opportunity to expand my position. The underlying long-term case has not changed for me, which is why I see the pullback primarily as a good opportunity to add.

Watchlist

The watchlist currently contains three stocks: Besi, Zoetis, and Uber. Nothing has changed there yet. Would you buy Zoetis at the current price? Let me know in the comments.

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For June there are again three stocks worth buying according to the Moats & Margins watchlist.

Last month Hermès, Copart, and Spotify were on the buy list. For this month the following three stocks make the buy list:

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Stock 1: Mastercard

Mastercard owns no bank, issues no loans, and carries no credit risk. The company only processes payments. Every time someone anywhere in the world uses a Mastercard, a small fee goes to Mastercard.

That does not sound spectacular, but Mastercard processed more than 170 billion transactions worldwide in 2025. At that scale, small fees become very large amounts.

To understand how Mastercard earns money, you first need to understand how a payment works.

When you pay with your Mastercard at a store, four parties are involved: you as the cardholder, your bank that issued the card, the merchant’s bank, and the store itself. Mastercard sits in the middle as the network that facilitates and authorizes the transaction.

Mastercard earns through three revenue streams. First, assessment fees: charges calculated as a percentage of the total payment volume running over the network, covering both domestic and international payments.

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Second, switched fees: per-transaction charges for technically processing and authorizing payments. Third, other services (value added services): data analytics, fraud detection, and loyalty programs that the company sells to banks and merchants.

What makes the model so attractive is what Mastercard does not do. It issues no loans, carries no credit risk, and needs no large balance sheet like a bank. If a consumer fails to pay their bill, that is a problem for the bank, not for Mastercard. Mastercard’s network earns regardless of whether the transaction is ultimately repaid.

The result is an operating margin of 58% in 2025. Revenue was $32.8 billion, operating profit $18.9 billion, and net income $15 billion. Every additional dollar of revenue costs Mastercard virtually nothing in incremental costs, because the infrastructure is already built. This creates enormous scale advantages and higher EBIT margins as revenue grows.

The Market

The global shift from cash to digital payments is the structural growth driver behind Mastercard. Worldwide, more than 30% of all payments still go through cash. In emerging markets like India, Southeast Asia, Africa, and Latin America that percentage is even higher. Every euro or dollar that shifts from cash to digital potentially expands the network over which Mastercard collects its fees.

More card payments means more volume and therefore more revenue for Mastercard.

The market is a classic duopoly. Mastercard and Visa together control more than 90% of global card payments outside China. Visa is larger in volume, Mastercard grows faster in services and international markets. New entrants cannot replicate this network. Banks worldwide have been building their payment infrastructure on Visa and Mastercard for decades, and switching means replacing billions of cards, terminals, and systems.

The moat is the network itself. More cardholders make the network more attractive for merchants to accept. More merchants ensure cardholders use their card more often. That flywheel has been spinning for sixty years and becomes harder to stop every year. Mastercard can now be used at 150 million different businesses worldwide.

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The primary risk is regulation. Governments and central banks in Europe, India, and Brazil are actively building alternative payment networks to reduce dependence on Visa and Mastercard. In India, UPI now processes more transactions than all card networks combined. Mastercard earns very little from that for now. If that trend continues in other large markets, it affects long-term growth.

EPS Growth Expectations

EPS for 2025 came in at $16.54 per share. This is the starting point for the valuation.

Analysts expect average EPS growth of 15 to 16% per year in the coming years, driven by volume growth in emerging markets and the expansion of services Mastercard offers to banks and other parties.

In my model I assume 14% average EPS growth per year through 2028, slightly below analyst expectations. The combination of volume growth, scale advantages, and an aggressive share buyback program makes that assumption realistic.

With 14% growth per year, EPS comes out at $24.50 in 2028.

Mastercard currently trades at a P/E of just 28, well below the five-year average of 35. The forward P/E is even below 25, also well below the five-year average.

For the exit multiple I use a P/E of 30, implying a modest revaluation of the stock. There is some fear in the market that stablecoins could disrupt the business model of Visa and Mastercard. I do not believe in that thesis. As long as Mastercard keeps growing and improving margins, I expect the multiple to move back closer toward the five-year average of 35.

With an EPS of $24.50 and an exit P/E of 30, I arrive at a price target of $735 in 2028. From the current price of $498, that represents a compound annual growth rate of 14%.

Conclusion: BUY

Pros: One of the strongest moats in the world, no credit risk on the balance sheet, structural tailwind from the global shift from cash to digital, and an operating margin of 58% that can expand further as scale advantages grow.

Cons: Regulatory pressure from national payment networks in emerging markets, the exit P/E of 30 leaves little room if revenue growth disappoints, and the dependence on consumer spending makes the model sensitive to a recession.

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Stock 2: Intuit

Intuit is a company most people know through its products: TurboTax, QuickBooks, Credit Karma, and Mailchimp. Four products that are each individually market leaders in their category, and that together form one platform for the financial administration of consumers and small businesses in America.

The stock has fallen more than 60% over the past year, while operational results remained excellent. Revenue grew 16% in fiscal year 2025 to $18.8 billion, and operating profit rose 36%.

Recently the company reported quarterly results, after which the share price fell nearly 20%. The market fears that AI will make Intuit’s products obsolete. The results showed a significant growth slowdown.

Intuit earns through four segments that reinforce each other.

The largest segment is Global Business Solutions, accounting for nearly half of total revenue. The core of this is QuickBooks, the most widely used accounting package for small and medium-sized businesses in the world.

More than 8 million subscribers worldwide manage their invoices, payroll, taxes, and cash flows through QuickBooks. In fiscal year 2025, Online Ecosystem revenue from this segment grew 20%. That is driven by higher prices per subscriber, more users, and broader adoption of payment processing and payroll features as additional services on top of the base packages.

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QuickBooks is a good example of a land-and-expand model. A small business starts with basic bookkeeping. Once the platform proves its value, usage expands to payroll, payments, financing, and taxes. Each expansion grows revenue per customer without Intuit needing to acquire new customers. Switching costs are high: anyone who has their entire administration in QuickBooks does not easily switch to a competitor.

The Consumer segment includes TurboTax and Credit Karma.

TurboTax is the market leader in tax filing software in the US with more than 40 million returns filed per year. The strategic shift happening here is the growth of TurboTax Live: a hybrid model where tax professionals guide clients through the platform.

TurboTax Live grew 47% in fiscal year 2025 to $2 billion in revenue. That is important because it doubles Intuit’s TAM. The market for tax returns prepared with an advisor is larger than the market for fully self-directed filing.

In Q3 2026 TurboTax showed modest growth, however. Management stated this had nothing to do with AI alternatives, but the market did not believe it. The share price fell nearly 20% in a single day partly due to weakness in this segment.

Credit Karma is the third major component. The platform offers more than 130 million registered users personalized recommendations for credit cards, loans, insurance, and savings accounts. Credit Karma earns through affiliate links when a user accepts a product. In fiscal year 2025, Credit Karma revenue grew 32% to $2.3 billion, driven by recovery in the credit card and lending market.

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In the US this is a large market, because a good credit score is important for obtaining loans.

The fourth segment is Mailchimp, the email marketing platform for small businesses. Mailchimp is less spectacular than the other three, but it provides an additional entry point for small entrepreneurs who start with marketing and then also do their bookkeeping through Intuit. It is therefore a means to cross-sell and upsell, keeping the customer more deeply connected to the ecosystem.

What makes the model as a whole strong is the combination of high retention and cross-selling. A small business using QuickBooks is a potential customer for TurboTax, Credit Karma, and Mailchimp. Intuit has the data to know that customer and the platform to serve them. That ecosystem is hard to copy for a player that offers only one of the four products.

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The Market

The market for financial software for small businesses and consumers grows structurally, driven by the increasing digitization of administration and finances. A large portion of small businesses worldwide still manage their bookkeeping via Excel or even paper. That shift toward cloud-based software has been underway for years and has not yet ended.

The AI transition is for Intuit not a threat but an accelerant. The company has built up more than twenty years of financial data from consumers and small businesses. That dataset is enormously important for AI applications. LLMs do not yet have that data. Intuit is already positioning itself as a platform of AI agents that can fully handle taxes, bookkeeping, and finances. TurboTax Live is the first concrete expression of that.

The risks are also there. The IRS, the American tax authority, has in recent years experimented with a free direct filing tool. So far Intuit has managed to limit that threat through lobbying and by strengthening its own free offering, but it remains a political risk that cannot be calculated.

The Consumer segment is also seasonal. The largest portion of TurboTax revenue falls in the first and second calendar quarters. That makes the quarterly numbers volatile and can unfairly influence the share price in periods outside tax season.

Additionally, consumers are faster to switch to AI alternatives. Claude, for example, can now easily handle a large portion of tax returns and personal bookkeeping or assist users with these tasks.

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EPS Growth Expectations

EPS for fiscal year 2025 is $14.73 per share, an increase of 31% compared to a year earlier. This is the starting point for the valuation.

Analysts expect average EPS growth of 15% through 2028, driven by further margin increases, buybacks, and revenue growth.

In my model I assume 14% average EPS growth per year through 2028, slightly below analyst expectations. Due to the operating leverage in the business model, earnings will grow faster than revenue. With a buyback program, EPS grows even faster than revenue and profit growth.

With 14% growth per year, EPS comes out at $21.96 in 2028.

Intuit currently trades at a P/E of 19, the lowest valuation in its history. Historically Intuit traded at a P/E above 50. That multiple compression is the result of the broader SaaS sell-off. For Intuit it is primarily the concern about AI competition for TurboTax.

In my model I use an exit P/E of 23, still well below the historical average, but a modest recovery from today.

With an EPS of $21.96 and an exit P/E of 23, I arrive at a price target of $505 in 2028. From the current price of $308, that represents a CAGR return of 16.6% per year.

Conclusion: BUY

Pros: Four market-leading products that reinforce each other within one ecosystem, structural operating leverage, a twenty-year AI dataset that is hard to replicate, and the lowest valuation in five years.

Cons: Political risk around a free IRS filing tool that could hurt TurboTax, seasonality in the Consumer segment makes the share price volatile, and the exit P/E of 23 assumes some recovery in valuation that may not materialize if sentiment stays negative.

Stock 3: 3i Group (Action)

3i Group is a British private equity holding company, listed on the London Stock Exchange. But in practice, anyone buying 3i is buying one company: Action.

Action is the fastest-growing non-food discount retailer in Europe. It sells a continuously rotating assortment of household products, garden items, toys, office supplies, and seasonal products in more than 3,000 stores spread across twelve countries. Prices are extremely low, the shopping experience is based on surprise and discovery, and customers come back frequently.

3i owns 65.3% of the shares in Action. That stake accounts for virtually the entire valuation of 3i as a listed company.

Action earns on volume and turnover. The average price at Action is far below that of supermarkets and other discounters. That attracts customers who might otherwise not buy at all. Action compensates for the low prices with high store visit frequency and high revenue per square meter.

The business model of 3i revolves around investing in and owning private companies. 3i buys stakes in unlisted businesses, helps them grow, and eventually sells them at a profit or benefits from dividend payments. The difference from a regular investment company is that 3i is actively involved in the strategy of its investments, not just as a passive shareholder looking to exit within three years.

The value of those stakes is reassessed every six months based on an EV/EBITDA multiple, a commonly used method for valuing private companies. Enterprise value is calculated by multiplying EBITDA by a sector-specific multiple. Debt is then subtracted and cash added. What remains is the equity value, the portion belonging to shareholders, including 3i.

That equity value of all investments combined, plus the cash and other assets on 3i’s balance sheet, forms the NAV: the net asset value per share. That is the number against which 3i’s share price is measured. You can think of this as the equivalent of EPS for regular companies.

3i holds stakes in several companies, including Cirtran, Hans Anders, Royal Sanders, and WilsonHCG. Yet the weight lies with Action, which accounts for more than 85% of 3i’s total NAV. Anyone buying 3i is therefore in practice primarily buying Action, with a small diversified portfolio of medium-sized European companies alongside it.

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In fiscal year 2026, which ended in March, Action generated €16 billion in revenue and €2.4 billion in EBITDA, 16% and 14% more than the year before respectively. Action opened a record 384 new stores, growing the store network by 13%. This growth is not infinite, but management still foresees more than sufficient growth opportunities in Europe and even in the US.

3i’s NAV per share thereby rose to £30.32 at the end of FY2026, an increase of 19% year-on-year. That is the fifth consecutive year with a return on equity of more than 20% for 3i.

The Market

The European non-food discount market is growing structurally. Consumers are increasingly looking for value, a trend that accelerates in periods of inflation and economic uncertainty like the current one. Action benefits from that dynamic. The target audience does not buy less when the economy weakens. They buy more at Action instead of from competitors selling more expensive, premium products.

Action’s store network now covers twelve countries, with the strongest positions in the Netherlands, Belgium, France, Germany, and Poland. The growth strategy is simple: open more stores in existing markets and enter new countries. The white spaces on the map are still large. In southern Europe, Scandinavia, and eastern Europe, Action is barely present. There is still more than enough store potential here.

France is the point of attention. As Action’s largest market, the country showed weaker like-for-like sales in the autumn of 2025 due to declining consumer confidence and a price war with competitors. In December and early 2026 growth recovered to modestly positive. It is a temporary effect in one market, but it warrants attention.

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The share price also fell nearly 20% due to the persistent LFL growth problems, which now appear to be spreading to Germany as well.

The moat of Action lies in the combination of scale advantages and the treasure hunt concept. Through the enormous volumes Action purchases, it can buy from suppliers at significant discounts. Through the constantly rotating assortment, customers come back to see what is new, not because they need something specific. That behavior is hard to copy for a supermarket or a webshop bound to a fixed assortment.

The primary risk with 3i is concentration. Virtually the entire market capitalization of 3i consists of the Action stake. If Action disappoints, 3i disappoints. Short-seller ShadowFall has previously argued that the EV/EBITDA multiple at which 3i values Action is too high. A reduction of that multiple from 18.5 to 15 times would bring NAV per share back to approximately £24. That is the risk you need to account for. Management would lose a great deal of credibility if Action ever needed to be revalued.

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The Valuation

For 3i, a price target based on P/E does not work. The company reports intrinsic value per share as NAV, and the share price trades relative to that NAV at either a premium or a discount.

The current NAV per share is £30.32. The current share price of £23.15 implies a discount of approximately 35% to NAV. That is an exceptional situation. Historically 3i traded at a premium of 30 to 65% above NAV, because investors were willing to pay extra for the quality of management and the growth power of Action. That premium has completely evaporated.

The full valuation of Action is available on Substack in a separate post:

To determine the expected return, we use expected NAV growth as our starting point. 3i targets a 15% return on equity per year. Over the past five years the company averaged 30%. An assumption of 15% NAV growth per year is therefore conservative but realistic.

With a constant discount of 30 to 35% to NAV, that delivers a CAGR of 15%. If the discount partly or fully disappears and the stock returns to a neutral valuation, that return is structurally higher. A return to the historical premium would meaningfully accelerate returns over the coming years.

Conclusion: BUY

Pros: Action is one of the strongest retail concepts in Europe with a proven model, the current discount of 30 to 35% to NAV provides a margin of safety that was not present at the historical premium, and NAV growth of 15% per year is a conservative assumption given the track record.

Cons: Extreme concentration in one asset, the France risk deserves attention if the recovery fails to materialize, the multiple risk on the Action valuation is real, and the currency exposure between euro and pound structurally weighs on reported NAV.

Sell List for June

Alongside three stocks that look worth buying on the basis of delivering more than 10% annual return according to the 2028 price targets, there are also three stocks on the sell list because they are expected to deliver less than 6% per year on the same basis.

For June these are Melexis, Nebius, and AMD.

To keep this post from running too long, I will not revisit the business models of these companies in detail, only the EPS growth, P/E, and 2028 price target to explain why they are on the sell list.

Melexis

Melexis is a Belgian sensor manufacturer focused almost entirely on the automotive industry. The company designs integrated sensors and drivers that measure, detect, and control functions inside cars: steering angle, motor position, temperature, pressure, current. From electric windows to steer-by-wire. Dozens of Melexis chips are embedded in every modern car.

That makes the company structurally dependent on one industry that is currently having a difficult time. Global auto production is vulnerable due to oversupply, weak Chinese demand, and uncertainty around EV subsidy policies. Melexis feels that directly. Revenue fell 10% in 2025 to €839.6 million, and net profit fell 34%. EPS dropped from €4.24 in 2024 to €2.78 in 2025.

In my model I assume 10% EPS growth per year through 2028, which assumes a cautious recovery in the automotive sector. With that assumption, EPS comes out at €3.70 in 2028.

For the exit multiple I use a P/E of 20, in line with what a cyclical semiconductor company with limited diversification outside automotive can justify. The P/E has now been pushed up to 30, while the fundamentals are still lagging. The market appears to be running ahead. For Melexis I account for a multiple decline to 20 times earnings.

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With an EPS of €3.70 and an exit P/E of 20, I arrive at a price target of €74 in 2028. From the current price of €81, that implies a negative return of -3% per year.

Melexis can positively surprise if the adoption of steer-by-wire and other advanced driver assistance systems drives chip content per car faster than expected. But as long as the automotive sector remains under pressure and EPS stays structurally below levels from a few years ago, the current price does not justify sufficient return.

AMD

AMD is after Nvidia the most important chipmaker in the AI infrastructure market. The company designs processors for data centers, PCs, and gaming, and has in recent years gained significant market share from Intel in CPUs and from Nvidia in AI GPUs. The 2025 numbers are excellent: record revenue of $34.6 billion, up 34%, with the data center segment as the engine at $16.6 billion.

The problem is not the company. It is the price you pay today.

GAAP EPS for 2025 is $2.67 per share. That is strikingly low for a company with $34.6 billion in revenue, but GAAP earnings are weighed down by high amortization of acquisitions, SBC, and restructuring costs. Non-GAAP EPS was $5.50, but for the valuation I stick to GAAP EPS.

CEO Lisa Su indicated at the most recent Capital Markets Day that AMD expects long-term EPS above $20 per share. That is ambitious, but the direction makes sense given the revenue trajectory and market growth.

In my model I assume 50% GAAP EPS growth per year through 2028, driven by operating leverage on strong revenue growth and a declining share of one-off costs. AMD achieves much lower margins than Nvidia and that gap will narrow somewhat. With that assumption, EPS comes out at $9.01 in 2028.

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Analysts expect comparable growth in non-GAAP EPS. For the exit multiple I use a P/E of 35. For a semiconductor company that is already a generous valuation, but not unreasonable given AMD’s AI positioning. Nvidia currently trades at a comparable valuation while growing faster and achieving higher margins.

From the current P/E this implies a significant multiple decline.

With an EPS of $9.01 and an exit P/E of 35, I arrive at a price target of $315 in 2028. From the current price of $497, that implies a negative return of -14% per year.

AMD can positively surprise if GAAP earnings converge toward non-GAAP earnings faster than expected, or if the MI450 GPU and the Helios rack-scale platform in 2026 and 2027 lead to an acceleration in data center market share at Nvidia’s expense. Lisa Su has proven she can deliver. But at the current price, earnings per share need to more than double from the $9 my model produces just to justify the return. That is the problem. The biggest upside surprise would sit in a sustained high valuation, but that is something I do not want to bet on.

In short: one of the best-managed chip companies in the world, but the valuation runs far ahead of the GAAP earnings the company generates today.

Nebius

Nebius is an AI cloud infrastructure company that rents GPU compute power to companies training and running AI models. It was founded by Arkady Volozh, the founder of Russian tech company Yandex, after he left the company following Russia’s invasion of Ukraine. Nebius is listed on the Nasdaq and is building data centers at a rapid pace worldwide.

The growth numbers are impressive. In Q4 2025, revenue grew 547% year-on-year to $228 million. Annualized recurring revenue, or ARR, was $1.25 billion at the end of 2025. For 2026, management provides revenue guidance of $3 to $3.4 billion. More than half of that revenue is already contracted, including agreements with Meta and Microsoft.

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But that comes with a capital intensity that few companies can sustain. In Q4 2025 alone, Nebius invested $2.1 billion in GPUs and data centers. For the full year 2026 the company plans $16 to $20 billion in capital expenditure. On a revenue base of $3 to $3.4 billion, that capex-to-revenue ratio structurally guarantees losses in the coming years, even if revenue keeps growing.

Nebius is loss-making on a GAAP basis. Building a P/E model from a negative earnings base is pointless, because you cannot put a multiple on a negative number. I therefore use an adjusted EPS of $0.40 as a starting point, a figure that is already extremely optimistic. This is not about current profitability, but an assumption of what the company could generate under favorable circumstances if investments normalize somewhat.

In my model I assume 75% EPS growth per year through 2028. That is an astronomically high assumption, but even then I arrive at an adjusted EPS of only $2.14 in 2028. Analysts expect a non-GAAP EPS of $5.16 in 2028.

For the exit multiple I use a P/E of 100. That is exceptionally high for any company, but reflects the AI sentiment premium the market is currently willing to pay for infrastructure growth.

With an EPS of $2.14 and an exit P/E of 100, I arrive at a price target of $214 in 2028. From the current price of $208, that implies a return of just 1% per year.

Nebius can positively surprise if revenue growth exceeds the capex cycle earlier than expected and profitability materializes faster. The company has contracts with the largest technology companies in the world and the demand is there. But at the current price you are already paying for a scenario in which virtually everything goes right. And that is while there are also material weaknesses in internal control systems identified over fiscal year 2025, which adds additional uncertainty about the reliability of the reported numbers.

In short: a strong company in a fast-growing market, but the current price leaves no room for the return that would justify the risk.

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You see such businesses occasionally, but almost never at a valuation this low. The company trades at a P/E of just 11.

Now comes the surprise: it is an airline. Ryanair. Who would have thought? A sector that is known in the investment world as one of the worst markets to invest in, yet Ryanair ticks off almost all the quality boxes of a genuine quality business.

Today we are going to examine the business in some depth. Why are airlines normally not good investments? In what ways does Ryanair differ from the rest? We look at the unique strategy, go deeper into the financials, and of course also discuss the valuation. I will do all of this somewhat less extensively than normal, but I thought it would be interesting to analyze a completely different type of business for once.

Supermarkets are also not normally known for being great investments, but Dino Polska is an exception to that rule thanks to its unique strategy. Is Ryanair perhaps the Dino Polska of the airline industry?

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Why Airlines Are Not Good Investments

Airlines have for decades been known as one of the worst industries to invest in. That might sound strange, because flying is enormously popular and demand for air travel continues to grow worldwide. Yet airlines have historically created surprisingly little value for shareholders. In fact, many carriers have actually destroyed capital over long periods.

The reason is simple. An airline looks like an attractive business model at first glance, but behind the scenes it is an extremely difficult sector in which to operate profitably.

One of the biggest problems is the enormous capital intensity of the sector. Aircraft cost tens to hundreds of millions of euros each. On top of that there are high fixed costs for maintenance, personnel, fuel, airports, and regulation. Even when planes fly half empty, those costs keep running. An airline therefore has gigantic fixed costs that must be paid continuously.

This gives airlines enormous operating leverage. That means small changes in revenue have a gigantic effect on profit. When a plane is slightly less full or ticket prices fall, a profitable carrier can suddenly become loss-making. In good years airlines often earn reasonable money, but in bad years the profits evaporate immediately.

Competition is also brutal. At their core, airlines largely sell the same product: a seat from A to B. For most consumers it matters little which carrier they fly with. People therefore often simply choose the cheapest option. This creates constant pricing pressure and little pricing power. The moment one carrier lowers prices, competitors often have to follow to keep their planes full. It is better to sacrifice margin than to fly with empty seats.

That makes it very difficult to achieve structurally high margins. Many airlines literally compete each other into the ground. As a result, ticket prices often barely exceed the actual cost of the flight. For shareholders very little profit remains.

Fuel prices also play an enormous role. Kerosene is one of the largest cost items for an airline. When oil prices rise, profit margins can disappear at lightning speed. Airlines have very little control over this themselves. Even perfect management can do little against a sudden explosion in fuel costs.

On top of all that, the sector is extremely sensitive to external shocks. Think of pandemics, wars, terrorist attacks, economic recessions, strikes, or bad weather. One unexpected event can cause demand for air travel to collapse completely. During the pandemic we saw how virtually the entire sector lost billions and many carriers could only survive thanks to government support.

Historically the aviation sector has therefore destroyed an enormous amount of capital. Over the years gigantic amounts have been invested in aircraft, infrastructure, and expansion, while the total profits of the sector often did not match those investments. Many carriers went bankrupt, had to issue shares at low prices, or built up enormous debts. Shareholders were regularly heavily diluted.

As happened recently with Air France-KLM. Shareholders were diluted at a CAGR of 28% over 10 years:

Even Warren Buffett called airlines a bad investment for years. He once said that the aviation industry has destroyed more money than it has earned since its inception. Buffett later invested in several American airlines nonetheless, but ultimately sold those during the pandemic with large losses. Greg Abel has since built a stake in Delta Airlines.

That does not of course mean every airline is automatically a bad investment. Some carriers have unique advantages, such as extremely low costs, scale advantages, or a dominant market position. But as an industry, aviation remains one of the most difficult markets in which to achieve sustainably high returns as a shareholder. It is a cyclical market, so you need to be more of a trader to generate returns.

That is precisely why Ryanair is so interesting. Because despite all the structural problems of the sector, Ryanair appears on many dimensions to operate completely differently from the average airline. The same thing that happens with Dino Polska.

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Why Ryanair Does Better

What makes Ryanair so interesting is that the company does almost everything completely differently from traditional airlines. Where many European airlines became inefficient, bureaucratic, and expensive over the years, Ryanair has focused entirely on one thing: having the lowest costs in the sector. In the aviation industry that is enormously important.

Most airlines try to offer a premium experience with different classes, lounges, extensive service, and complex networks. Ryanair does exactly the opposite. The company tries to make flying as simple and efficient as possible. No luxury, no unnecessary service, but simply getting people cheaply from A to B.

That sounds simple, but behind that strategy sits an extremely efficient operation.

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One of the biggest advantages of Ryanair is its focus on scale and standardization. The company flies almost exclusively with one type of aircraft: the Boeing 737. As a result, maintenance, pilot training, and spare parts are much cheaper and simpler. Traditional airlines often have all sorts of different aircraft types, which makes operations far more complex and expensive.

Ryanair also purchases enormous numbers of aircraft simultaneously in bulk. This allows the company to negotiate much better prices with Boeing. Because Ryanair is one of Boeing’s largest customers, it gets significant discounts that smaller competitors simply cannot obtain.

Operationally Ryanair also works much more efficiently than competitors. The company tries to keep aircraft on the ground as briefly as possible. The moment a plane lands, it is prepared for the next flight at lightning speed. Passengers disembark, new passengers board, and the plane departs again. The faster a plane is back in the air, the more money it earns. A plane on the ground only costs money.

Traditional airlines often fly to major premium airports like Heathrow, Schiphol, or Charles de Gaulle, where the costs for gates, slots, and ground handling are enormously high. Ryanair deliberately chooses smaller and cheaper airports instead. As a result, operating costs are much lower and aircraft can often turn around faster without the congestion of large international hubs.

Ryanair also extracts additional efficiency from the layout of its aircraft. More seats in a plane means fixed costs can be spread across more passengers. Items like hand luggage, seat selection, and food on board are also charged separately. This allows Ryanair to offer extremely low ticket prices while still achieving strong margins. There are always people who buy something on board or add luggage.

The competitive position of Ryanair is therefore much stronger than many people think. In Europe there are actually very few genuine low-cost carriers left. EasyJet is a serious competitor, but most traditional airlines simply cannot compete with Ryanair’s cost level.

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According to CEO Michael O’Leary, many European airlines are bloated, bureaucratic organizations that were protected by governments for years. Many national carriers historically had strong ties with the state and were therefore less forced to operate efficiently. You still see that today in high cost structures, complex organizations, and slower decision-making.

Ryanair has profited from precisely that. While competitors struggled with high costs and weak margins, Ryanair kept obsessively focusing on cost reduction, scale advantages, and operational efficiency.

Ryanair also distinguishes itself with its marketing. The company is known for its striking, sometimes controversial, and often humorous campaigns on social media. Where traditional airlines often communicate formally and corporately, Ryanair chooses a bold and informal style that works enormously well on platforms like TikTok, Instagram, and X.

Much of that marketing is completely organic. Ryanair cleverly uses memes, current events, and self-deprecating humor to go viral. As a result, the company gets millions of views without spending enormous marketing budgets. Younger consumers in particular now recognize Ryanair’s humor immediately.

That approach fits perfectly with the brand. Ryanair does not try to come across as luxury or premium. The company knows customers primarily want the cheapest flight. By not taking itself too seriously and playing into that cleverly, Ryanair has built a surprisingly strong brand identity for a budget carrier.

Precisely in a difficult industry like aviation that can make an enormous difference. When the sector is under pressure, it is usually the cheapest players that remain standing. Ryanair can offer ticket prices at which many competitors simply cannot make any profit.

That is probably the most important reason why Ryanair is structurally more profitable than almost all other European airlines. The company has made a traditionally terrible industry into a business that surprisingly has many characteristics of a quality company.

The strength of Ryanair’s model is also visible in the numbers, more on that later.

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The Risks of Ryanair

Although Ryanair clearly operates much more strongly than the average airline on many dimensions, it naturally remains active in a difficult and cyclical industry. There are still various risks that investors need to account for.

One of the biggest risks is perhaps that Ryanair is completely dependent on Europe. That is simultaneously an enormous strength and a potential problem. Europe is an enormous market with many short distances, a lot of tourism, and high demand for cheap flights. That is precisely why Ryanair could grow into the dominant low-cost carrier of the continent.

At the same time, Europe is becoming increasingly critical of flying. Governments want to reduce CO₂ emissions and are trying to steer consumers more often toward train travel or other more sustainable alternatives. As a result, taxes on flying keep increasing. Think of higher ticket taxes, stricter environmental rules, and possible restrictions on short-haul flights.

For a company that entirely revolves around low ticket prices, such measures could over time become a serious problem. When flying is structurally made more expensive through regulation, that can put pressure on demand for budget flights.

An additional long-term risk for Ryanair is that European governments are actively trying to make alternative transport modes more attractive. The train in particular is increasingly being positioned as a sustainable alternative to short-haul flights within Europe.

The European Union is therefore not only investing billions in rail infrastructure and international train connections, but in some cases also subsidizing train tickets to make train travel more competitive with flying, in addition to the extra taxes on flying. The goal is clear: stimulating consumers to take the train more often instead of the plane.

Within Europe that can work relatively well, because distances are limited. On many routes flying is fast in the air, but travelers still lose a lot of time to security, queues, and transport to and from airports. High-speed trains can become an attractive alternative on such journeys.

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A journey from Amsterdam to Paris, for example, could be possible in approximately 2.5 to 3 hours with modern bullet trains. Especially when governments keep ticket prices low through subsidies, the train can become more attractive than a budget flight for many travelers.

The reality is however that the rollout of a genuine European high-speed network is far from complete. Many projects are delayed by bureaucracy, political discussions, and high investment costs. It will therefore probably still take years before train travel on a large scale becomes a serious threat to budget carriers like Ryanair.

Yet the direction is clear: Europe wants to make flying less attractive and actively stimulate more sustainable alternatives. Over the long term that could put structural pressure on the growth of cheap short-haul flights within Europe.

Competition also remains a risk. Ryanair currently has one of the strongest cost structures in Europe, but competition in aviation never disappears entirely. EasyJet remains an important low-cost carrier and traditional airlines can also sometimes compete aggressively on certain routes to retain market share.

Fuel prices also remain an important uncertainty. Kerosene is one of the largest cost items for airlines. When oil prices rise sharply, as happened regularly in recent years, that can directly pressure Ryanair’s margins. Although Ryanair operates more efficiently than many competitors, the company ultimately remains dependent on external factors over which it has little control.

Airlines often hedge against high oil prices, but they still face higher costs when oil prices are elevated.

Aviation also remains sensitive to economic weakness. During recessions consumers often cut back first on travel and holidays. Although Ryanair thanks to its low prices will probably remain stronger than more expensive carriers, Ryanair will also feel the impact of a weaker economy.

Geopolitical tensions, strikes, pandemics, and disruptions in the aviation sector remain risks as well. The pandemic showed how quickly the entire industry can come to a standstill. Even the strongest airline ultimately remains vulnerable to extreme external events.

Ryanair is therefore probably one of the best-managed airlines in the world, but it remains an airline. That means investors must always account for structural risks that simply come with this industry.

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Exceptionally Strong Financials

The financial performance of Ryanair is perhaps the most striking part of the whole story. When a company operationally outperforms the competition, you almost always eventually see that reflected in the numbers. At Ryanair that difference is clearly visible. While many airlines struggle with low margins, high debt, and low ROIC, Ryanair shows strong revenue growth, high margins, a strong balance sheet, and high returns on capital. Precisely in an industry historically known for capital destruction, those are exceptional achievements.

To understand why that is so special, you first need to understand how airline financials normally work.

Airlines are extremely capital-intensive. Aircraft cost gigantic amounts and must be continuously replaced, maintained, and expanded. As a result airlines often have enormous capex expenditure. They also often carry a large debt load for financing these aircraft. A large portion of operating cash flow flows straight back into new planes, maintenance, or lease obligations.

That means many airlines despite high revenues ultimately retain little free cash flow. Often carriers even need to take on significant debt to finance their fleet. As a result many airlines end up with weak balance sheets and high interest charges.

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Ryanair is an exception precisely on that front.

Ryanair’s revenue has grown enormously in recent years. Since 2018 revenue rose from approximately €7 billion to more than €15 billion today. That amounts to a CAGR of approximately 10%, despite the enormous impact of the pandemic on the aviation sector.

Even more impressive is that Ryanair combines that growth with strong margins. The company achieves EBITDA margins of more than 24% and operating margins of around 15%. For an airline those are exceptionally high levels.

When you compare Ryanair with other large airlines, the difference becomes really clear. Traditional European carriers like Air France-KLM and Lufthansa often achieve net profit margins of just a few percent. In some years they are even close to breakeven.

Ryanair by contrast achieves net profit margins well above 10%. That is a level most traditional airlines cannot come close to.

The balance sheet of Ryanair is also strikingly strong. Where many airlines have built up heavy debt, Ryanair has a very healthy balance sheet with a strong cash position. The company even operates with a negative net debt to EBITDA ratio, meaning Ryanair holds more cash net than it has debt.

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That is exceptional in the aviation sector.

Most competitors are deeply in debt. Delta Air Lines operates with a net debt to EBITDA of around 2, while carriers like Air France-KLM and Lufthansa also have considerably higher debt levels than Ryanair.

That strong balance sheet gives Ryanair enormous flexibility. During difficult periods the company can keep investing, win market share, or buy cheap aircraft when competitors are under pressure.

Ryanair also achieves an extremely high ROIC of well above 20%. That means the company is very efficient with the capital it invests. That is particularly remarkable, because historically airlines usually achieve very low returns on their enormous investments in aircraft and infrastructure.

How can Ryanair achieve this?

The answer again lies in the cost structure and efficiency. Ryanair uses its aircraft more intensively, purchases more cheaply, flies more efficient routes, and carries more passengers per aircraft. As a result the company simply earns much more on every euro invested.

To make this clearer, let me explain this using the ROIC formula. That way you can hopefully better determine in the future where a company’s high ROIC actually comes from and which component is most important. That is crucial to understand, because not every high ROIC is the same. Some companies achieve a high ROIC thanks to extremely high margins, while others excel through an enormous asset turnover. The very best companies often know how to combine both.

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The formula can be broken down into two important components:

The first component, NOPAT divided by revenue, is the profit margin. How much profit do you retain on every euro of revenue?

The second component, revenue divided by invested capital, is the asset turnover. How much revenue do you generate from every euro invested in the business?

Many companies are only good at one of those two, if they are good at either at all. Luxury companies and software businesses for example achieve extremely high margins but have a low turnover. Supermarkets do exactly the opposite: low margins, but an extremely high turnover because gigantic volumes flow through.

Ryanair, surprisingly, does both well. On one hand Ryanair achieves relatively high margins for an airline thanks to its extremely low cost structure. On the other hand the company also has a fast asset turnover, with hundreds of flights per day. The aircraft fly more frequently, are more full, and generate far more revenue per plane than at traditional airlines.

That is crucial, because aircraft are gigantically expensive assets. When you use those assets more efficiently than competitors, the revenue per invested euro of capital automatically rises. That is precisely why Ryanair can achieve a much higher ROIC than other airlines. The company combines relatively strong margins with a high asset turnover.

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That actually looks a lot like what Dino Polska does. There too you see a company that not only achieves good margins, but simultaneously deals extremely efficiently with invested capital. That combination often creates the very best businesses over the long term. If margins fall away, the ROIC is maintained by the high turnover, and vice versa.

The high capex remains of course an important part of the story. Ryanair must continuously invest in new aircraft to keep the fleet modern and efficient. That costs billions of euros, but precisely because Ryanair stands so financially strong, it can make those investments without heavily burdening the balance sheet.

Another striking point is the share buyback program. In recent years Ryanair has been aggressively buying back its own shares. The number of shares outstanding has declined more than 10% since 2018. The company sometimes buys back nearly 4% of all shares per year.

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That is remarkable in the aviation sector, where many carriers historically had to issue new shares to finance losses or debt. Ryanair does the opposite: it generates sufficient cash to return capital to shareholders, also in the form of dividends.

It is precisely that combination that makes Ryanair so unique. The company combines strong growth, high margins, a strong balance sheet, high returns on capital, and shareholder-friendly capital policy within an industry normally known for precisely the opposite.

That is probably the most important reason why Ryanair, despite the difficult sector, is starting to display characteristics of a genuine quality business.

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The Valuation Is Attractive

Then we come to perhaps the most interesting part of the analysis: the valuation. Because a great business is not automatically a great investment. The price you pay ultimately remains enormously important for the return on your shares.

At Ryanair that is particularly interesting. Because despite the strong market position, high margins, strong balance sheet, and high returns on capital, the stock still trades at relatively low multiples.

To properly assess the valuation, I will do this in two ways: via multiples and via an intrinsic valuation with a DCF model.

Multiple Valuation

With the multiple analysis we can determine whether the company is relatively attractively valued. How does the market value this company compared to competitors and compared to its own historical valuation?

With airlines you almost always see low valuations. The sector historically trades at low P/E ratios, low EV/EBITDA multiples, and relatively low free cash flow valuations.

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There is a clear reason for that. The airline market is simply not attractive for investors, as already discussed in detail. Ryanair is no exception there.

Despite Ryanair operationally outperforming virtually all competitors, the stock still trades around a P/E of approximately 12. That is normally low for a company with such returns on capital and such strong margins.

When you compare Ryanair with other airlines, you do see that the stock usually trades at a premium. Lufthansa and Air France-KLM often trade at much lower multiples. Delta Air Lines also trades relatively cheaply.

That difference is logical. Ryanair is simply a much better business. It has higher margins, a stronger balance sheet, higher returns on capital, and a far more efficient operation than most competitors. The market is therefore willing to pay somewhat more for Ryanair than for a traditional airline.

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Yet that premium remains relatively limited. That actually shows how negatively investors structurally look at the aviation sector. That is in some ways understandable. The risks mentioned earlier do not simply disappear. Airlines remain sensitive to recessions, oil prices, climate policy, taxes on flying, and geopolitical disruptions. Europe is also actively trying to make alternatives like train travel more attractive.

That is precisely why the market will probably never pay the same multiples for Ryanair as for software companies or luxury brands, no matter how well Ryanair performs operationally.

DCF

In addition to the multiple analysis we of course also want to know what Ryanair is intrinsically worth. Perhaps the entire airline sector is too expensively valued. We will determine this using a DCF model.

For those unfamiliar with a DCF model, a brief explanation:

That is important because the stock price in the short term can often deviate significantly from the actual underlying value of a company. Over the long term the price usually eventually follows the free cash flows a company generates.

The approach of the model is relatively straightforward. First the revenue growth for the coming years is projected. Then assumptions are made about EBIT margins and the tax rate, from which the NOPAT is ultimately calculated.

After that, it is assessed how much of that profit must be reinvested to enable future growth. That element is crucial for airlines, because the sector is extremely capital-intensive. New aircraft, maintenance, and fleet expansion require large continuous investments.

Free cash flow ultimately emerges from NOPAT minus the necessary reinvestments.

This DCF uses a 15-year horizon. The first 10 years are explicitly calculated based on revenue growth, margins, and reinvestments. After that follows a fade-out period of 5 years, in which growth gradually declines toward a stable terminal growth rate of 3%.

For Ryanair I use a relatively high required return of 11.5%.

That required return consists of:

• 9.5% standard required return consisting of 4.5% risk-free rate plus 4% equity premium.

• 1% extra for the structural risks of the airline industry, competition and so on.

• 0.5% extra for climate and regulatory risks.

• 0.5% extra for the dependence on oil and fuel prices.

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This is on the conservative side, but in this sector it is important to build in a margin of safety. The history of the sector shows that unexpected shocks can have an enormous impact on profitability and valuations.

For the valuation I will be extra cautious, because the smallest changes in oil prices, economic growth, and regulation can already have enormous consequences for margins and revenue growth.

The market will probably grow at 6% through 2033. Due to the economic dependence, this will not be linear.

For the first five years revenue growth of 6% per year is assumed. In the following five years that growth gradually declines to 5% per year.

The margins in particular remain difficult to estimate, because they are heavily dependent on oil prices among other things. In 2017 EBIT margins were still around 24%, while they have since fallen back to approximately 15%.

For the first five years it is therefore assumed that margins weaken further toward 13.5%. In the years after that, margins gradually recover toward 15%. During the terminal growth period an EBIT margin of 13% is ultimately assumed.

These assumptions lead to a fair value of €24.26 per share, which is slightly above the current price of approximately €23.50. Based on these assumptions the stock would therefore be slightly undervalued.

When however a lower required return of 10.5% is used, the fair value already rises toward €30 per share. That immediately shows how sensitive a DCF valuation is to the required return used. Small changes in the required return can have a large impact on the final fair value. The intrinsic value of a stock therefore depends to a significant extent on the personal return that an investor demands on their investment.

Should You Buy Ryanair?

The core of the story is actually the same as what I tried to make clear earlier with Dino Polska: even in sectors that historically are almost never attractive to invest in, exceptions can sometimes be found.

For me Ryanair is a good example of that.

The company has a unique strategy, an extremely efficient operation, a strong balance sheet, high returns on capital, and probably the best cost structure in Europe. Despite those qualities, Ryanair receives relatively little attention from investors, simply because it is active in an industry where investors have historically had bad experiences.

At the same time, it is important to remain realistic. Being the best in a bad industry does not automatically make you a great investment.

However strongly Ryanair operates, aviation remains an extremely difficult industry. Margins remain unpredictable and the sector remains enormously sensitive to external shocks such as oil prices, recessions, pandemics, geopolitical tensions, and regulation around climate and flying.

Precisely for that reason even a “normal scenario” at airlines often feels less reliable than in many other sectors.

The valuation of Ryanair looks attractive, certainly when you look at the quality of the business relative to competitors. Yet personally I would want an additional margin of safety on top. Only below a price of approximately €18 would the stock potentially become genuinely interesting, provided the underlying thesis has not changed.

Yet I will probably never buy Ryanair, because however impressive the company is within the sector, it ultimately remains an airline. Even the best airline in the world still operates in an industry that remains structurally difficult. There are simply better businesses on the stock market with more predictable margins, less cyclical risk, and stronger long-term characteristics.

Thank you for reading. I thought it would be interesting to analyze a completely different type of business than usual.

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Yet sentiment on the stock market suddenly turned when growth began to slow.

The primary cause was the price war in Poland. Major supermarket chains such as Biedronka, Lidl, and Dino are all aggressively trying to win market share. As a result, prices are temporarily under pressure, which directly weighs on margins.

At the same time, food inflation in Poland cooled significantly. That sounds positive for consumers, but for supermarkets it often works the other way. During periods of high inflation, revenue automatically rises as products become more expensive. Once that inflation eases, sector revenue growth also slows.

Investors also began to worry increasingly about Dino’s like-for-like growth, the revenue growth of stores that have been open for more than one year. For growth companies that is an important metric. Once investors get the impression that underlying growth is structurally slowing, a stock can come under severe pressure, even when the fundamental business remains strong. That appears to be exactly what is happening with Dino right now.

Yet it is important to look beyond the short term. Behind the temporary headwinds sits the same business. Dino Polska has in a relatively short period of time built a unique business model that perfectly aligns with the Polish consumer. It combines low prices with efficient stores, strong logistics, disciplined capital use, and a management team that is extremely focused on the long term.

It looks in many ways like a quality business and a future compounder.

In this deep dive I examine Dino Polska in depth: from the business model and moat to the valuation of the stock. Deep dives like this are normally exclusive to paid members, but since we reached 100 subscribers I wanted to share this analysis with everyone as a small gesture of appreciation.

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This deep dive took an enormous amount of time. If you want to read more analyses like this, consider a paid membership for just €9.99 per month. That directly supports me in continuing to produce this kind of in-depth research. A free subscription is also very much appreciated.

Poland: One of Europe’s Most Interesting Growth Stories

Many investors barely look at Poland. When people think about Europe, they usually think about Germany, France, the Netherlands, or the United Kingdom. Poland is still often seen as an “emerging” Eastern European country, but that image is increasingly inaccurate.

In fact, Poland has grown into one of the biggest economic success stories in Europe over the past few decades.

After the fall of communism around 1990, the country began an enormous economic transformation. Poland transitioned from a centrally planned economy to a free market economy. That process certainly did not go without difficulties, but over the long term it worked out exceptionally well. Since then the Polish economy grew for years faster than many Western European economies.

Anyone traveling through Poland today sees a country in full development. New highways, modern industrial parks, shopping centers, and residential neighborhoods are visible everywhere. Cities such as Warsaw, Kraków, and Wrocław have completely transformed in twenty years. Infrastructure improved enormously and the standard of living rose significantly. Poland has become one of the safest countries in Europe and holds firmly to traditions that many European countries are increasingly abandoning.

What makes Poland extra interesting is that the country combines economic growth with relatively low wages. As a result Poland has become increasingly attractive as a manufacturing location for international companies over recent years. Workers are well educated, while labor costs remain lower than in Western Europe.

That led to more employment, higher incomes, and a fast-growing middle class — precisely the ideal environment for a company like Dino Polska.

Poland has approximately 38 million inhabitants, making it one of the largest consumer markets in Europe. But what makes Poland truly interesting for Dino is the way people live and consume.

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A large part of the population lives outside the major cities, in smaller towns, villages, and rural areas. That differs significantly from countries like the Netherlands, where almost everything is highly urbanized. Precisely for that reason enormous hypermarkets do not work equally well everywhere in Poland. Many consumers simply want a supermarket close to home.

Polish consumers have also historically been very price-sensitive. Incomes were long below those in Western Europe, so consumers pay close attention to offers and compare prices carefully. At the same time, Poles place a high value on quality and freshness, especially when it comes to meat products, precisely where Dino fits perfectly.

Where many international supermarket chains strongly focus on large stores and many packaged products, Dino focuses instead on compact neighborhood stores with fresh products and traditional meat departments. The company simply understands the Polish consumer better than many foreign competitors.

Shopping behavior in Poland is also different from, for example, the Netherlands or the United States. Many consumers make smaller grocery runs more frequently rather than one large weekly supermarket trip. This is partly because apartments are on average smaller and people store less. Consumers also often live close to stores, making it easy to pop in between other activities.

This plays perfectly into Dino’s hands. The entire store concept is built around daily small purchases.

For investors it is also important to note that Poland economically is far from “finished.” Incomes are still rising and consumption is growing with them. Particularly outside the largest cities, many regions are still developing strongly.

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As a result, the supermarket market still has plenty of room to become more modern and efficient.

Historically the Polish market consisted primarily of small local stores, but that market is shifting increasingly toward modern supermarket chains. Small independent stores are slowly losing market share to more efficient chains like Dino.

Additionally, Poland has relatively little supermarket floor space per inhabitant compared to some Western European countries. There is therefore still a lot of room for new stores, especially in eastern Poland where Dino still sees major expansion opportunities.

That is crucial, because for a growth company everything ultimately revolves around reinvestment. As long as Dino can open new stores at high returns, the company can keep growing for years.

When you put it all together, it becomes clear why Poland is such an attractive market for Dino Polska.

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The country combines a large population with rising prosperity, many smaller towns and villages, and consumers who care about both price and quality. At the same time, there is still ample room for modern supermarket chains to win market share.

Dino has aligned its entire business model to precisely those characteristics. That is the core of the company’s success. It understands how Polish consumers live, shop, and consume.

That is precisely why Dino could grow into one of the fastest-growing supermarket chains in Europe.

The Strength of Dino Polska

At first glance Dino Polska looks like just another supermarket chain. The company sells everyday groceries, has relatively small stores, and operates in a sector where competition is normally brutal. Yet Dino is fundamentally different from many other supermarket businesses. Behind that simple exterior lies an extremely efficient system that is cleverly built on multiple levels. That is also where the hidden strength of Dino Polska lies.

It is precisely that combination of choices that makes Dino special. The company does not have one gigantic competitive advantage, but multiple smaller advantages that reinforce each other. This creates a business model that is much harder to copy than it initially appears. Anyone can open a supermarket, but making it as profitable as Dino Polska is far more difficult.

One of the most important choices Dino makes is its focus on smaller towns and villages. Where many supermarket chains want to be present in large cities with high population density, Dino does exactly the opposite. The company primarily opens stores in smaller locations where there is less competition and where consumers need a supermarket close to home.

Dino store locations in dense areas versus Biedronka:

That might seem like a small difference, but it completely changes the business model.

In smaller villages, land is often cheaper, parking is more readily available, and operating costs are lower. At the same time, consumers in such areas are often more loyal to stores that are conveniently nearby. For daily groceries it ultimately comes down to convenience. Dino plays into exactly that.

Dino’s stores are also relatively small. Virtually every store has a floor area of approximately 400 square meters. That makes them much more compact than the large hypermarkets of competitors, but still large enough for daily groceries. The assortment consists of approximately 5,000 products: bread, milk, meat, vegetables, soft drinks, cleaning products, and other everyday items. Large enough for the average consumer, but small enough to keep the store efficient.

That simplicity creates speed. Customers do not have to walk through enormous stores and can quickly do their shopping. That fits perfectly with the shopping behavior of many Polish consumers, who make smaller grocery runs more frequently rather than one large weekly trip.

Another important element of the business model is standardization. Virtually every Dino store looks the same. The parking areas are comparable, the store layout is largely identical, and the shelves are usually in the same place. That might sound unimportant, but standardization delivers enormous benefits. Action applies the same model.

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New stores can be built faster because Dino knows exactly what a store should look like. Materials can be purchased more cheaply in bulk and maintenance becomes simpler because virtually every store uses the same components. Many supermarket chains have all sorts of different store types: some small, others large, some modern and others outdated. That makes logistics and maintenance complicated. Dino keeps it extremely simple.

One of the most interesting aspects of Dino is its own construction company. The family of founder Tomasz Biernacki established Krot-Invest, a company that specifically builds Dino stores. This makes Dino far less dependent on external contractors.

That delivers multiple advantages. First, construction costs are lower. Second, stores can be built faster because Dino has full control over the process. It also prevents delays and disputes with external parties. The company knows exactly how a store should be built and can continuously optimize that process.

That might sound like a detail, but it is an enormous advantage when you want to open hundreds of stores per year. Many competitors depend on external construction companies and therefore have less control over speed, quality, and costs. Dino has largely internalized that process.

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This allows Dino Polska to scale much faster than competitors. They only need to arrange building permits, which is considerably simpler in Poland, and then start building. Competitors must first negotiate with construction companies.

Additionally, Dino owns approximately 95% of its stores. That is fairly exceptional in the supermarket world. Many supermarket chains rent their locations because it seems cheaper in the short term. Dino deliberately chooses ownership instead, as over the long term this is far cheaper.

Initially that requires enormous investments, but over the long term it delivers important advantages. Dino pays no rising rents and simultaneously builds value in real estate. It also has full control over its locations, making strategic decisions much easier.

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A good example is the solar panels on the stores. Because Dino owns the real estate, it could relatively easily install solar panels on a large portion of locations. For supermarket chains that rent their properties that is often much more complicated. The real estate ownership also provides stability. Rental contracts can become more expensive or expire, but Dino has far less of that problem.

This also gives Dino Polska relatively low energy costs compared to competitors. That might seem like a small advantage, but across a network of thousands of supermarkets even minimal efficiency improvements can have an enormous impact. A cost saving of just 0.1% can easily add up to millions per year.

Another important element of the business model is the focus on fresh meat. Virtually every Dino has a traditional meat department, something that perfectly aligns with the Polish consumer. Poles place a high value on fresh meat and prefer fresh products to packaged alternatives. Dino understands that better than many international supermarket chains.

The company also owns its own meat processing business: Agro-Rydzyna. This means Dino is vertically integrated and controls an important part of the production chain itself. That delivers major advantages. The company has more control over quality, lower costs, and less dependence on external suppliers. Moreover, margins stay higher because part of the profit remains within the own chain.

Fresh meat departments also drive repeat customers. People often come back multiple times per week for fresh products, which increases the visit frequency of stores.

Logistics also plays an enormous role within Dino. The company invests heavily in distribution centers and supply. Every day fresh products are delivered to stores spread across Poland. Through the standardized stores and the relatively simple assortment, Dino can operate extremely efficiently in logistics.

The larger the network becomes, the stronger the scale advantages begin to work. A larger store network means more efficient purchasing, lower distribution costs, and a better cost structure. This allows Dino to offer low prices while margins remain relatively strong.

Another striking point is that Dino spends relatively little on marketing. Many supermarket chains spend enormous amounts on advertising campaigns, discount promotions, and offers. Dino does that far less. That is partly because stores are close to consumers. People simply know the store because it is in their neighborhood.

Word-of-mouth also works well in smaller communities. When consumers are satisfied with price, convenience, and quality, they keep coming back. As a result, Dino’s marketing costs are much lower than those of some competitors.

What is remarkable is that despite low prices, Dino still achieves relatively strong margins. That seems contradictory, because normally low prices go hand in hand with low profit margins. But it is precisely Dino’s efficient cost structure that makes this possible.

Through cheap locations, standardization, own real estate, vertical integration, efficient logistics, and low marketing costs, the company can offer competitive prices and remain profitable.

When you bring all those elements together, an impressive business model emerges. Dino combines cheap locations, standardization, owned real estate, vertical integration, efficient logistics, low marketing costs, and strong capital discipline. Precisely because all those elements reinforce each other, a supermarket chain emerges that is much harder to copy than many investors think.

The supermarket itself is easy to set up, but the strong margins and fast scaling method are not easy to copy.

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The most important thing may be that Dino can reinvest enormous amounts of capital at high returns. New stores deliver attractive returns, allowing the company to open ever more stores and grow profits further. That is ultimately the power of compounding.

Precisely that is why so many long-term investors find Dino Polska so interesting. It can reinvest its entire cash flow at high returns, creating, just like for small investors, a compounding effect in the business model.

The Market of Dino Polska

The supermarket market is normally not an attractive market for investors. Competition is fierce, margins are low, and consumers can easily switch to another store. In many countries the market is also largely saturated, meaning supermarket chains primarily compete with each other on price. As a shareholder you are generally not better off for it. In Poland this is slightly different.

The Polish supermarket market is still in the middle of a transformation. That is precisely what makes the market so interesting for a company like Dino Polska. Poland is today already one of the largest economies in Europe, but in terms of development the country in many respects is still in a phase that many Western European countries were in during the 1990s. That is precisely why enormous growth opportunities still exist, both for the economy and for companies like Dino Polska.

After the fall of communism the Polish retail market consisted primarily of small local stores and family businesses. Modern supermarket chains were barely present. But as Poland grew economically, international players began entering the country. Major names such as Carrefour, Tesco, Lidl, and Aldi saw opportunities in the fast-growing economy. Especially large hypermarkets became popular: enormous stores where consumers could do a lot of grocery shopping in one go.

But Poland ultimately proved not perfectly suited for that model, even though it works well for the rest of Europe.

As mentioned earlier, a large portion of the Polish population lives outside the major cities. Consumers also relatively often make smaller grocery runs instead of one large weekly supermarket trip. This created precisely a lot of demand for smaller supermarkets close to home, such as Dino.

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The largest player in Poland is Biedronka. This chain has by far the largest market share and thousands of stores spread across the country. Biedronka positions itself strongly on low prices and is often seen as the price leader in Poland. For Dino this is by far the most important competitor.

Lidl and Aldi are also important players within the discount segment. Lidl focuses somewhat more on larger stores and a broader discount concept, while Aldi is still relatively small in Poland compared to Germany. There are also players such as Carrefour and Żabka. Żabka in particular is interesting, as the company focuses on small convenience stores in urban areas. But that model differs considerably from Dino. Żabka is primarily about speed, convenience, and urban locations, while Dino focuses on daily groceries in smaller places.

What makes Dino special is that it actually sits between multiple categories. It is not a classic discount supermarket like Lidl, but also not a hypermarket or an expensive convenience store. Dino combines low prices with fresh products, relatively small stores, and locations close to consumers.

Precisely that combination proves very attractive to Polish consumers.

A major advantage of Dino is that the company for years focused on smaller towns and villages where competition was more limited. Many international chains focused primarily on large cities because of higher population density. Dino does exactly the opposite.

This allowed the company to build a network in smaller communities where consumers needed a modern supermarket close to home. That gave Dino years of relatively ample growth room without facing heavy competition everywhere. That does not of course mean competition is no risk. On the contrary.

The supermarket sector remains extremely competitive and price remains one of the most important factors. Polish consumers pay close attention to offers and compare prices well. As a result supermarket chains must remain continuously competitive. That is also why a significant price war emerged over recent years.

In recent years large supermarket chains began more aggressively cutting prices to defend market share. Especially Biedronka and Lidl actively try to attract consumers with low prices and offers. Dino had to follow along to remain competitive, which temporarily put pressure on margins.

Yet Dino has multiple advantages within this competitive battle.

First, the company has a strong cost structure. Through its own real estate, standardization, and efficient logistics, Dino can operate relatively cheaply. The company also has a strong balance sheet with relatively little debt.

That might sound small, but precisely during a price war such differences become important. Companies with high debt or weak margins struggle far more when prices come under pressure. Stronger companies can usually better weather such periods and sometimes even win market share.

The low debt results in lower interest costs than competitors with a lot of debt, meaning Dino’s margins are higher and it can therefore offer lower prices than competitors while still remaining profitable.

Many investors therefore believe that Dino can ultimately emerge even stronger from this competitive battle.

Another important point is that Dino still has relatively little market share, sitting at around 6 to 8% of the total Polish supermarket market. That is low now, but precisely for that reason there is still a lot of growth room.

Biedronka is much larger but also growing more slowly now. Dino is still growing fast precisely because it operates from a smaller base. The key question for investors is therefore: how many stores can Dino ultimately open?

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Nobody knows exactly. But many analysts believe the store count could easily double. Especially in eastern Poland there is still a lot of expansion space. Dino has relatively fewer stores there than in western Poland. When eastern Poland ultimately reaches comparable store densities to the western regions, enormous growth potential opens up.

That matters, because the success of Dino ultimately revolves around reinvesting in new stores. As long as new stores deliver high returns, the company can keep creating compounding value for years. The key question is, again, how long can Dino sustain this? In eastern Poland there are still many growth opportunities, and beyond that the company could try to open locations outside Poland. In the medium term there therefore appear to be no imminent problems.

Dino also benefits from multiple long-term trends simultaneously. Small local stores are slowly disappearing from the market, while modern supermarket chains become more efficient and win market share. Just look at what happened in the Netherlands. In the 1990s there were countless small supermarkets; now only a handful of large ones remain. At the same time, Polish purchasing power is still rising, which typically leads to higher consumer spending.

Scale advantages are also becoming increasingly important. The larger Dino becomes, the more efficiently the network can operate. Distribution centers supply more stores, logistics costs are more efficiently distributed, and negotiating power with suppliers improves. That further strengthens the competitive position of the company.

Yet you must never underestimate competition in the supermarket sector. Consumers remain price-sensitive and competitors can copy parts of Dino’s strategy. Biedronka can expand more aggressively into smaller villages, Lidl can compete more strongly on price, and online grocery could play a larger role over the long term.

For now, however, Dino appears excellently positioned. The company has built a clearly differentiated concept and benefits from a market that is still growing and modernizing. Precisely because Poland is not yet fully saturated, there remains a lot of room for expansion for the time being.

When you put it all together, it becomes clear why so many investors are enthusiastic about Dino Polska. The company operates in a growing market, still has relatively little market share, benefits from scale advantages, and has a long expansion runway. It also has a unique concept with strong vertical integration that makes it better streamlined than competitors and able to scale faster. Through its strong balance sheet it can moreover offer lower prices to achieve the same margins.

That does not mean the risks disappear. But it does mean Dino for now still has the characteristics of a genuine compounding machine.

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The Moat of Dino Polska

For investors a moat is enormously important. A moat is a durable competitive advantage that allows a company to remain profitable for years and makes it difficult for competitors to take away market share.

For companies like ASML or Visa such a moat is often fairly clearly visible. ASML owns unique technology and Visa has a global payments network that is almost impossible to replace. For supermarkets it is more complicated. Supermarkets largely sell the same products and consumers can relatively easily switch to another store. The moat seems absent in the business model.

Yet Dino Polska has built something surprisingly strong. The elements have already been briefly mentioned, but here they are briefly repeated.

The company may not have a classic moat, but it has a combination of multiple smaller advantages that together form a powerful system. Charlie Munger once called such a combination a “lollapalooza effect”: different positive factors that reinforce each other and together become far more powerful than individually. That is precisely what you see with Dino.

One of the most important elements of Dino’s moat is scale. The larger the network of stores becomes, the more efficiently the company can operate. Dino gains more negotiating power with suppliers, logistics becomes more efficient, and fixed costs can be spread across more stores. As a result, costs per store slowly decline as the network grows.

For smaller competitors it is virtually impossible to operate at the same scale. Especially in smaller villages it becomes difficult to build a comparable network without enormous investments.

Standardization also plays an enormous role. Virtually every Dino store looks the same. That delivers major advantages. Stores can be built faster, maintenance becomes simpler, and employees learn processes more quickly. Many supermarket chains have all sorts of different store types, which makes logistics more complicated. Dino keeps it extremely simple. That simplicity creates enormous efficiency. Supermarkets process enormous amounts of money. Precisely for that reason even small efficiency improvements can have a tremendous impact on profitability. A minimal cost saving or slightly higher margin translates across such large revenues to millions in additional profit.

Real estate ownership also forms an important advantage. Dino owns approximately 95% of its stores. That makes the company far less dependent on rental contracts than many competitors. Over the long term that results in lower costs, more control over locations, and additional stability. Dino also builds value in real estate, making the company financially stronger.

The own construction company further strengthens that advantage. Because Dino controls a large part of the construction process itself, it can expand faster and operate more efficiently. Many competitors depend on external contractors, while Dino has organized many processes internally.

The focus on fresh meat also forms an important element of the competitive position. Many international supermarket chains strongly focus on packaged products, while Dino understands that Polish consumers place a high value on fresh meat. That is why virtually every store has a traditional meat department. The own meat production also provides more control and strong vertical integration.

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A large part of revenue comes from meat and fresh products:

Another important advantage is Dino’s low catchment area. Simply put, a Dino store needs relatively few inhabitants to be profitable. Many large supermarket chains need high population densities to operate profitably, while Dino can run profitably in smaller villages and communities.

This allows the company to expand into areas where competitors have less interest. That is very attractive for the growth story of Dino.

The low marketing costs are also striking. Many supermarket chains spend enormous amounts on advertising campaigns and discount promotions. Dino does that far less. The stores are often close to consumers and benefit strongly from word-of-mouth. That further lowers operating costs.

Dino has also built a strong corporate culture. The company is known for efficiency and cost consciousness. Founder Tomasz Biernacki is said to be extremely focused on details and cost control. You see that everywhere within the organization: no luxury headquarters, no excessive marketing campaigns, and no unnecessary complexity. Everything revolves around efficiency and long-term thinking. The model looks very similar to Action’s. Those kinds of cultures and ways of thinking are very hard for competitors to copy.

Competitors may be able to adopt individual elements of the model, but copying the complete Dino system is far more complicated. The strength of Dino lies not in one separate advantage, but in the combination of standardization, real estate ownership, vertical integration, logistics, low costs, small villages, and an efficient corporate culture. All those elements reinforce each other and make it a strong, unique model.

Another advantage is Dino’s negative working capital. Every supermarket has this, but it is still a nice characteristic of the business. Dino Polska can sell its inventory, receiving money from the consumer, before it needs to pay its own suppliers. This creates an enormous cash flow advantage and limits inventory risk.

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In the supermarket market, where moats are rare and competition is strong, there are of course aspects that make one player stronger than another. Dino Polska is an example of that. It does not have a clear single moat, but does many things better than competitors, allowing it to achieve higher margins.

At the same time, it is important to remain realistic. Dino’s moat is probably not unbreakable. Supermarkets remain a competitive sector and consumers remain sensitive to price. When competitors become more aggressive, margins can temporarily come under pressure.

This is normally not a market that makes you happy as a shareholder, because consumers are in charge. Sustained price wars can keep margins artificially low, something you would rather not see. The pricing power is therefore absent from the model.

But precisely because Dino operates so efficiently, the company appears better equipped to withstand competition and price wars than many other players.

Dino’s moat does not sit in one great advantage, but in a cleverly built system that operates just a little more efficiently on virtually every dimension than many competitors.

You can also look at Dino Polska’s moat differently. Precisely because the company operates more efficiently than many competitors, its costs are lower. This allows Dino to offer lower prices without profitability immediately coming under severe pressure.

Lower prices then attract more customers. More customers create higher volumes, and higher volumes lead to greater scale advantages in logistics, purchasing, and distribution. Those scale advantages lower costs again, allowing Dino to keep its prices competitive or even lower them further.

This creates a flywheel effect where scale keeps generating more scale. This principle is also known as the Scale Economies Shared model: a company uses its scale advantages not only to achieve higher margins, but shares part of those efficiency gains with the customer through lower prices. That further grows volume, which reinforces the scale advantages once more.

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The Management of Dino Polska

In many successful companies management plays an enormous role, and that certainly applies to Dino Polska. Behind the success of the company stands a remarkable entrepreneur: Tomasz Biernacki.

Biernacki is one of the wealthiest people in Poland, but simultaneously also one of the most mysterious entrepreneurs in Europe. He almost never gives interviews, barely appears in the media, and deliberately stays completely in the background. Even during the IPO of Dino Polska in 2017 he did not appear publicly.

That might sound strange, but many long-term investors see this as a positive signal. Everything suggests that Biernacki has absolutely no interest in attention, status, or public recognition. His entire focus appears to be on building the company, and that is exactly what you see reflected in the way Dino is managed. It is entirely focused on long-term value creation and not on making a lot of money quickly in the short term.

One of the most important reasons why investors are enthusiastic about Dino’s management is the enormous skin in the game of Biernacki. He still owns more than 50% of the company’s shares. That is extremely important, because the interests of management and shareholders are thereby almost completely aligned.

At many listed companies, managers have relatively little of their own money in the business, causing focus to sometimes shift toward short-term results, bonuses, or quick stock gains. At Dino it is completely different. Because Biernacki owns more than half of the company, he feels every decision directly in his own net worth. When Dino grows successfully he benefits enormously, but poor decisions hit him equally hard. That automatically makes management think much more about the long term, which is in your interest as a shareholder.

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You see this reflected in virtually all of Dino’s strategic choices. The company deliberately chose real estate ownership over renting, for example. In the short term that requires far more capital, but over the long term it delivers important advantages such as lower fixed costs, more control over locations, and additional stability. Many managers would avoid such a strategy because it depresses short-term profit, but Dino did exactly the opposite.

Investments in logistics, distribution centers, and solar panels also fit perfectly within that long-term thinking. Management appears to continuously look at how the company can be stronger in ten or twenty years, rather than how profit can be slightly higher next quarter.

Biernacki is also known as extremely cost-conscious. Stories circulate about him concerning himself with the price of waste bins in stores. That might sound excessive, but many exceptionally successful entrepreneurs have precisely an obsession with details and efficiency. At Dino you see that culture everywhere.

The company, for example, has no luxury headquarters in Warsaw but is based in the smaller city of Krotoszyn. That fits perfectly within the culture of simplicity and cost control. Offices there are much cheaper than in Warsaw. Many companies become bureaucratic and slow over time, while Dino tries to remain extremely efficient.

That culture is more important than many investors realize. A strong corporate culture ultimately determines how thousands of small decisions are made within an organization. When a culture revolves around efficiency, discipline, and long-term thinking, you eventually see that reflected in the numbers. As a long-term investor in a company, you also want the entire business to be oriented toward long-term value creation.

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Beyond Biernacki, the rest of the management team is also remarkably stable. Various key executives have worked at the company for more than twenty years. That creates continuity, experience, and deep understanding of the business model. Management knows exactly how stores should be opened, how logistics stays efficient, and how costs are kept under control. They know the company, its strengths, and the market through and through.

That might sound self-evident, but in retail execution is everything. A supermarket chain may have a good concept, but when execution is weak, margins disappear quickly. Precisely because margins in the sector are relatively low, small operational differences make an enormous difference. Dino demonstrates precisely that it is operationally exceptional.

Management also excels in capital allocation. Ultimately, successful investing often revolves around management teams that can deploy capital wisely, and that is precisely where Dino distinguishes itself. The company reinvests virtually all profit in new stores, distribution centers, and logistics. As long as new investments deliver high returns, that is exactly what shareholders want to see. By applying this model, a strong compounding effect can emerge in the business model.

Dino can reinvest almost its entire cash flow at a high ROIC:

Many companies pay dividends while growth opportunities are still enormous. Dino deliberately does not do that. Management understands that it is currently much more attractive to reinvest profit at high returns. That is ultimately the essence of compounding. Dino opens new stores, achieves high returns on them, and then uses those profits to open even more stores. That process can continue for years as long as the market provides sufficient room.

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It would after all be a waste to buy back shares or pay dividends now when management can use the cash flow to generate an 18% return. As a shareholder that is much harder to achieve yourself.

That is precisely why management is so important at Dino. The company must constantly decide where new stores go, how many stores are opened, how logistics is expanded, and how capital is allocated. So far management has shown it is exceptional at all of that.

Naturally risks also exist. Dino is closely connected with Tomasz Biernacki, meaning the company partly remains dependent on one person. Should he step back, that could impact the culture and strategy of the business. That so-called founder risk is something investors need to account for.

At the same time, many processes and the corporate culture are now deeply embedded within the organization. An experienced management team has also been working together within the company for years, which somewhat lowers the risk.

When you put it all together, Dino has a management team that looks exceptionally strong: a founder with enormous skin in the game, a culture of efficiency and long-term thinking, stable leadership, and strong capital allocation. That often forms the foundation for exceptional businesses over the long term.

The Quarterly Results of Dino Polska

The numbers of Dino Polska were strong. Looking at the results, you understand why many investors are so enthusiastic about the company. Especially the combination of strong growth, high returns on capital, and enormous reinvestment opportunities makes Dino a special player in the market. I deliberately keep repeating this, because it is actually the most important part of the thesis.

Many supermarket chains barely grow. In mature markets companies open only a limited number of new stores and it is primarily about defending market share. Revenue growth and earnings growth therefore often remain low. At Dino it is completely different.

The company is still growing hard. Revenue grew for years at double-digit rates and much faster than most supermarket chains in Europe. That is partly because Dino opens hundreds of new stores every year, but existing stores are also often still growing strongly.

When only new stores drive growth that can be risky, but at Dino existing stores often grow faster than food inflation. That means consumers return more frequently and spend more money in the stores. The combination of new stores and higher revenue per store therefore creates a powerful growth engine.

The recent Q1 2026 results also show that Dino continues to perform strongly operationally, despite the difficult market and the price war in Poland. In the first quarter of 2026 the company opened 62 new stores, compared to 58 in the same period a year earlier. Revenue grew 14.8% year-on-year and like-for-like revenue growth accelerated to 4.4%, while it was only 0.5% in Q1 2025.

That is an important signal. Many investors were worried that the growth slowdown would be structural, but these results suggest operational trends are improving again. The acceleration in like-for-like growth in particular is interesting, as it shows that existing stores are beginning to perform more strongly again.

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The market has been in the process of a significant revaluation of the stock over recent months, partly because LFL growth came under heavy pressure from the price war in Poland. The strong Q1 results give investors somewhat more optimism again.

The store network also continued to grow, reaching 3,094 stores at the end of Q1 2026. This keeps Dino one of the fastest-growing supermarket chains in Europe.

The revenue development of recent years clearly shows how powerfully the compounding machine of Dino works. Revenue grew from 25.7 billion PLN in 2023 to 29.3 billion PLN in 2024 and then to 33.6 billion PLN in 2025. That represents an exceptionally strong CAGR for a supermarket company.

Earnings often grew even faster than revenue. That is because scale advantages are slowly beginning to take effect. As the network grows larger, Dino can operate more efficiently. Distribution centers supply more stores, logistics costs are distributed more efficiently, and negotiating position with suppliers improves.

You do not yet see that fully reflected in the margins. In recent years margins have been under significant pressure, primarily because declining LFL growth acts as a brake on scale advantages. Dino Polska’s relatively high margins and cheaper operations do give the company more room to lower prices compared to competitors.

When LFL growth picks up again and the price war calms somewhat, the scale advantages in the business model will start working again.

Supermarkets are normally known for low margins and fierce competition. Yet Dino managed to build relatively strong margins through the various factors mentioned in the moat chapter. That is an important signal that the business model works efficiently. The gross margin is higher than for many competitors and the EBITDA margin is also strikingly strong for a supermarket company.

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Dino was only recently overtaken by Ahold, a company already in the mature phase that is much more focused on profit than Dino. Carrefour remains at a considerable distance:

Margins were also still under pressure this quarter. In Q1 2026 EBITDA still grew 6.1% year-on-year, but the EBITDA margin declined 0.5 percentage points to 6.7%. That is primarily due to the ongoing price war in Poland and higher operating costs. Here are the main reasons for the margin pressure:

It therefore appears that Dino’s margins in 2021 to 2023 were too high and are now correcting back toward normal. The higher personnel costs and higher construction costs are structural increases, while inflation and the price war will be temporary problems.

Yet it is important to put that in perspective. Despite the lower margins, Dino continues to grow profitably while many competitors seem to have more difficulty with current market conditions. Precisely during difficult periods you see which companies are truly strong. The strongest companies can use this situation to win more market share. That is precisely what Dino is doing by continuing to grow faster than the competition.

Dino remained profitable and financially healthy. That is partly due to the efficient cost structure of the business. Through standardization, real estate ownership, and strong logistics, Dino can operate more cheaply than many competitors. A strategy that is now bearing fruit.

The balance sheet is also strong. The debts of the company are relatively low, which is important in a sector where margins can sometimes temporarily come under pressure. Companies with high debt often struggle when earnings growth slows or price wars emerge. Dino instead has financial flexibility to further lower prices without running into liquidity problems.

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According to the Q1 2026 results, the net debt to EBITDA ratio sits at just 0.1x, while the interest coverage ratio increased to 16.8x. That means Dino is barely dependent on debt and can extremely comfortably service its interest charges. Because the company pays no dividend, all free cash flow can be used to repay debt.

That gives the company multiple advantages. It can keep investing during difficult periods, continue opening new stores, and potentially even win market share while weaker competitors must slow down to meet their interest obligations. Many investors underestimate how important a strong balance sheet is during economic headwinds, especially in a competitive market like retail.

Another important element of Dino’s financial strength is operating cash flow. The company generates a lot of cash from its daily activities and then uses that money to reinvest in growth.

When investors look at free cash flow, Dino can sometimes seem less attractive because free cash flow looks relatively low compared to earnings. But there is an important nuance. Dino invests enormous amounts in new stores, distribution centers, and logistics. Those investments temporarily depress free cash flow, but they are made to continue growing and achieve long-term earnings growth.

In Q1 2026 Dino invested approximately 410 million PLN in capex, primarily targeting new stores, logistics infrastructure, and further network expansion. If Dino were to stop expanding today, free cash flow would be much higher. But management deliberately chooses to reinvest, and that is precisely what you want to see in a compounding machine.

The most important financial characteristic of Dino may be its high ROIC: Return on Invested Capital. That is the return the company achieves on the capital it invests. Dino Polska continues to score enormously high there. New stores deliver attractive returns, meaning each new investment can generate a relatively large amount of profit. As long as Dino has sufficient room to open new stores at high returns, the compounding model keeps running.

That is extremely powerful. Many companies have either high returns or a lot of growth room, but rarely both simultaneously. A software company may have high margins but limited growth opportunities, while a retailer may have a lot of growth room but low returns on capital. Dino combines both elements, the holy grail for quality investors.

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The company can open new stores for years to come and simultaneously achieves high returns on those investments. This creates a flywheel effect: Dino opens new stores, earns more money, uses those profits to open more stores again, and meanwhile strengthens the scale advantages within the network. Logistics and efficiency then improve further, keeping returns high. And that process repeats itself again and again.

The key question is: how long can Dino Polska keep opening stores at these high returns? Analysts expect a possible doubling of the store count is still possible in Poland alone. The runway therefore appears long enough.

Dino also benefits from negative working capital: customers pay directly at the checkout, while Dino often pays suppliers only weeks later. As a result the company receives cash before it needs to pay itself. Growth therefore partly finances itself automatically.

When Dino generates more revenue, the amount of cash temporarily available within the company also rises. That makes the business model more capital-efficient than many investors realize.

The real estate strategy also plays an important financial role. Because Dino owns virtually all stores, the company is building not only a retail network but also an enormous real estate portfolio. That creates additional long-term stability. Real estate prices in Poland will likely grow faster than inflation, so this portfolio could deliver a nice bonus for Dino over the long term.

Of course real estate ownership also brings disadvantages. It requires a lot of capital and makes the company less flexible when a location performs poorly. But so far that strategy appears to have worked excellently. Dino has not closed a single store since 2007, which is quite impressive for a fast-growing retailer.

When you put it all together, it becomes clear why Dino’s financial performance is so strong: high revenue growth, strong earnings growth, relatively high margins, a healthy balance sheet, strong cash flows, high returns on capital, and enormous reinvestment opportunities.

This was of course already known, but from the previous chapters you will have understood why Dino Polska succeeds in this. It is therefore important not only to keep monitoring the financial performance, but also the culture and internal actions, because those ultimately lead to the strong financial performance of Dino Polska.

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The Risks of Dino Polska

No company is perfect, and that also applies to Dino Polska. Although the company has many strong characteristics, there are also clear risks that investors need to account for. Precisely with strong growth companies, the danger often arises that investors become too optimistic. That also happened with Dino Polska in recent years. When a company achieves high returns for years, the idea sometimes emerges that growth can continue endlessly. But ultimately every company faces limitations, competition, and changing market conditions.

One of the biggest risks for Dino is therefore overexpansion. The business model of the company revolves entirely around opening new stores. Every year Dino opens hundreds of new locations spread across Poland. That worked excellently over the past few years, but the larger the network becomes, the greater the risk that stores begin taking revenue away from each other. This is also known as cannibalization.

When two Dino stores are located too close to each other, customers can simply divide themselves across multiple locations. As a result, revenue per store declines and returns on new investments can slowly fall. So far Dino appears to have relatively little trouble with this, partly because there is still a lot of expansion room in eastern Poland. But as the company grows toward four, five, or perhaps even six thousand stores, location selection becomes increasingly important and difficult.

The key question ultimately remains how many Dino stores can really fit in Poland. Nobody knows that exactly, and precisely for that reason this is probably the most important long-term risk for the business. They can of course always enter new markets outside Poland, but whether these will be equally successful is another question.

Competition also remains a major risk. The supermarket sector is extremely competitive. Consumers can easily switch to another store and price remains one of the most important factors. Especially Biedronka and Lidl are strong competitors with enormous scale advantages.

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The current price war in Poland shows how intense that competition can become. When competitors aggressively cut prices, Dino must follow to retain customers. That puts margins under pressure. In the short term that may not be a major problem, but when pricing pressure persists for years it can structurally affect profitability. These are battles as a shareholder you only end up worse from. The company must lower margins or price itself out of the market, a very unpleasant situation.

Biedronka in particular remains a dangerous competitor. The company has a much larger market share and enormous scale. When Biedronka decides to expand more aggressively into smaller villages, that could limit Dino’s growth room. Lidl also remains a risk. Lidl is known for operational efficiency, strong price competition, and deep financial pockets.

Another important risk is that the Polish market ultimately becomes saturated. Today Poland is still growing strongly and the supermarket market is shifting toward modern chains, but over the long term Poland will also become a mature market. Ultimately a moment will come when opening hundreds of new stores per year becomes more difficult.

That means growth at Dino will probably slow over time. And that is important for investors, because a large part of the current valuation is based on future growth. When that growth structurally comes in below expectations, that can put pressure on the stock. The question is not whether this happens, but when.

Dino is also strongly dependent on Poland. Many international supermarket companies are active in multiple countries, while Dino derives virtually all its revenue from one market. That means economic or political problems in Poland can directly impact the company.

Geopolitical risks also play a role. Poland is close to Ukraine and Russia. Although Poland performs strongly economically, the region remains sensitive to geopolitical tensions. Foreign investors may therefore be more reluctant to invest in Polish stocks. That does not need to cause operational problems directly, but it can influence valuations and sentiment around Polish stocks.

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There is also a clear founder risk. Tomasz Biernacki plays an enormous role within Dino. The culture, strategy, and discipline of the company are strongly connected to his way of thinking. Should he step back or become less involved, that could impact the organization.

Many successful founder-led companies eventually face that challenge. At the same time, Dino appears to have built a strong internal culture by now, and an experienced management team has been working together within the company for years. That somewhat lowers the risk, but it remains something investors need to account for.

The real estate strategy also carries risks. Owning real estate delivers many advantages, but simultaneously makes Dino less flexible. When a store performs poorly, the company cannot simply terminate a lease as some competitors can.

Real estate ownership also requires a lot of capital. Dino must therefore continuously make large investments to keep growing. So far that strategy has worked excellently, but when returns on new stores were to decline, real estate ownership could become less attractive.

Yet Dino continues to open new stores almost every day.

Online grocery also poses a risk over the long term. Today online grocery still plays a relatively small role in Poland. Many consumers still prefer to do physical grocery shopping, especially for fresh products. That dynamic can of course change over the long term.

In Western Europe online grocery is slowly growing further. Although it will probably never become completely dominant due to low margins and logistical challenges, it can put pressure on traditional supermarket chains. For now Dino appears less sensitive to this than large hypermarkets, because the company revolves precisely around proximity and daily small grocery runs. Yet it remains a trend to keep an eye on.

The supermarket sector also remains sensitive to operational errors. Margins are relatively low, meaning small problems can quickly have an impact. Higher personnel costs, logistics problems, rising energy costs, or mistakes in expansion can enormously affect profitability. This is amplified by the very limited pricing power in the business model: a consumer can easily switch to a competitor offering cheaper prices.

Yet Dino Polska can keep offering lower prices through its efficient business model.

For Dino there is also the additional risk of food safety. Because the company strongly focuses on fresh meat products and owns its own meat processing business, a food incident could cause major reputational damage. In retail everything ultimately comes down to consumer trust.

Yet it is important to put these risks in perspective. Many of these challenges are known and partly manageable. Moreover, Dino has so far shown that the company is operationally strong and can deal well with difficult circumstances.

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The strong balance sheet, efficient cost structure, and long-term management focus give the company a solid starting position. But ultimately Dino remains just a retailer in a competitive sector. Investors must therefore always remain realistic, even with exceptional companies.

The Valuation of Dino Polska

Perhaps by now you are convinced of the quality of Dino Polska, or perhaps not at all. The valuation can potentially make the company even more interesting, or considerably less so.

A good company is not automatically a good investment. Ultimately valuation plays an enormous role. Even the best company in the world can become a bad investment when investors pay too much for it.

It is important to be extra critical about the valuation of Dino Polska, because it is “just a retailer.” Retail remains a difficult sector. Margins are relatively low, consumers can easily switch to competitors, and price remains ultimately an important factor. Even the best retailer in the world does not have the same structural protection as for example a software company with high switching costs or an Uber with strong network effects.

For years the stock traded at extremely high valuations. Investors were willing to pay significant multiples because Dino was growing so fast while simultaneously achieving strong returns on capital. That is logical. Companies that can reinvest at high returns for years are rare, and that is precisely what made Dino so attractive.

But high quality automatically also creates high expectations. When growth temporarily began to slow and margins came under pressure from the price war in Poland, the stock fell sharply. As a result the valuation is today considerably more realistic than a few years ago.

The P/E ratio of Dino Polska has decreased significantly over recent years and currently sits around 19 times earnings. That is still not a “cheap” stock in absolute terms, but considerably more attractive than a few years ago.

Yet Dino remains more expensively valued than many other supermarket chains. The key question is whether the company deserves that premium valuation. Personally I think so. Given the large growth runway, higher margins, high ROIC, and low debt level, a higher valuation is well defensible.

Looking only at the P/E ratio you might conclude that Dino Polska is currently not extremely expensive, certainly not compared to the historical valuation. But ultimately a P/E ratio says little about the intrinsic value of a company. For that you need to look further, for example via a reverse DCF analysis.

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Reverse DCF

People who have read my earlier deep dives know I am normally fairly extensive in valuations. For Dino Polska I deliberately want to keep it somewhat simpler. The most important value drivers for returns, a strong corporate culture, long-term focus, high ROIC, and sufficient growth prospects, all appear to be excellently in order at Dino.

Normally valuation should actually be only a small part of the analysis, simply because you will ultimately have 99% of your assumptions wrong anyway. That is why the fundamental analysis is far more important, and that is precisely what I have focused on extensively above.

With Dino I also do not have the feeling that the exact valuation is currently going to be decisive for future returns. Two years ago that was different, when the stock was trading at an extremely high multiple. But today a large part of the future return appears more likely to come from new store openings, high returns on capital, and the strong management culture.

Additionally, it does not seem particularly useful to make an extremely elaborate valuation now with assumptions about like-for-like growth, exact store openings, and margins per region. Should there be a lot of interest in that, I can always make a separate post. For now a simple reverse DCF seems sufficient to relatively simply determine whether the stock is attractive.

With a reverse DCF you only need to assess whether the growth expectations the market is currently pricing in are realistic. That is far easier than having to make your own assumptions.

What first needs to be determined is the required rate of return. Based on the current market rate that would come out at approximately 9.5%, consisting of an equity premium of 4.5% and a risk-free rate of 4%. Yet I want to add extra premiums for company-specific risks.

I therefore add:

• 0.5% for the intense competition within retail,

• 0.5% because Dino operates in Poland, with additional political, economic, and currency risks,

• and another 0.5% for the current price war within the Polish supermarket market.

This brings me to a total required return of 11%. That is fairly high for a quality company, but simultaneously also provides extra margin of safety.

Also keep the following in mind:

• Current EBIT margin: 6.1%.

• Revenue growth in 2025: 15%.

• Revenue CAGR over the past 10 years: 29%.

For the model I use a 15-year horizon, because I believe Dino Polska can still achieve above-average growth for years through new store openings and further like-for-like growth.

Situation 1: Margins stay at the current level

When EBIT margins remain at the current level of approximately 6.1%, the market is currently pricing in revenue growth of approximately 8.2% per year at a required return of 11%.

That is lower than Dino’s historical growth path. When you also consider that inflation averages approximately 2% per year, Dino only needs to grow approximately 6.2% organically. That can be achieved through new store openings or by keeping like-for-like growth on track.

That seems very achievable, especially since this situation assumes margins structurally stay at the current, historically low level. The market is therefore already pricing in a sustained price war, higher operating costs, and slower growth.

Situation 2: EBIT margins recover to 7%

When the EBIT margin were to recover to the historical average of approximately 7%, Dino would only need to achieve revenue growth of 6.7% to deliver an 11% return.

That also seems achievable. Of course these are firm assumptions when you expect a company to sustain this for fifteen years, but given the enormous growth room Dino still has, it certainly does not seem unrealistic.

Situation 3: A required return of 10%

The 11% required return I use is fairly conservative. Suppose you are satisfied with a required return of 10%, because you consider the company qualitatively strong enough, then Dino only needs to achieve approximately 5% revenue growth with an EBIT margin of 6.5%.

That clearly shows how low market expectations have actually become compared to a few years ago.

Looking at the valuation it therefore seems reasonable to conclude that Dino is currently attractively valued. At approximately 19 times earnings the stock trades at one of its lowest ever valuations, while the reverse DCF also shows the market is no longer pricing in extremely optimistic growth.

Whether Dino ultimately manages to achieve that growth remains of course the question, but it certainly seems achievable. The market is currently pricing in sustained price wars, slower store growth, and higher operating costs, while Dino in Q1 showed precisely an acceleration in like-for-like growth and opened dozens of new stores again.

That is why I am keeping the valuation relatively brief this time. With Dino the focus needs to primarily stay on the company itself. The valuation is currently relatively straightforward: the stock has simply become considerably more attractive than two years ago.

If you would like a more detailed valuation, please let me know in the comments.

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Is Dino Polska Worth Buying?

Dino Polska remains an enormously interesting company for long-term investors. The company combines characteristics that rarely appear together: strong growth, high returns on capital, a disciplined management team, and enormous reinvestment opportunities. Virtually all cash flows can be reinvested at attractive returns, and that is precisely the basis of compounding.

Dino also has a management team that looks exceptionally strong. The focus is entirely on efficiency, long-term thinking, and capital discipline. You see that reflected in virtually everything: the real estate ownership, the logistics infrastructure, the standardization of stores, and the controlled expansion. Dino does not grow aggressively for growth’s sake, but tries primarily to open stores that actually deliver high returns.

What makes the stock extra interesting today is that the valuation looks attractive for the first time in years. The market is currently pricing in structural problems, while much of the current headwind is probably primarily temporary in nature. The price war in Poland is putting margins under pressure, but at the same time Dino is still showing strong operational performance, with rising like-for-like growth and dozens of new store openings per quarter.

Moreover, Dino has precisely through its efficient business model the ability to keep prices low and put competitors under pressure. Through the low cost structure the company can compete more aggressively without profitability completely disappearing. That flywheel effect of scale, efficiency, and low prices likely remains an important competitive advantage.

The real question ultimately remains: how long can Dino keep growing?

That is precisely what makes the investment case simultaneously attractive and difficult. To fully justify the current valuation, the company needs to keep growing for years and keep reinvesting capital at high returns. That requires trust in the growth runway of the business. The valuation and thereby your return can evaporate significantly if the runway proves much shorter than expected.

Yet that runway appears large for now. Many analysts believe a doubling of the store count is still possible, especially in eastern Poland where Dino is relatively less present. Additionally, over the long term there is of course also the possibility of expanding outside Poland, though that remains primarily speculative for now.

Ultimately the case of Dino Polska comes down to one central question: can the company keep growing for years?

If the answer to that proves to be yes, then the stock today looks considerably more attractive than a few years ago. Perhaps Dino ultimately remains, as Peter Lynch would say, “just a retailer,” but it is a retailer with an exceptionally strong business model, a long growth runway, and a management team that clearly understands how value is created over the long term.

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The company is experiencing the largest share price decline in its history and now trades more than 60% below its all-time high. The valuation has fallen sharply: the P/E ratio declined from 50 to just 15 times earnings.

Yet the company still achieves a ROIC of more than 20%, has EBIT margins above 35%, and holds a very strong market position. The question therefore is: is this quality stock now a perfect entry point, or a classic value trap?

Today I am analyzing Zoetis, but in a slightly different format than usual. Typically I write an extensive deep dive or, as with Evolution, a short update after the quarterly results. That format was well received, so I want to do this more often.

With Zoetis I also want to go a bit deeper into the business model and the market, since I notice there is a lot of interest in that. If the conclusion turns out to be positive, Zoetis could potentially be added to the quality portfolio.

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What Zoetis Does

Before going deeper into the quarterly numbers that caused the share price to fall more than 20% on Thursday, it is important to first understand what the company actually does. Without insight into the business model and the strength of the business, the numbers are hard to put in perspective.

Zoetis was spun off from Pfizer in 2013 and focuses entirely on the animal health market. That separation allowed both companies to concentrate fully on their own areas of expertise. Zoetis has since grown into the global market leader in animal health. The company develops, manufactures, and sells medicines, vaccines, and diagnostic products for both companion animals and livestock.

An important difference between human healthcare and the animal health market lies in regulation and the role of insurers. Particularly in the United States, healthcare is a complex system with multiple insurers and intermediaries that purchase and reimburse care. In other countries, governments and insurers also negotiate prices with healthcare providers.

Within animal health, this works much more simply: a veterinarian prescribes a medicine or vaccination and the owner pays directly. Sometimes reimbursed by an insurer, but this is negligible. Where power in human healthcare lies largely with intermediaries, in animal health it sits much more with the producer itself.

Veterinarians are generally small clinics with too little leverage to negotiate on prices. This gives Zoetis enormous pricing power to raise its product prices by an average of 3 to 5% per year. What is crucial is that manufacturers build strong relationships with veterinarians so that their products are actually prescribed.

This pricing power is clearly visible in the rising gross profit margins of the business:

Zoetis approaches this intelligently: the company invests heavily in building that trust relationship, with a worldwide network of approximately 800 veterinary specialists who guide, train, and support veterinarians. The party with the strongest relationship has an advantage over the competition.

The customers of Zoetis are therefore primarily veterinarians, though these can also be wholesalers acting as intermediaries.

Now you might be wondering: why would someone spend hundreds or even thousands of euros on a pet? Buying a new one is often cheaper. The answer lies not in the amount of money, but in the relationship. For most owners a dog or cat is no longer just a pet, it is a full family member. Someone who is always enthusiastic when you come home, who sleeps next to you and is simply always there. Some elderly people have nobody else but their cat or dog.

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The bond people form with their animal activates the same emotional mechanisms as caring for a child or a loved one. And when your child is sick, you do not start by asking about the price of the medicine. That is precisely the market in which Zoetis operates. The company’s own research shows that 95% of pet owners consider their animal a full family member. Additionally, 86% say they are willing to pay whatever it costs when their pet needs medical care.

Even when household budgets declined by 20%, the majority of respondents said they would not cut back on their pet’s care. Keep that in mind.

That makes the customer of Zoetis fundamentally different from the customer of almost any other business. There is hardly any price comparison or trade-off between brand A and brand B based on cost. If the vet says that Apoquel relieves the dog’s itching, the owner buys Apoquel. Full stop. The relationship with the veterinarian is therefore the most important factor for Zoetis.

The most important products of Zoetis include:

• Apoquel, which reduces itching in dogs with allergic skin conditions.

• Cytopoint, a monthly injection against itching in dogs with atopic dermatitis.

• Librela, a monthly injection against arthritis pain in dogs.

• Lenivia, a quarterly injection against arthritis pain with a longer duration.

• Simparica and Simparica Trio, chewable tablets against fleas, ticks, heartworm, and intestinal parasites in dogs.

• ProHeart 6/12, an injection against heartworm providing 6 or 12 months of protection.

• Vanguard, vaccines against multiple diseases simultaneously.

• Solensia, a monthly injection against arthritis pain in cats.

• Portela, a quarterly injection against arthritis pain.

• Revolution Plus, a spot-on treatment against fleas, ticks, ear mites, and heartworm for cats.

• Core EQ Innovator, a vaccine against five core diseases in one shot.

• Fostera and Suvaxyn, vaccines against circovirus, pneumonia, and PRRS virus. Protivity, a vaccine against lung disease caused by Mycoplasma bovis in cattle.

• Dectomax-CA1, a parasite treatment specifically against New World screwworm.

• Poulvac Procerta, vector vaccines against Marek’s disease, Newcastle disease, and infectious bursal disease in one dose.

There is however also a risk here for Zoetis. In 2025, five products account for no less than 42% of total revenue, while the ten largest products together represent 57% of revenue. When patents on one or more of these products expire, that can put significant pressure on both revenue growth and the pricing power of the business.

That said, patent expiry in animal health is a considerably less severe problem than in human healthcare. In pharmaceuticals, medicines whose patents expire can sometimes lose up to 90% of their revenue almost immediately. In animal health it works differently.

That is primarily because competition is more limited. In human healthcare the competitive pressure is far greater, meaning generic alternatives often rapidly capture market share. At Zoetis it can take years before a serious competitor appears on the market. Even when that happens, it typically leads to a revenue decline of only around 20 to 50% for the affected product. That makes the risk around expiring patents considerably more nuanced, though it does not eliminate it.

Unfortunately that is not all. Over 14% of revenue comes from one single large customer: a US distributor for veterinarians. That carries a significant risk, because when this customer orders less, Zoetis feels that directly in its results.

And that is exactly what has been happening over the past few quarters, alongside a number of other problems. We will come back to this in more detail shortly.

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Revenue Breakdown

Zoetis reports its revenue in two segments: companion animals and livestock.

The companion animal segment, consisting of dogs, cats, and horses, accounts for 69% of total revenue and grows faster than the livestock segment. Margins are higher, customers are emotionally highly engaged, and demand is barely cyclical. If someone has been giving their dog Apoquel for years, they do not suddenly stop just because the economy is temporarily under pressure. That gives this segment a defensive character you rarely see in other businesses.

The livestock segment, covering cattle, pigs, poultry, and fish, represents the remaining share of revenue. This segment is more stable in terms of volumes but more sensitive to fluctuations in food prices, agricultural income, and global demand for animal protein. A livestock farmer under financial pressure will cut costs faster than a pet owner. This makes the segment more cyclical in nature, though it does benefit from structural long-term growth drivers such as population growth, urbanization, and rising meat consumption in emerging markets.

Management has therefore chosen a clear strategic direction: more focus on companion animals and less dependence on livestock. By 2027 Zoetis expects approximately 70% of revenue to come from the companion animal segment. This is a deliberate choice, since that is precisely where the higher margins, lower cyclicality, and greatest growth opportunities lie.

In terms of geographic revenue split, the United States is by far the most important market for Zoetis, accounting for over 55% of total revenue. The rest comes from dozens of other countries, each individually representing less than 4% of total revenue.

That spread means Zoetis is well diversified internationally, but the company remains heavily dependent on the US market and the trajectory of the American consumer and pet care sector.

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The Market and Moat of Zoetis

The global animal health market is currently estimated at approximately $53 billion and has been growing steadily for decades. Since 2008 the sector has grown at an average of more than 5% per year. Even during the financial crisis of 2009 the market did not contract: growth slowed to around 3%, but remained positive. This confirms the recession-resistant character of the business.

Zoetis also expects moderate market growth in the years ahead:

The growth drivers are moreover largely structural in nature. In western markets the number of pets is increasing. Younger generations more deliberately choose a pet over having children, older people with significant spending power seek more companionship from animals, and expectations around animal welfare and medical care continue to rise.

Pets live longer today than before, precisely because owners spend more on preventive and curative care. The older an animal gets, the more medical care it needs, which further stimulates demand.

In emerging markets such as China, Brazil, and Mexico a different story is playing out. The middle class is growing, disposable income is rising, and pet ownership is increasing rapidly. People who have financial room for the first time acquire a dog or cat and then begin spending more on the health of that animal. Zoetis therefore benefits indirectly from middle class growth in emerging markets.

For the livestock segment the growth drivers are different but equally structural. Population growth, urbanization, and rising meat consumption in emerging markets increase demand for animal protein. At the same time, disease outbreaks and food safety are becoming increasingly important topics. Livestock farmers who want to keep their herds healthy simply need products from companies like Zoetis. That is increasingly becoming a necessity rather than a choice.

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Zoetis is the absolute market leader in this steadily growing market, larger than the number two and three combined. The main competitors are Boehringer Ingelheim Animal Health, Merck Animal Health, and Elanco, alongside a large number of smaller players and start-ups. None of them however have the same scale, product breadth, or distribution power as Zoetis.

That market leadership translates in multiple ways into a competitive advantage. Zoetis can invest more in R&D than competitors, has a larger sales organization, and has strong global name recognition among veterinarians. A vet in the Netherlands, Brazil, or Japan knows the products of Zoetis. That is far from the case for every competing brand.

And that contact with the veterinarian is, as discussed earlier, enormously important. Those relationships have been built over decades and give Zoetis a lead that a newcomer cannot easily close, even with a comparable product or a lower price. Market leadership and that trust relationship constantly reinforce each other:

Yet that position is not untouchable. The structurally high margins of Zoetis have increasingly attracted competition. Not just from traditional players like Elanco and Boehringer, but also from large human pharmaceutical companies such as Merck, which are taking the animal health market increasingly seriously. For them the step is not large: they already have R&D capacity, manufacturing infrastructure, and regulatory expertise. What they lack is precisely what Zoetis has built over the years: the relationship with the veterinarian, the brand recognition in the veterinary world, and a proven track record in the market. But with enough capital and time, that too can be overcome. Especially when patents expire. The lead that Zoetis has built is therefore coming under increasing pressure.

R&D and Patents

The core of Zoetis’s competitive advantage lies in the company’s R&D machine. Since its IPO in 2013, Zoetis has invested more than $5 billion in R&D. Historically approximately 7% of revenue goes toward R&D, and management has indicated it wants to maintain that level. No competitor in the animal health market can match the amount Zoetis invests in new medicines.

Those investments genuinely deliver results. Zoetis has received more than 2,000 product approvals worldwide, currently holds approximately 5,500 granted patents, and has an additional 1,450 patent applications pending in more than 50 countries. The company has 18 blockbusters, of which 9 have been launched in the past ten years.

That last point is perhaps the most impressive aspect. Zoetis continuously reinvents itself. Many pharmaceutical companies rely for years on one or two major products until patents expire and revenue collapses. Zoetis meanwhile is already building the next generation of products while the current blockbusters are still growing strongly.

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Patent expiries are less problematic than in human healthcare due to the lack of competitors, as already mentioned. On top of that, Zoetis builds an additional layer of protection through its shift toward monoclonal antibodies such as Librela, Solensia, Lenivia, and Portela.

Traditional medicines are chemically produced. You can think of them as a simple recipe: combine the right substances in the right proportions and you have the product. That makes them relatively easy to copy once a patent expires. A generic medicine is essentially the same product, made more cheaply by a competitor.

Monoclonal antibodies work differently. These are proteins grown in living cells through a biological production process that takes years to master. You cannot simply copy the recipe because it is not in a chemical formula but in a living organism. A competitor wanting to replicate such a product must build that entire production process from scratch. That takes years, hundreds of millions in investment, and offers no guarantee of success. Hence the term biosimilar rather than generic: it is never exactly the same, only comparable.

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For Zoetis this means its newest and most innovative products, precisely the products that need to drive growth in the years ahead, enjoy a much longer protection period than its older portfolio. The competition simply needs more time to catch up. Two layers of protection where most pharmaceutical companies have only one.

Scale Advantages

As the largest player in the market, Zoetis benefits from scale advantages that smaller competitors simply cannot match. R&D investments weigh less heavily on profit margins when you have a much larger revenue base over which to spread those costs. The same applies to manufacturing, marketing, and distribution. Zoetis can roll out a new product directly across dozens of countries using an existing sales team of over 4,000 employees. A smaller competitor must first build that infrastructure, something that takes years and requires enormous investment.

But the real problem for competitors is not only that they are smaller. It is that they can barely achieve that scale without first having the margins that Zoetis already enjoys today. To grow you need investment. To invest you need margins. And to achieve high margins you need scale.

That creates a classic chicken-and-egg problem that Zoetis solved years ago, while new entrants are structurally at a disadvantage because of it.

That scale also translates into stronger negotiating power with suppliers, lower production costs per unit, and the ability to invest in technologies such as diagnostics and genomics, investments that are simply financially out of reach for many smaller players.

Pricing Power

The combination of a fragmented customer base, emotionally engaged pet owners, and strong branded products gives Zoetis considerable pricing power. Annual price increases of 3 to 5% are implemented without much resistance, something the CFO recently confirmed again during a conference call.

Notably, approximately half of the organic revenue growth of recent years has come from price increases, while the other half came from volume growth. That is particularly attractive, because price growth requires almost no additional investment and flows almost directly to EBIT margins.

That strength is visible in the margins. The gross margin rose in ten years from 66% to 71%, driven by better pricing and more efficient operations. Put simply: Zoetis makes a product for around $3 and sells it for $10, while customers keep accepting that year after year.

The Friendly Intermediary

The role of the veterinarian as intermediary came up earlier in the business model description, but also deserves attention here as an essential part of the moat.

Zoetis has for years invested in personal relationships with veterinarians worldwide. That creates not only a high barrier to entry for new competitors, but also a customer loyalty that often outlasts the patent itself.

A competitor can copy a molecule, but not the trust relationship that Zoetis has built over decades with the people who ultimately prescribe the products. That relationship cannot be bought. It has to be earned.

And that is perhaps the most powerful pillar of the entire competitive advantage of Zoetis.

In summary, Zoetis is the market leader in a steadily growing market, with a strong moat that protects the business against increasing competition.

The Q1 Numbers

The Zoetis share price fell more than 20% after the publication of the quarterly results. That is striking, because Zoetis is known precisely as a stable company with typically consistent growth in the high single digits and few surprises. Such a sharp market reaction therefore implies the numbers were seen as a significant negative surprise. Let us look at why.

Revenue grew 3% to $2.3 billion, exactly in line with analyst expectations. That growth was however entirely attributable to favorable currency effects. On an operational basis, revenue was flat.

Profitability also remained broadly unchanged. That was partly due to one-off restructuring costs of $22 million. Without those costs, both EBIT and net income would have risen slightly.

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Due to significant share buybacks, earnings per share still rose 7%. Zoetis had nearly 5.7% fewer shares outstanding than a year ago, which in itself is a positive development. It is important to keep in mind though that this EPS growth was driven almost entirely by share buybacks, not by underlying earnings growth from operations.

On the surface, these numbers do not actually look that bad. They are certainly not strong, but also not the kind of results that would normally justify a share price decline of more than 20%.

When we look at the underlying segments however, a far more concerning picture emerges. The companion animal segment showed a revenue decline of 4%. That is striking, because this is precisely the most important and most profitable growth segment of Zoetis.

Within the United States the decline was even more severe: the companion animal segment fell more than 11%. Thanks to strong international growth of 7%, the total decline was limited to 4%, but that only partly mitigates the concern. The international companion animal segment is now almost as large as the US business.

It should be noted that the international segment received an accounting benefit of approximately $100 million this quarter from changes in Zoetis’s accounting methodology. Without that effect, the international numbers would look less strong and there would be barely any real operational growth.

Management explained that the American consumer is currently more cautious and price-sensitive. Pet owners are visiting the vet less frequently and more often choosing cheaper, less premium medicines. That stands in direct contrast to what made the Zoetis business model so strong for years: the idea that consumers almost always keep paying for the health of their pet. That thesis now appears to be under pressure for the first time.

Management also indicated it is feeling more competitive pressure within dermatology and parasite control, together accounting for approximately 40% of revenue. Competitors are attempting to gain market share by offering cheaper alternatives. Combined with a price-sensitive consumer, this creates a difficult situation for Zoetis.

And it is precisely that uncertainty that markets typically react badly to, especially for quality businesses. The question now becomes: does Zoetis compete on price and sacrifice margins in the process, or does it hold its premium positioning with the risk that competitors capture further market share?

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Zoetis indicates it will take various steps to address these problems. Management is not sitting on its hands.

This growth weakness has been present since 2024, but this is the first time management has explicitly attributed the pain to the consumer.

As discussed, the companion animal segment is by far the strongest part of Zoetis, both in terms of market position, pricing power, and stability. The fact that precisely this segment performed so weakly in the last quarter is therefore concerning. Yet on its own it is still not a reason for a loss of more than 20% in market value, which I will address shortly.

Because not everything was negative for Zoetis. The livestock segment actually showed strong growth. A portion of that came from the previously mentioned accounting benefit of approximately $100 million, an effect that is one-off in nature. On a reported basis the segment grew 12% across all regions, driven by strong demand and a healthy underlying market. Without the accounting effect that growth looks considerably less impressive and there is in fact barely any real operational growth. With the Neogen acquisition, expected to close in the second half of 2026, this segment could remain an important growth driver in the coming years.

The balance sheet also deteriorated somewhat this quarter. The cash position declined to $1.9 billion. Inventories rose slightly, but not materially faster than revenue growth, so that is not yet an immediate concern. Because short-term liabilities fell less sharply, working capital deteriorated by approximately $250 million.

Total debt remained high and barely changed, at approximately $9 billion. Due to the lower cash position, net debt therefore increased further. Based on last year’s free cash flow, Zoetis would need approximately 4.5 years to repay all debt. The net debt to EBITDA ratio remained stable at around 2.

For a company with such high margins and strong profitability, that remains a relatively significant debt position, partly as a result of earlier acquisitions.

The deterioration in working capital caused free cash flow to fall to just $291 million, versus $340 million a year earlier. This also directly explains why the cash position declined: in the first quarter Zoetis bought back no less than $660 million in shares and paid an additional $224 million in dividends. Together that is clearly above the free cash flow the company currently generates.

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That aggressive capital allocation cuts both ways. On one hand it is logical that Zoetis buys back shares aggressively now, since the stock is historically cheaply valued. On the other hand, those buybacks must not come at the expense of balance sheet quality and solvency, and that is starting to become a slight concern.

The fact that Zoetis has bought back more than 6% of the share base on an annualized basis is a strong signal of confidence from management. But this aggressive pace is difficult to sustain over the longer term if free cash flow does not start growing again.

In summary, it was a very weak quarter for Zoetis in which several structural problems came clearly to the surface. That picture was further confirmed when management lowered the 2026 outlook.

This was the guidance Zoetis provided with the Q4 2025 results:

This is the new guidance for 2026:

At first glance the deterioration might seem manageable, but for analysts this was primarily a confirmation that the problems at Zoetis are more persistent than previously thought. The expected revenue growth range moved from 3 to 5% to 2 to 5%, but it is particularly the lower EPS expectations that are driving increasing pessimism.

The sharp decline of more than 20% therefore stemmed from a combination of factors: weak growth, the poor performance of the US companion animal segment, a price-sensitive consumer appearing for the first time, and increasing competitive pressure.

While the market reaction may seem somewhat exaggerated, especially since the outlook did not collapse entirely, this decline feels better substantiated than for example the 20% share price fall at Adyen following its Q4 results at the time.

How Can Zoetis Come Back?

The problems of this quarter are real, but that does not immediately mean the investment case of Zoetis is broken. The company still has a number of strong elements that enable it to fight back, though that will probably not happen overnight. Management is clearly aware of this and has already announced an initiative focused on cost savings, a shorter time-to-market, and sharper commercial focus.

The most concrete reason for cautious optimism remains the pipeline. Zoetis currently has more than twelve products in development with blockbuster potential, each representing more than $100 million in revenue. And unlike many pharmaceutical companies, the timeline here is not completely vague. Zoetis has published a concrete schedule with expected approvals per year, and that schedule looks impressive.

In 2025, Portela and Lenivia were already approved, two long-acting pain relievers for both cats and dogs that only need to be administered once every three months rather than monthly. That makes them a direct improvement over Solensia and Librela and ensures the products are simpler to use for both veterinarians and owners.

For 2026 Zoetis expects approval for a new generation of diagnostics, a long-acting version of Cytopoint, and a new poultry vaccine. The long-acting Cytopoint in particular is commercially interesting. Cytopoint is already a proven blockbuster, and a version with longer duration makes the product more attractive for owners, increases return behavior toward the medicine, and simultaneously extends the patent protection. Precisely when competitive pressure in dermatology is increasing, Zoetis is therefore coming with an improved version of its own market-leading product.

In 2027 perhaps one of the most interesting products in the entire pipeline may follow: a monoclonal antibody for chronic kidney disease in cats. Kidney disease is one of the most common causes of death in older cats and there is currently no effective long-term treatment. If this product works as expected, Zoetis opens an entirely new category in which it has direct first mover advantage. The company also expects approval for Simparica Duo and new vaccines for pigs and poultry.

The years beyond also look interesting. For 2028 and 2029 multiple oncology products are planned, targeting cancer in dogs and cats. Cancer is the largest cause of death in older dogs, meaning the market potential is enormous. Moreover, the willingness of owners to pay in this category is probably greater than in almost any other indication. Zoetis is also working on a new dermatology line based on monoclonal antibodies and an improved version of Convenia to limit the impact of generic competition. This is important, since dermatology is currently under significant pressure.

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After 2030 the pipeline only gets broader, with products targeting obesity, anxiety disorders, heart disease, and new long-acting parasite treatments for dogs and cats.

What particularly stands out about the pipeline is the logic behind the choices. Zoetis consistently targets conditions that are common in older pets: chronic pain, kidney disease, cancer, heart problems, and anxiety. Those are precisely the categories where owner willingness to pay is greatest. At the same time the company increasingly chooses monoclonal antibodies as its technology platform, meaning new products are better protected against generic competition than the older portfolio. New growth categories and stronger protection, simultaneously.

The pipeline does not solve the current problems immediately. It is simply too early for that. But it does show that Zoetis in the years ahead is not entirely dependent on recovery in existing products. New revenue is coming, probably, in new categories, with stronger patent protection.

Beyond the pipeline, the accumulated knowledge of Zoetis remains a significant advantage. The company knows how to bring an animal medicine from laboratory to market, how to navigate approval processes in dozens of countries simultaneously, and how to launch a product globally through an existing sales organization. That sounds straightforward but it absolutely is not. It is knowledge built over decades that enables Zoetis to operate faster and more efficiently than most competitors.

That experience also makes the pipeline more credible. Nine of the fifteen current blockbusters have been launched in the past ten years. That is proof of an ability to actually convert innovation into commercial success. A competitor can raise capital and build an R&D department, but cannot simply buy decades of experience.

But the Playing Field Has Changed

Yet it would be naive to think Zoetis will simply return to the world of pre-2025. The playing field has structurally changed.

The high margins of Zoetis have for years acted as a magnet for competition. Large human pharmaceutical companies with deep pockets and existing R&D infrastructure increasingly see animal health as an attractive market. These are no longer small players, but companies with the resources to seriously invest in sales teams, veterinarian relationships, and R&D.

As a result, for the first time there is genuine competition in markets where Zoetis stood virtually alone for years, such as dermatology and parasite control. The consequences of that were directly visible in Q1 2026: more pricing pressure, lower growth, and increasing competition in the core of the portfolio. Zoetis is not used to competing, so the question is whether it is competitive enough to respond.

The most important point is perhaps this: that pressure will probably not disappear anytime soon. That means Zoetis now really needs to prove how strong its moat actually is. For years that question was largely theoretical, simply because serious competition barely existed. Now that competition is real, the answer must come through innovation. Not through small optimizations or new packaging, but through genuine product innovation that opens new categories where competitors are not yet active.

That is precisely why the pipeline is so important, and precisely why the next two to three years will probably be decisive for the long-term position of the business.

Zoetis still has the resources, the knowledge, and the relationships to win that battle. But it is no longer a given.

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Valuation

Now we come to one of the most interesting questions: is the stock worth buying after a decline of more than 20%?

If you look only at the P/E ratio, you might conclude Zoetis has become extremely cheap. The stock now trades at less than 14 times earnings, while in 2022 investors were willing to pay more than 60 times earnings. In fact, Zoetis has not been this cheaply valued in the past twelve years.

Unfortunately, looking only at a historical P/E ratio is not sufficient to determine whether a company is actually cheap. For that we need to determine the intrinsic value of the business through a DCF analysis.

That requires us to make our own assumptions about future growth, margins, and cash flows. And that is precisely what is harder than usual at Zoetis right now. Due to the changing competitive environment and the increasing dependence on new products, it has become more difficult to forecast with confidence what revenue growth and margins the company can achieve in the coming years.

Fortunately an alternative exists: the reverse DCF. With this method you can make visible what assumptions the market is currently pricing in for Zoetis. Based on that, it becomes easier to assess whether those expectations are realistic, or whether the market has simply become too pessimistic or too optimistic.

For the time horizon I use a fifteen-year model, appropriate for the quality of Zoetis and its ability to achieve above-average returns on invested capital over a sustained period. As the required return I use 10%. That could theoretically be set slightly lower, but given the current uncertainty around competition and margin pressure, 10% feels like a cautious and realistic assumption. The high debt position depresses intrinsic value by approximately $16 per share.

At the current price of approximately $82, the market is roughly pricing in 2.75% annual revenue growth, assuming stable EBIT margins. That revenue growth seems achievable in itself. The animal health market grows structurally, and Zoetis still has strong brands, pricing power, and a solid market position.

At the same time, it is unlikely that margins will remain fully stable. Through expiring patents, increasing competition, and potentially weaker scale advantages, there will probably be pressure on profitability.

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If we for example assume a decline in EBIT margin to 32%, Zoetis would need to achieve approximately 4.25% revenue growth to justify the current valuation. That also seems historically achievable. Through annual price increases of 3 to 5% alone, combined with limited volume growth from a wealthier population and further growth of pet care, you already get close to that level.

That is of course primarily the theory. In practice it remains quite possible that competitive pressure proves stronger than expected, pushing margins further down than the market currently anticipates.

Earnings Growth Model

To estimate what kind of return we can expect in the coming years, we can use an earnings growth model. The formula is relatively straightforward:

Let us assume 3% earnings growth per year. That seems realistic and actually sits slightly below analyst expectations.

Due to the currently low valuation, Zoetis is buying back shares at an extremely high pace. Based on the current buyback program that pace runs at around 6 to 7% per year, while the dividend yield at the current price is approximately 2.5%. That is however on the high side and not representative of the historical average for the business. The current yield is heavily influenced by the sharp price decline. I therefore want to normalize those figures somewhat.

For this model I use a dividend yield of 2% per year and share buybacks of 5% per year. Those are still strong numbers, but more realistic for the longer term.

Additionally, it seems too pessimistic to assume further multiple compression. In this scenario I therefore model a revaluation to 17 times earnings over five years. That is still substantially below the historical average of nearly 35 times earnings.

The expected annual return therefore comes out to:

That is a very attractive expected return for a traditional quality business like Zoetis.

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At the same time, this calculation reveals something important: the largest portion of the expected return currently comes not from earnings growth, but from other factors such as share buybacks and a potential revaluation of the multiple.

And that makes the situation somewhat less attractive than it initially appears. In an ideal scenario, the return comes primarily from durable earnings growth and strong operational performance. Precisely that underlying earnings growth is currently under pressure at Zoetis.

What to Do With Zoetis

Zoetis is not a company that has fundamentally damaged itself. The core of the business is still intact: the moat still exists, the market grows structurally, and the pipeline is full of products that can open new categories in the years ahead. But 2026 shows for the first time that the almost taken-for-granted growth of the past decade is no longer guaranteed.

The problems are clearly visible. The US companion animal segment, by far the most important part of the business, contracted 11% in Q1. That appears to be the result of three factors playing simultaneously: a more cautious consumer visiting the vet less often, increasing competition within the most important product categories, and pressure on older blockbusters with expired patents.

What makes that particularly painful is that management for years emphasized that pet owners barely cut back on their animal, even during economically weaker periods. For the first time that thesis is really being tested, and the outcome was disappointing.

In the short term Zoetis will primarily need to focus on better commercial execution in the US, stronger positioning of Librela, and defending market share within products like Apoquel and Simparica Trio. But the real solution probably lies further ahead, in the pipeline.

The long-acting version of Cytopoint in 2026, the kidney disease product for cats in 2027, and the oncology products in 2028 and 2029 can open new growth categories in which Zoetis has direct first mover advantage. That also fits the historical pattern of the business. Nine of the fifteen current blockbusters did not exist ten years ago.

Yet there is an important difference from before: competition today is far more serious. Historically Zoetis built its position in a relatively quiet market with limited competitive pressure. Now increasingly more large pharmaceutical players are entering the animal health market, with deep pockets and existing R&D infrastructure. For the first time the moat of Zoetis is really being tested.

That is precisely where the biggest uncertainty lies. The scale advantages, the veterinarian relationships, and the R&D machine are all strong competitive advantages, but they have never really been tested under serious pressure before.

At the same time, the valuation is more attractive than it has been in years. The market is currently pricing in a scenario in which Zoetis grows only modestly, while the company historically combined years of high single-digit growth with extremely strong margins and ROIC. If Zoetis even partially manages to return to its historical growth trajectory, the stock looks cheap at these levels.

It is somewhat reminiscent of Novo Nordisk in 2024 and 2025: a qualitatively strong company where the market temporarily believes the growth engine is structurally damaged. With Novo the fear was competition and saturation of the GLP-1 market, with Zoetis the question is whether the growth engine in animal health is structurally slowing. In both cases the fundamental quality of the business appears stronger than the share price currently suggests.

Yet I am not yet fully convinced, and it is important to be honest about that. The big unknown remains how Zoetis behaves in a truly competitive playing field. We know the company is strong from a dominant position, but we do not yet know how strong that position remains when competitors start attacking seriously.

Personally I would therefore choose a small position as a test, not a full allocation. Large enough to participate if the recovery comes faster than expected, but small enough to limit downside risk if the problems persist longer.

That is ultimately also the most honest conclusion: the quality of Zoetis is still beyond question, but the timing and speed of the recovery are uncertain at this point.

I am curious how you look at this. Do you think the current competitive pressure is temporary or structural? And do you expect the pipeline to ultimately compensate for the weakness in existing products?

Thank you for reading. A free subscription is the easiest way to stay on top of the next analysis.

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The full explanation of how this watchlist works will be published in a separate post shortly.

For this month the following three stocks make the buy list:

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Stock 1: Hermès

Luxury works differently from how most people think.

With an ordinary product, price determines demand. Raise the price and you sell less. With luxury it works the other way around. A higher price increases the appeal. The product becomes more exclusive, more desirable, a status symbol.

But within that industry there are major differences. There is luxury, and there is ultra-luxury. A Louis Vuitton bag is luxury. A Hermès Birkin is something else entirely.

You cannot simply buy a Birkin. You ask for one, and then you wait, sometimes for years. Hermès deliberately produces less than the market demands. That waiting list creates enormous exclusivity, and that is precisely why it works.

When you are finally allocated a bag, having often first purchased several other Hermès products, it is typically already worth several thousand euros more than what you paid.

Hermès sells exclusively through its own stores, 294 of them worldwide in 45 countries. The company deliberately avoids third-party retailers to preserve exclusivity and quality.

Production is entirely in-house, spread across 24 ateliers in France. Hermès decides exactly how much is made. That pace rises slowly, in line with atelier capacity, not in line with demand. To preserve exclusivity, production must always remain below demand.

Leather goods and saddlery is the largest segment, accounting for 44% of revenue. The Birkin and Kelly are the icons, but the segment also includes travel goods and smaller bags. Clothing and accessories form the second segment at 28%. Silk and textiles, watches, perfumes, and jewelry follow. Smaller segments with lower margins, but they strengthen the brand and offer existing customers additional entry points.

The result is an operating margin of 41% in 2025. Of every euro in revenue, 41 cents remain as operating profit. For comparison: LVMH achieves 35% in its best segment, fashion and leather goods. Hermès does that across the entire business. EBIT margins in the fashion and leather goods division are estimated at around 50 to 60%.

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The Market

The luxury market grows structurally, driven by the increase in affluent consumers and the emergence of luxury appetite in emerging markets. That broader market is cyclical and sensitive to the Chinese economy.

Hermès operates in a different segment entirely. The customers of Hermès are not the typical luxury buyer treating themselves after a good year. They are the core wealthy, people for whom a Birkin is not a major purchase. That group barely adjusts its behavior when the economy turns. These are the ultra-wealthy.

That is visible in the numbers. In 2025 Hermès grew 9% at constant exchange rates. Kering declined 13% and LVMH also showed revenue contraction. In the fourth quarter growth even accelerated to 10% against a high comparison base.

Europe, the US, Japan, and the Middle East all showed double-digit growth across the full year. Asia excluding Japan grew 5%, lagging the rest, but this segment also grew in every individual country within it.

A direct competitor at this level barely exists. Chanel is comparable but not publicly listed. Richemont is primarily in jewelry and watches. LVMH has breadth but lacks the same genuine ultra-luxury status, with only Louis Vuitton coming close. Hermès therefore faces very little competition at the level at which it operates.

The moat of Hermès lies in more than 185 years of heritage, full production control, and a brand that cannot be bought and cannot be built in a decade. There is simply no equivalent alternative in the space of leather goods.

The primary risk is brand concentration: everything stands or falls with one brand name. If that brand perception ever shifts, it is difficult to restore. We see this now with Kering, which is suffering from quality deterioration at Gucci.

At Hermès this risk is partly mitigated by the strong skin in the game of the founding family and the extreme focus on brand status, exclusivity, and production. It remains a vulnerability though, and one wrong decision could damage the ultra-luxury status of Hermès.

EPS Growth Expectations

In 2025 Hermès achieved earnings per share of €43.15. Analysts expect average revenue growth of 7.5% per year in the coming years.

Through strong scale advantages and enormous pricing power, visible in the significant margin improvement of recent years, I model 14% EPS growth through 2028, which is on the optimistic side. With these assumptions EPS in 2028 comes out at €63.93. That is fairly optimistic, which I compensate with the exit multiple I apply.

Hermès currently trades at the lowest valuation in nearly 10 years, but still around 37 times earnings. In my model I assume some recovery in valuation, but still well below the five-year average of 49 times, specifically 40 times earnings.

With an EPS of €63.93 and an exit P/E of 40, I arrive at a price target of €2,557 in 2028. From the current price of €1,588, that represents a compound annual growth rate of 17%.

Conclusion: BUY

Pros: Exceptional margin of 41% across the entire business, a solitary market position in ultra-luxury without a direct competitor, and a track record of consistent growth even when competitors are struggling.

Cons: Everything stands or falls with one brand name, the current price leaves little room for disappointment, and a sustained weakening of the Chinese consumer remains a risk for the Asian segment.

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Stock 2: Copart

Copart is a company you might not immediately think of, but one that has compounded strongly over the past ten years, sometimes outperforming most of the technology names you know well.

The stock has declined nearly 30% over the past year. That is why it is now on the buy list. The valuation has finally become attractive again.

The business is simple to explain. A car is damaged in an accident. The insurer assesses the damage and concludes that repair costs more than the car is worth. At that point the car is a total loss. Copart takes the vehicle into custody, stores it, and sells it through its own online auction platform to buyers worldwide. The company has buyers in more than 170 different countries.

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At its core it is a sophisticated marketplace: it connects sellers, primarily insurers, with buyers, often people looking for vehicle parts or project cars.

Copart was founded in 1982 by Willis Johnson, who started with one junkyard in California. Together with his son-in-law Jay Adair, he built the company into the world’s largest salvage platform. That family background is still visible in the strategy: Copart buys land rather than renting it, invests for the long term, and takes on no debt. The company is entirely focused on the long term.

That sounds like a detail, but it is the foundation of the entire moat.

Copart earns in two ways. First through storage and processing fees from the delivering party, usually the insurer. Second through commissions on the auction proceeds. Those commissions rise with the sale price. The more international buyers bidding on an auction, the higher the average proceeds, and the more Copart earns.

That is also the flywheel. More international buyers lead to higher sale prices. Higher prices make Copart more attractive to insurers, who want to recover as much as possible on a written-off vehicle. More insurer supply attracts even more buyers. International buyers pay on average 38% more than domestic buyers for the same vehicle. That price differential is the core of the value proposition toward insurers.

Where IAA primarily rents its land, Copart owns it. That sounds more expensive, but it is actually a competitive advantage. Copart controls the layout, the capacity, and the expansion of every location itself. There is no landlord who can raise the rent or decline to renew the contract. And near major cities, where most total-loss vehicles come from, land is scarce and expensive. Those who already own that land no longer need to buy it.

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The Market

The market for total-loss vehicles grows structurally for one reason: cars are becoming more expensive and technologically more complex. A bumper with lane assist and parking sensors can already cost more to replace than the car is worth. The total-loss rate, the share of accidents in which the car is written off as a total loss, reached a record level of 23.1% in 2025. In 1980 that figure stood at just 4%. That trend continues.

The market is a duopoly. Copart and IAA, now part of RB Global, together control approximately 80% of the US market. Copart has historically held the larger market share, better margins, and a larger international buyer network.

There are currently two headwinds weighing on volumes, and these are the primary reason the stock has fallen nearly 30% over the past year.

The first is the insurance premium crisis. Over the past few years, premiums in the US have risen sharply, sometimes by tens of percent per year. Many customers have responded by reducing their coverage levels or canceling insurance entirely. Someone with only liability insurance who has an accident falls outside the insurance system. That car does not go to Copart. Fewer insured drivers means fewer total-loss vehicles. Major insurers have begun cutting premiums, which will eventually reverse this effect.

The second headwind is competition. IAA is gaining meaningful market share for the first time in more than a decade. The primary reason is Progressive, the fastest-growing auto insurer in the US. Progressive has shifted an increasingly large portion of its salvage volume to IAA, with estimates of 50,000 to 70,000 vehicles per year being diverted away from Copart. It concerns one customer within a broader portfolio, but the effect is noticeable.

The moat of Copart sits in three layers. First, the land and location network. Copart owns more than 250 locations in 11 countries, representing over 10,000 acres of storage space. That network takes years and tens of millions to build, and is increasingly difficult to replicate near major cities due to zoning and environmental legislation.

Second, the international buyer pool of more than one million registered members. This creates strong network effects. Third, the strong management and long-term vision of the business.

The primary risk beyond the Progressive situation is the dependence on insurers. Approximately 80% of volume comes from insurance companies. If a major party decides to handle salvage operations internally or structurally shifts to IAA, that has a direct effect on volumes.

EPS Growth Expectations

EPS for fiscal year 2025 came in at $1.61 per share. This is the starting point for the valuation.

Analysts expect average EPS growth of 5 to 6% per year in the coming years, driven by cautious volume recovery and further international expansion.

In my model I assume 10% average EPS growth per year through 2028. That is more optimistic than analyst expectations, but Copart currently has $5.1 billion in cash on the balance sheet, representing 16% of market cap, and no long-term debt. That gives the company room to buy back shares structurally, pushing EPS higher even if revenue growth remains limited. This is a speculative assumption on my part, but given the current valuation quite plausible.

With 10% growth per year, EPS comes out at $2.14 in 2028.

Copart currently trades at a P/E of around 20. Historically the stock traded at 30 to 40 times earnings. The decline of the past year has brought the valuation down significantly. In my model I use an exit P/E of 22, well below the historical average, which prices in the uncertainty around volume recovery.

With an EPS of $2.14 and an exit P/E of 22, I arrive at a price target of $47 in 2028. From the current price of $33, that represents a compound annual growth rate of 12.5%.

Conclusion: BUY

Pros: Structural growth in total-loss volumes driven by increasing vehicle complexity, an international buyer network that competitors cannot replicate, and a strong balance sheet with $5.1 billion in cash and no debt.

Cons: Temporary volume loss from high insurance premiums and the Progressive shift to IAA, an ongoing DOJ investigation with unknown outcome, and an exit P/E of 22 that leaves little room if volume recovery takes longer than expected.

Stock 3: Spotify

Everyone knows Spotify. But the company’s reputation among investors lags behind the reality.

For years the story was the same: Spotify grows fast but has no profitable business model. Approximately 65% of music revenue goes directly to record labels and rights holders. What remains is not enough to be structurally profitable. In 2023 that was still true. Today, Spotify is becoming increasingly profitable.

Spotify has two revenue segments. Premium: subscription revenue from 290 million paying users worldwide. And advertising: revenue from the free user tier via audio ads and display. Premium is by far the larger segment, accounting for nearly 90% of total revenue.

The structural problem with the business model was always the licensing structure. Spotify pays 65% of music revenue through to record labels and rights holders. Podcasts and audiobooks do not fall under those agreements. The larger the share of non-music in listening time, the better this is for Spotify’s margin. On a revenue base of €17.2 billion, every percentage point of margin expansion is worth hundreds of millions.

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Spotify has also raised prices three times in four years. In the US a premium subscription now costs $11.99 per month. Every increase drives revenue per user higher without structurally reducing user growth. Churn stays low, because switching to a competitor means leaving behind your entire music profile. The introduction of audiobooks and podcasts also provides meaningful pricing power.

The Market

Spotify has a market share of 31.6% in global music streaming. The nearest competitor, Apple Music, sits at approximately 13%. Amazon Music and YouTube Music share the rest. That market share has remained stable over the past few years despite intense competition, which demonstrates how strong the position is.

Growth is no longer only coming from existing markets. In the fourth quarter of 2025, Spotify added a record 38 million monthly active users in a single quarter. The total user base now stands at 761 million. Latin America, Southeast Asia, and Africa are the fastest-growing regions, markets where music streaming still significantly lags its potential.

Competitors like Apple Music and YouTube Music operate as loss-making segments within broader ecosystems. Apple does not need to make money on music. The platform serves to keep iPhone users locked in. That makes competing on price difficult. But Spotify does not compete on price. It competes on personalization and habit.

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Your Discover Weekly, your Daylist, and your Wrapped cannot be exported to a competitor. Someone who has used Spotify for three years has built a music profile based on thousands of listening moments. Switching means starting from scratch. That is the moat of Spotify. Is this moat still strong enough if a competitor operates at half the price? Apparently strong enough, because Spotify keeps adding users.

The primary risk remains the dependence on Universal Music Group, Sony Music, and Warner Music. Together those three control approximately 70% of music rights. At every negotiation round they can demand higher royalty rates. Spotify negotiates from a stronger position as the platform grows larger, but the power imbalance does not disappear. The leverage remains with these companies.

EPS Growth Expectations

EPS for 2025 came in at €10.77 per share. This forms the starting point for the valuation.

Analysts expect average EPS growth of approximately 23% per year in the coming years, driven by further margin expansion and user growth.

In my model I assume 22% average EPS growth per year through 2028, slightly below analyst consensus. The combination of price increases, margin expansion in podcasts and audiobooks, and a growing user base in emerging markets justifies that assumption. Spotify also bought back $510 million of its own shares in 2025, which further boosts earnings per share.

With 22% growth per year, EPS comes out at €19.56 in 2028.

Spotify currently trades at a P/E of around 40. For the exit multiple I use a P/E of 35, deliberately below the current valuation, because I do not want to depend on multiple expansion to generate a good return. Mild multiple compression while earnings grow strongly is a healthier basis for the return.

With an EPS of €19.56 and an exit P/E of 35, I arrive at a price target of €684.50 in 2028. From the current price of €438, that represents a compound annual growth rate of 16%.

Conclusion: BUY

Pros: Dominant market position with 31.7% global market share, structurally rising margins driven by the shift toward podcasts and audiobooks, and a user base of 761 million with significant growth room in emerging markets.

Cons: Structural dependence on three major record labels that set licensing costs, Apple and YouTube Music operating as loss leaders making price competition difficult, and an exit P/E of 35 that requires margin growth to actually continue.

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Sell List for May

Alongside three stocks that look worth buying on the basis of delivering more than 10% annual return according to the 2028 price targets, there are also three stocks on the sell list because they are expected to deliver less than 6% per year on the same basis.

For May these are Shopify, PayPal, and Walmart.

To keep this post from running too long, I will not revisit the business models of these companies in detail, only the EPS growth, P/E, and 2028 price target to explain why they are on the sell list.

Shopify

Shopify builds the infrastructure for online entrepreneurs worldwide: webshop, payments, logistics, financing. The platform processed a total merchandise volume of $378 billion in 2025, revenue grew 30% to $11.6 billion, and $2 billion in free cash flow was generated. Operationally the business performs excellently.

But GAAP EPS for 2025 was only $0.95 per share. That is lower than the $1.57 in 2024, despite strong revenue growth. The cause is a combination of high SBC costs and investments that are processed as expenses under GAAP accounting. Free cash flow per share is considerably higher, but for the valuation I use GAAP EPS as the starting point, consistent with every other company in this analysis.

In my model I assume 50% EPS growth per year through 2028, driven by operating leverage as revenue scales and SBC costs decline as a percentage of revenue. With that assumption EPS comes out at $3.24 in 2028.

Analysts expect a comparable growth trajectory, forecasting EPS of $3.20 in 2028. For the exit multiple I use a P/E of 45, in line with a high-growth technology company not yet in a mature phase.

With an EPS of $3.24 and an exit P/E of 45, I arrive at a price target of $145 in 2028. From the current price of $127, that implies a modest return of just 4% per year.

Shopify can positively surprise if free cash flow converges toward GAAP earnings faster than expected. But at the current price, almost everything needs to go right to generate an acceptable return. A great business, but the price leaves no margin for error.

PayPal

PayPal processed a total payment volume of $1.79 trillion through 439 million active accounts in 2025. It is one of the most recognizable names in digital payments, active in more than 200 countries. But the numbers tell a less attractive story.

EPS for 2025 was $5.46, a rise of 35%. That increase is however partly misleading: a portion comes from investment gains on the company’s own portfolio and tax benefits from an internal restructuring, not from operational improvement.

Revenue growth for the full year was only 4%. Branded checkout, the most strategically important product, grew just 1% in Q4. PayPal itself expects EPS to decline in 2026 compared to 2025. At the same time there is significant internal turbulence, with yet another CEO departure.

In my model I assume 0% average EPS growth through 2028. Competition from Apple Pay, Google Pay, and newer players is compressing growth in the core product, while investments in new initiatives weigh on margins. This is very pessimistic, especially given the 5 to 6% annual share buyback. I account for an 8% EPS decline in 2026, partially offset in 2027 and 2028, bringing the average to 0% growth.

For the exit multiple I use a P/E of 10, appropriate for a mature payments company with no visible growth acceleration and a modest improvement from current levels.

With an EPS of $5.46 and an exit P/E of 10, I arrive at a price target of $54.60 in 2028. From the current price of $50, that implies a return of just 2.7% per year.

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Where could the stock positively surprise? PayPal is actively positioning itself in agentic commerce through partnerships with Google, OpenAI, and Perplexity. If those initiatives lead to structurally higher transaction volumes in the branded segment, the model could look better. A small EPS increase from buybacks and new revenue streams such as advertising could also be positive.

Walmart

Walmart is the world’s largest retailer. In fiscal year 2026, revenue was $713 billion, 280 million customers visit stores and websites every week, and e-commerce grew 24% to represent 23% of total revenue. The advertising platform Walmart Connect is growing fast. It is an impressive business. But it is also a mature business.

EPS for fiscal year 2026 was $2.64 per share. Walmart itself guides for fiscal year 2027 EPS of $2.75 to $2.85, growth of 4 to 8%. That is consistent with the historical pattern of stable but limited earnings growth.

Analysts project higher EPS growth in the coming years. In my model I nonetheless use 8% EPS growth per year through 2028, at the top end of the company’s own guidance. With that assumption EPS comes out at $3.08 in 2028.

Walmart currently trades at a P/E of approximately 47, extraordinarily high. For the exit multiple I use a P/E of 30, more in line with what a mature retailer with limited earnings growth can justify.

With an EPS of $3.08 and an exit P/E of 30, I arrive at a price target of $92.40 in 2028. From the current price of $130, that implies a negative return of -7.4% per year.

Walmart can positively surprise if the advertising platform and the Walmart+ membership model deliver structurally higher margins than the core retail business suggests. But as a mature company at the current price it simply does not justify sufficient return. The multiple could of course stay elevated for longer, which would produce a better outcome than modeled.

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In this post I take you through my thesis: why I bought Röko, what would make me sell, and what return I expect. Normally I share my full research on a company, but a thesis is really the conclusion of that process. If you are interested in a comprehensive deep dive on Röko, feel free to reach out.

This is also a way of showing how I structure my own thinking when researching a stock. For every company I write a short thesis, so that during market declines I can return to my original arguments and keep a clear head.

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Why I Bought Röko

When looking for businesses that can keep growing year after year, you quickly end up at companies with a strong compounding model. These are businesses that can reinvest the earnings they generate today at high returns, causing shareholder value to increase at an accelerating pace.

In Europe such businesses are relatively rare, but that does not apply to Scandinavia. Sweden in particular is home to a remarkable number of successful serial acquirers, such as Lifco, Addtech, and Indutrade. These are companies that achieve their growth by repeatedly acquiring small, profitable niche businesses. In the right hands, serial acquirers can become exceptionally powerful compounders, because every acquisition immediately adds earnings, and those earnings can in turn be deployed into new acquisitions. The compounding effect becomes stronger over time.

Röko stood out to me clearly among all of them. Not because it is already the largest or most well-known serial acquirer, but precisely because it has all the ingredients that built the success stories of the companies mentioned above, combined with a smaller scale and therefore a much broader opportunity set. But above everything, it comes down to management. The most important reason I opened a position is not the current portfolio of Röko, which is solid, profitable, and stable, but the quality of the system behind the business, the way capital is deployed, the discipline with which acquisitions are made, and above all the people who designed and shape this model.

Röko was founded by Fredrik Karlsson and Peter Billing, two names that within the Scandinavian market are synonymous with exceptional capital management. Karlsson has a track record you rarely see. At Lifco he built an extraordinarily efficient acquisition network that delivered double-digit EBITA growth for decades. Under his leadership, shareholders could count on more than twenty percent annual returns, and not just briefly, but for twenty consecutive years. Results like that only emerge when someone precisely understands which businesses to buy, which to pass on, and how to build an organization where value creation comes first.

Röko is his new platform, and that makes it particularly interesting. Where Lifco has become a large and somewhat unwieldy vehicle, Röko is still in a much earlier stage. The scale is smaller, the flexibility greater, and the opportunity to acquire at attractive prices far more abundant. The opportunity set, the universe of businesses eligible for acquisition, is enormous. Europe is full of small and medium-sized enterprises that have been profitable for years, run by entrepreneurs approaching retirement who are looking for a successor willing to keep their business intact. For a party like Röko, that is an almost inexhaustible pool of opportunities. And because Röko operates sector-agnostically, meaning it is not restricted to one industry, it can keep buying in both good and weaker economic periods.

That sector-agnostic approach is precisely what makes the model so robust. Large companies are often hit by cycles in one specific market, but the world of small niche market leaders moves much more steadily. There are always entrepreneurs who want to sell, sometimes because of succession planning, sometimes for personal reasons, sometimes because they want their business to grow under a more professional organization. That allows Röko to do deals almost continuously without waiting for any specific sector to recover.

What also appeals to me is the way Röko integrates the businesses it acquires. They typically buy eighty percent of the shares and let the original entrepreneur retain twenty percent, a detail that has an enormous impact. It ensures the owner remains motivated to keep growing the business and that the knowledge and culture of the company are preserved. This structure minimizes the risk of misalignment, because everyone is working in the same direction and benefiting from the same success. Acquisition quality therefore stays high and the risk of cultural friction stays low.

Another important element is that Röko only acquires businesses that have proven over many years that they can operate profitably. These are typically niche market leaders with low capital requirements, which means they generate high cash flow. These businesses are remarkably stable, precisely because they are not dependent on broad consumer trends or capital-intensive investments. They keep running steadily, delivering solid cash flows, and form the perfect building blocks for a compounding model.

Finally, the stake management holds in the business plays a major role. Karlsson and Billing together own approximately thirty percent of all shares and have recently bought more. That means their financial future is directly tied to the success of Röko. They are building something that should be stronger in ten or twenty years than it is today, not something aimed at a quarterly result or a bonus structure. For me that matters more than any policy document or incentive scheme.

When I put all these factors together, I saw a business that is not dependent on hype, spectacular technology, or risky expansion. Röko is building something less visible but far more powerful: a robust, decades-long value creation machine based on simple, proven principles, executed by people who have been doing this at the highest level for years.

That is ultimately why Röko stood out to me among all other serial acquirers in Scandinavia, and why I have confidence in the compounding model over the long term.

When I Would Sell Röko

Although I view Röko as a business built for the long term, no company is immune to changes that can undermine the quality of the compounding model. My decision to ever sell would never depend on temporary headwinds or a single weak quarter, but on structural signals indicating that the fundamental strength of the model is deteriorating. For a business whose success depends primarily on a disciplined approach to acquisitions and strong management, any sell decision would focus not on short-term numbers but on the mechanisms running under the hood.

The first factor that could shake my confidence is a loss of discipline on the acquisition side. Serial acquirers live and die by the quality of their deals, and the moment a company consistently starts overpaying or acquiring businesses that do not fit the carefully built profile, the achievable future growth is directly impaired. If Röko were to consistently pay higher multiples than the typical eight times EBITA, or deviate from its own strict criteria, that would be a signal to me that the compounding mechanism is losing its power.

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Management also plays a crucial role, and particularly Fredrik Karlsson. He is one of the architects of the model, and his departure without a very strong and credible successor would be an important reason to reconsider my position. In an organization like Röko, where capital allocation is the core activity, a change of the primary decision-maker can have major consequences. Only if someone like Bladh or another internal candidate clearly emerges as a worthy successor would confidence remain intact, but without that continuity the risk of strategic dilution increases considerably, though I do not see this happening anytime soon.

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A third concern would arise if cash conversion structurally deteriorates. The strength of Röko lies in its ability to convert a large portion of reported earnings into actual free cash flow, and that cash forms the fuel for new acquisitions. If cash conversion falls durably below seventy percent, that fuel slowly dries up and the compounding process stalls.

Margins also play an important role in my assessment. A structural decline in the EBITA margin below eighteen percent would suggest that the quality of acquired businesses is lower than before, that integration is going less smoothly, or that friction is building within the portfolio. Such signals indicate something is fundamentally going wrong in the execution of the strategy, making the compounding story more fragile.

Another potential reason to sell is not directly related to the performance of the business itself, but to valuation. Even the best company in the world can become a poor investment when the price has run too far ahead. If the valuation were to rise to extreme levels, such as more than thirty times EBITA, without growth prospects accelerating, the expected return opportunity drops to a level where I would rather deploy my capital elsewhere. A great business is not automatically a great investment, because price always determines a large part of the ultimate return.

Finally, I would become alert if deal flow structurally dries up or competition intensifies to the point where Röko is forced to pay higher prices or acquires fewer businesses. We are seeing a little of this in the current year, but it is not yet concerning. Although Europe is an enormous market with countless suitable SMEs, it is not inconceivable that periods will come where deal flow disappoints or where other acquisitive parties drive up prices. When that happens over a sustained period, the core of the model, continuing to do quality and affordable acquisitions, comes under pressure.

In all these cases the concern is not temporary fluctuations or normal cycles, but structural changes that undermine the foundation of the compounding model. Only when such signals become clear and persistent would I consider selling my position. As long as the mechanism keeps running as designed, I view Röko as a business meant to be held in a portfolio for years, perhaps even decades.

Valuation and IRR

How I Approached the Valuation

To understand how the valuation of Röko is built in my thesis, it is important to first understand how this business actually works. Röko is not a classic company that grows by selling more of one product. It is an acquisition platform, and growth comes primarily from continuously buying new, profitable businesses. Those businesses immediately add earnings, and those earnings form the basis for new acquisitions in the following year. That makes Röko essentially a compounding machine that keeps getting larger as long as deal flow stays active. You already know this, but it is worth keeping firmly in mind when thinking about the valuation.

The valuation model starts with where Röko stands today. Revenue, EBITA, margin, and share count form the starting point. From there the model calculates each year how the business grows. A small part of that growth comes from the businesses Röko already owns, since many of these niche sectors grow steadily through organic growth. But the main engine is acquisitions. The model looks each year at how much cash Röko retains after all costs, because that determines how many new businesses can be acquired that year. The more cash coming in, the more businesses Röko can add and the faster earnings grow. That logic is central to the entire valuation process.

Those acquired businesses do not just add earnings in that one year, but in every year that follows. They form new building blocks that generate additional cash, which Röko can then redeploy into yet more acquisitions.

You can think of it as a snowball that does not grow by itself along the way, but is actively fed by additional clumps of snow. Every year that Röko generates sufficient free cash flow, it can build the snowball further. Every year that capital earns returns, the ball grows faster. That is why assumptions about the number of acquisitions play an enormous role in the ultimate valuation.

As the model rolls through the years, each scenario, bear, base, and bull, develops its own growth path. In a cautious scenario, margins are somewhat lower, cash conversion is weaker, and Röko can buy fewer businesses.

Earnings therefore grow more slowly. In a neutral scenario, acquisition capacity stays intact and the business grows steadily. In the optimistic scenario, more cash becomes available, more businesses can be added, and the snowball rolls much faster down the hill. Each scenario uses exactly the same calculation method, but follows a different pace because the assumptions differ.

At the end of the projection, in 2032, the model looks at how much earnings Röko generates by then. That figure is entirely built from the earnings of the existing portfolio and the earnings of all businesses added along the way.

That total EBITA in 2032 then forms the foundation for the valuation. The model applies a realistic multiple to those earnings, which depending on the scenario is higher or lower. That gives the future enterprise value. Once debt and cash are subtracted or added, the value for shareholders remains. Divide that by the number of shares outstanding and you get the share price corresponding to that scenario.

The final step is straightforward. You compare that future price to today’s price. The difference, expressed as an average annual return, is the IRR. That figure shows what an investor buying today could earn if that scenario actually plays out. In the bear case the return is lower because Röko could acquire fewer businesses. In the bull case it is higher because the compounding machine ran much harder.

This is how the valuation is built: step by step calculating how many businesses Röko can keep acquiring, how much earnings come from those, and what valuation applies to them. The model is therefore not a crystal ball, but above all a way of making visible how important deal flow is for Röko’s growth, because the more businesses that can be added, the larger the platform becomes and the higher the ultimate value for shareholders can be.

One important thing to keep in mind: management expects EBITA to grow at 15% per year through 2032.

Bear Case

In the bear case I assume a situation in which several components of Röko face headwinds simultaneously. The goal is not to create a doomsday scenario, but a cautious picture of what can happen when margins come under pressure and deal flow turns out less favorable.

In this scenario cash conversion declines to seventy percent. That means a smaller portion of earnings is actually available as free cash flow to acquire new businesses. Acquisition growth therefore comes in lower and the compounding engine slows. At the same time the EV/EBITA multiple falls from the current 21.8 to sixteen by 2032, because investors in a weaker market are willing to pay lower valuations. The existing portfolio also does not grow organically, as organic growth in this case is zero percent. Finally, the EBITA margin falls back to eighteen percent, which is logical in an environment with higher costs or less efficient integration.

All these assumptions together mean EBITA grows at only 8.3% per year, clearly below the fifteen percent the management itself expects. Against the current share price that translates into an annual return of 6.72%. That clearly shows the model does not run on autopilot but is heavily dependent on the degree to which Röko can keep adding new businesses.

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Base Case

The base case reflects the scenario I personally consider most likely. Here I assume Röko continues to function as designed, with stable margins, a reasonably strong deal flow, and sufficient free cash flow to acquire new businesses year after year.

Cash conversion gradually rises toward eighty-two percent by 2032. That is realistic because Röko historically generates strong cash flows and can achieve scale advantages as the organization grows. The EV/EBITA multiple declines to twenty, which is a normal valuation for a profitably growing business that is not being overvalued. Organic growth amounts to one percent per year, fitting for the niche markets in which Röko operates, and the EBITA margin stays stable at around twenty-one percent.

Despite these healthy assumptions, EBITA growth still comes in below management guidance, keeping this scenario conservative. Yet the expected return in this case comes out at approximately 16.5% per year, an attractive long-term return fitting for a robust compounding model.

Bull Case

The bull case shows what might happen when circumstances align favorably and Röko can keep investing optimally. In this scenario the business receives a higher valuation with an EV/EBITA of 25 by 2032, fitting for quality serial acquirers that consistently execute their model. Organic growth rises to three percent per year, cash conversion climbs to eighty-eight percent, and the EBITA margin improves to 22.5%.

Thanks to the high cash flows, Röko can acquire considerably more businesses, causing total earnings to grow faster. In this world EBITA rises just above the fifteen percent management is targeting, which makes sense when acquisitions keep flowing smoothly and margins improve slightly. The IRR in this scenario comes out well above twenty-five percent per year. This scenario illustrates how sensitive the model is to a higher deal flow and higher margins, because every additional acquisition accelerates future growth.

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Management Guidance

Beyond these three scenarios it is useful to look at what happens if Röko realizes exactly what management itself expects, namely annual EBITA growth of fifteen percent. When you project that growth rate through to 2032, you arrive at an EBITA per share of approximately 253.5 Swedish kronor.

If you then value that earnings figure against a slightly declining EV/EBITA multiple of nineteen, you arrive at a future share price that translates into an internal rate of return of approximately 18.3% per year. This scenario sits exactly between the base and bull case and shows that even when Röko “merely” meets its own targets, the return is still solid. It provides a useful reference point between caution and optimism.

Weighted IRR

To arrive at a realistic overall picture, I have weighted the three scenarios based on their probability: fifteen percent for the bear case, seventy percent for the base case, and fifteen percent for the bull case. That distribution reflects my assessment that Röko’s model is robust enough to run in line with the base scenario in most years, while both disappointments and positive surprises always remain possible.

When you apply these weights, you arrive at an expected IRR of approximately 16.4% per year. That is the average outcome across the three scenarios and gives a good sense of the return an investor can expect if Röko continues doing what it does best over the coming years: adding quality niche businesses under attractive terms, causing the earnings base to keep growing year after year.

Short Thesis

I bought Röko because it is one of the purest compounding models in Europe, built by a management team that has proven its worth over two decades. The business deploys its entire free cash flow to acquire profitable niche businesses, causing the earnings base to grow year after year without depending on any single sector or economic cycle. The quality of capital allocation is the core of my investment, not the current portfolio.

I would only consider selling if the engine of this model structurally falters, for example if management loses its discipline, acquisition quality deteriorates, margins structurally decline, or cash conversion comes under sustained pressure. An extreme overvaluation without accelerating growth could also be a reason to reduce my position.

Based on a bear, base, and bull scenario weighted by probability, my expected return comes out at approximately 16.4% per year. That exceeds management guidance and shows that the compounding mechanism, as long as deal flow stays at the right level, can deliver a powerful long-term return for shareholders.

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During the pandemic, the online gambling industry, and with it Evolution, benefited from the closure of physical casinos. A large share of gambling traffic shifted online, precisely the market in which Evolution operates.

The online gambling market appeared set for a secular growth trend from which Evolution could benefit for years. From 2024 onward, however, things went wrong: problems in Asia, slowing growth, and legal challenges in Europe. That is also visible in the share price, which has nearly halved.

In this short update I discuss the numbers and the problems the company is facing. Can Evolution come out the other side, or are the issues more structural in nature? I then look at the valuation to assess whether the stock is still worth buying.

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The Numbers: Q1 2026

Reported revenue declined 1.5% to €513 million, another quarter of contraction. At first glance that looks weak, but Evolution reports in euros while a large portion of revenue comes in dollars, pounds, and other currencies. Adjusted for exchange rate effects, revenue grew 6.8% year-on-year. That paints a very different picture, though growth still remains clearly below what we have historically come to expect from this company.

Management once again acknowledges dissatisfaction with the current growth trajectory, but emphasizes it is not shying away from the problems. What those problems actually are is addressed further below.

The live segment, the most important part of Evolution’s business, showed a contraction of 3.1%. This segment includes live roulette and blackjack delivered from studios to players, and is precisely the domain where Evolution faces almost no competition.

The RNG segment, by contrast, again showed solid growth. This part of the business, including slots and casino games without live dealers, is less differentiated and faces considerably more competition. Evolution offers this segment primarily to deliver a complete product offering to gambling operators.

The pain points of this quarter become most visible in the geographic revenue breakdown. Evolution reports revenue in two ways: based on the location of the customer, the operator, and based on the IP address of the player.

Latin America, an important growth market for Evolution, performed strongly with revenue growth of 29.3% year-on-year. The company also acquired a studio in Argentina from a competitor that has exited the market.

North America also maintained solid growth at 21.4%. However, due to the weak dollar, only 10.1% of that remained in effective terms. This is still an improvement compared to the final quarter of 2025. News from this region remains positive, especially with the planned launch of a new studio in Michigan and improved regulation in a Canadian province, which could support further growth in the coming quarters.

The biggest challenges remain in Asia and Europe, the most important revenue regions. In Asia there was a slight improvement with quarter-on-quarter growth of 2.2%, possibly a first sign of recovery, though it is still too early to draw conclusions. In Europe revenue declined 5.9% quarter-on-quarter, partly as a result of the ring-fencing measures the company has voluntarily imposed on itself.

A positive development is that over 48% of revenue now comes from regulated markets, which is essential for sustainable long-term growth.

The decline in EBITDA margin also came in better than feared. EBITDA fell 1.9%, bringing the margin to 65.4%. That remains exceptionally high. There are very few businesses that can sustain margins at this level. As Evolution continues to shift toward regulated markets, ongoing pressure on those margins is likely. The lower margin this quarter was primarily the result of higher personnel costs.

Given the recent strikes in Georgia, a region with relatively low wages, it seems reasonable to expect personnel costs to continue rising in the coming years. The EBIT margin consequently declined slightly from 58.2% to 57%.

Thanks to higher interest income, net profit remained virtually unchanged. The company bought back over 3% of its own shares, pushing earnings per share up to 1.26 compared to 1.24 a year ago.

The balance sheet of Evolution remains exceptionally strong: the company carries almost no debt and holds a cash position of nearly €1.1 billion, representing approximately 10% of market capitalization. These resources can be deployed for acquisitions, such as the recent purchase of Galaxy Gaming, or for further share buybacks.

The capital intensity of the business is low, with investments consisting primarily of software and game development. As a result, Evolution generates substantial free cash flow. This quarter free cash flow came in at €325 million, which on an annualized basis could amount to approximately €1.2 billion, even without any further growth.

Management has already indicated it will not pay a dividend but will likely use free cash flow for share buybacks. At the current valuation, Evolution can buy back approximately 10% of outstanding shares annually without even touching its existing cash position.

Despite the lower growth, the strong financial position of the business still leaves ample room to create value for shareholders.

The absence of a clear capital allocation decision may also suggest the company is considering a larger acquisition or potentially anticipating a buyout. This remains speculative for now.

Finally, the launch of over 110 new games this quarter is a strong signal that Evolution continues to invest in product development. The strength of the business lies in its distinctive games. Without this special content it loses its competitive advantage. New launches can further strengthen that lead and maintain popularity with players.

Where It Has Been Going Wrong for Two Years

The table above tells the story better than any commentary could. Look at the year-on-year revenue growth from right to left: 16.7%, 15.3%, 14.7%, 12.3%, 3.9%, 3.1%, -2.4%, -3.7%, -1.5%.

This is not a temporary dip caused by one bad quarter. This is a persistent downward trend that has been running for two years. Evolution went from a company that grew structurally at 15% per year to a company that is contracting. And this is happening while the global online casino market keeps growing. The problem is therefore not the market. It lies in the two regions that were the engine of this business for years: Europe and Asia.

Europe: The Regulatory Wave

Europe was the foundation of Evolution. The company grew large here, signed its first major operators here, and still derives the largest share of its revenue from here. But Europe is changing, and not in Evolution’s favor.

Over the past few years, virtually every major European gambling market has tightened its regulations. The Netherlands introduced strict advertising bans and imposed heavy fines on operators that failed to comply. Germany introduced stake limits of €1 per spin and mandatory breaks between gaming sessions, measures that directly and severely affect revenue per player. Belgium, Spain, and Sweden followed with similar restrictions. And the end is not yet in sight. In multiple countries new proposals are on the table that would tighten the rules even further.

The direct consequence is that players spend less per session. They are forced to play more slowly, place smaller bets, and take breaks more frequently. For Evolution, which earns a commission on every amount wagered by operators, this directly translates into lower revenue, even if the number of active players remains the same.

On top of that, a subtler but equally important dynamic is at play: channelization. Channelization refers to the share of total gambling volume that flows through licensed operators. The idea behind regulation is that players are protected because they play with licensed parties. But what happens in practice is the opposite. The more restrictive the licensed market becomes, the more attractive unlicensed operators become for players who simply want to gamble without restrictions. And those unlicensed operators do not use Evolution. They run on cheaper, less regulated alternatives. Every player who moves from licensed to unlicensed is direct revenue lost for Evolution.

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Evolution is also deliberately imposing additional restrictions on itself beyond what the law requires. This is called ring-fencing: actively avoiding certain operators or market segments where the regulatory risk is too high. CEO Martin Carlesund mentions this every quarter. It costs revenue in the short term but protects the business against fines, license revocations, and reputational damage over the long term. It is the right decision, but it makes the revenue pressure in Europe feel even more acute, especially as regulation continues to increase.

When will Europe stabilize? That is the million-dollar question. There is no clear signal that the regulatory wave has peaked. Germany has only recently cleaned up its market and is considering further steps. The European Commission is looking at harmonizing gambling rules across the EU. In countries like the Netherlands and Belgium, legal proceedings are still ongoing over how strict the rules may be. The realistic expectation is that Europe will remain under pressure for the next two to three years.

This was of course already part of the thesis if you were invested in Evolution. You knew this was coming. What may have been surprising is how early and how severe it arrived.

Asia: The Cybercrime Crisis and the Structural Threat

Asia is a different story. And a more painful one.

To understand what is happening, you need to know how Evolution operated in Asia. China has banned online gambling. But in practice, millions of Chinese players were gambling through operators based outside China but targeting the Chinese market. Evolution supplied its platform to these operators, and Asian revenue grew explosively for years. At its peak, Asia, measured by player IP, accounted for more than €200 million per quarter. That was nearly 40% of total revenue.

From 2023 onward this changed fundamentally. Cybercriminals found a way to infiltrate Evolution’s live dealer tables. By bribing studio employees or through other means, they could predict the outcome of games before the rest of the table had a chance to react. They systematically won, at the expense of operators and ultimately of Evolution. The scale was enormous. Asian revenue collapsed.

Evolution has since invested heavily in combating this fraud. Better detection systems, stricter employee screening, platform adjustments. And results are visible. For two consecutive quarters Asia has shown quarter-on-quarter growth. In Q1 2026, Asian revenue measured by player IP came in at €197.8 million, roughly flat with a year earlier.

But that number deserves a caveat. The recovery is fragile. The CEO himself says that volatility and uncertainty will “certainly continue for the rest of the year.” And structurally something has changed. Growth in Asia was partly built on a grey market of operators serving Chinese players. Some of those operators have ceased operations, scaled back capacity, or switched to other providers. The market has become smaller and more cautious. Evolution is now more selective about which operators it serves, which improves the quality of the business but compresses volume.

The honest conclusion is this: Asia is recovering, but will likely never again be the growth engine it once was. The explosive growth before 2023 was partly built on a foundation that was not sustainable. What remains is a more regulated, smaller but more stable Asian segment. That is better than nothing, but it is not what investors priced in during 2021 and 2022. Which explains the enormous share price decline.

What makes the situation extra complex is the geopolitical dimension. China has actively taken steps against online gambling platforms targeting Chinese players, even outside its own borders. Operators working in this grey zone have increasingly become targets for enforcement actions, both from China and from the countries where they are based. This is a risk that is not going away; if anything, it is growing. For Evolution this means the Asian recovery remains vulnerable to external shocks entirely outside its control.

What Europe and Asia have in common is that neither problem emerged overnight. Both built up gradually and show up in the quarterly numbers as a slow erosion. Revenue growth that was still above 15% at the start of 2024 has slipped quarter after quarter.

The irony is that this is happening in a period when global demand for online casino keeps growing. Evolution is not losing market share to competitors. It is losing revenue to regulation, fraud, and geopolitics. That makes it fundamentally different from a company being beaten by a better rival. The competitive position is intact. The external environment has deteriorated.

For investors that is an important distinction. It means the damage is reversible, if regulation ever eases, if Asia fully recovers, if the grey market reconsolidates around licensed providers. But it also means the timing is uncertain. You do not know when it turns. And in the meantime revenue declines, even though the underlying business remains of high quality.

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Evolution is nonetheless taking the right steps, and management deserves real credit for that. The ring-fencing is a voluntary choice. Evolution is imposing restrictions on itself that go beyond what the law requires, because it expects regulators will respond positively to that. They are not waiting to be forced. They are taking control themselves, even if it costs revenue in the short term.

For investors that is uncomfortable to watch. Revenue you deliberately leave on the table feels different from revenue lost to a competitor. But it is the right call. A company that proactively cooperates with regulators builds goodwill that pays dividends later. A company that waits to be called out ultimately pays a much higher price.

Valuation

The problems Evolution is facing appear to be temporary in nature, though that is of course no guarantee. The market has little confidence in that view, which is reflected in the valuation: the P/E has fallen nearly 80% to just 10.7 times earnings.

I have previously argued that Evolution AB is capable of creating value for shareholders even without growth, with any additional growth being a welcome bonus. But is the stock actually cheap right now? That is what the valuation needs to answer. I therefore run a reverse DCF to analyze what the market is currently pricing in, supplemented by two scenario analyses: one in which the problems persist, and one in which the company largely manages to solve them.

Reverse DCF

Before running two scenarios, it is useful to understand what the market is actually saying right now. That is what a reverse DCF does. Instead of calculating a future value, you reverse the logic: given the current share price, what growth has the market priced in?

Evolution currently trades around 613 SEK. There are 199.2 million shares outstanding. The company currently achieves an EBIT margin of 57%.

Free cash flow over the last twelve months was approximately €1.2 billion. The FCF yield at the current price is therefore over 8.5%. That is what you get if you buy in today and cash flow stays flat.

For the time horizon I use a conservative 10-year model, which seems appropriate given the dynamic regulatory environment in which the company operates. For the required return I use 12%, because I want to be well compensated for the additional risks relative to the market return of roughly 8 to 9%.

With an unchanged EBIT margin of 57%, this means the company only needs to grow revenue at 4.5% per year to deliver a 12% return.

That is above the current growth trajectory, but barely above inflation, not an ambitious assumption for a strong return. Excluding currency headwinds, current growth is around 7% per year. The market therefore appears to be pricing in persistent problems in Asia and Europe, while not giving any credit to the Americas and Latin America as new growth catalysts.

If the EBIT margin declines to 50%, the company would need to achieve revenue growth of approximately 8% per year.

Scenario 1: Problems Persist

For these valuations I use an exit multiple approach, because this allows me to properly assess the potential of share buybacks. The risk naturally lies in estimating the exit multiple, which can capture much of the value. I will therefore keep this estimate very conservative.

In this scenario the problems at Evolution continue: slower growth in the Americas, Asia and Europe recover only slowly. The company needs to spend more to combat piracy in Asia, and the push toward more regulated revenue puts pressure on margins.

Management opts for moderate share buybacks, but not as aggressively as the free cash flow and cash position would allow.

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In terms of numbers: in the first five years revenue grows modestly at 3% per year, and from years five through ten there is no growth but also no contraction. This is consistent with the current performance of the business.

The real pain lies in margins. Net profit margins decline from the current 49% to just 45% in the first five years, and then weaken further to 40% in the final five years.

The company buys back only 3% of its shares annually, in line with the current pace. The P/E declines further to just 7 times earnings, lower than what is typically paid even for a company in outright contraction.

The share price in 2035 would come out at 497 kronor per share. From the current price that represents a return of -1.9% per year.

This is an extremely negative scenario, but one the market appears to be pricing in. Especially given that the weakness has now persisted for multiple consecutive quarters.

Scenario 2: Recovery

In this more optimistic but still realistic scenario, Evolution AB manages to regain its growth momentum. The problems in Europe and Asia are largely resolved over the coming years, after which those markets grow again, albeit at a lower pace than in the past.

Latin America and North America develop into strong growth engines, which is already visible in the recent numbers. Total revenue, adjusted for negative currency effects, grows at approximately 7% per year in the first five years and 5% in the following five years.

Margins remain largely intact but face some pressure from higher personnel costs and lower margins in regulated markets.

An important management decision is the large-scale buyback of shares. As long as Evolution trades at a low valuation, all free cash flow is deployed for buybacks. In the first five years this allows for buybacks of over 8% of shares annually. As valuation recovers this pace slows to an average of 5% per year over the full ten-year period.

Thanks to the strong cash position and scale advantages, supported by the resumption of growth, the net profit margin declines only modestly: to 48% in the first five years and to 46% in the years thereafter.

The P/E ratio improves on the back of stronger performance, remaining growth potential, and renewed investor optimism, rising to 15 times earnings.

In this scenario the share price in 2035 comes out at 2,442 kronor, representing a CAGR of 29.7% per year.

I consider these two scenarios the bull and bear case for Evolution, both of which pass Damodaran’s 3P test. Even without growth the business has the ability to create value for shareholders. The ball is now in management’s court to actually deliver on that.

Through sustained regulatory pressure or increasing headwinds in growth markets, the negative scenario could of course turn out considerably worse than sketched here. I expect, however, that the actual outcome will land somewhere between the two scenarios, which still leaves the stock with an attractive risk-reward profile.

The only question is whether the market sees it that way too. If, like me, you have been a shareholder of Evolution for more than a year, you have not had an easy ride, especially while alternative companies have continued to perform strongly.

The opportunity cost of holding the stock continues to accumulate, particularly as long as clear signs of recovery fail to materialize. At the same time, the share price was in the middle of a strong recovery ahead of the Q1 results, which may reflect the first signs of renewed investor optimism.

Thank you for reading. Are you adding to your Evolution position after this decline? Let me know in the comments.

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Netflix briefly fell out of favor. The potential acquisition of Warner Bros. Discovery created uncertainty among investors and pushed the share price back toward fair value. Now that deal has fallen through and Netflix is even receiving a breakup fee of $2.8 billion, sentiment has shifted and the stock has moved considerably higher again.

But is that renewed interest justified? Everyone knows Netflix, but not everyone understands how strong the company is operationally. The advertising business is growing fast, margins are improving quarter after quarter, and free cash flow is reaching record levels. At the same time, the stock trades at a valuation that leaves little room for disappointment.

In this deep dive I examine the business thoroughly. From the business model and the moat to the DCF valuation in three scenarios and my personal conclusion.

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The Case for Netflix

Note: since this analysis was written, the share price has moved considerably lower following the quarterly results. Keep that in mind.

Netflix belongs to a select group of companies that have structurally transformed their entire industry. What started as a DVD rental service has grown into the world’s largest streaming platform, active in more than 190 countries and with over 300 million paying households. For consumers, Netflix has become a fixed part of daily life. For investors, the company has grown more complex to assess over the past few years.

The core of that complexity lies in the phase Netflix is now in. It is no longer a pure growth company that can simply add new subscribers, especially not in mature markets like the United States and Europe. At the same time, Netflix is certainly not a defensive media company with stable, predictable cash flows and low investment needs. It sits exactly between those two worlds: a mature, technology-driven entertainment company that is now actively converting its scale into profitability.

The strategic focus has shifted clearly in recent years. Where everything used to revolve around subscriber growth, the emphasis is now on increasing the average revenue per user, expanding advertising revenues, and creating new forms of engagement through live events and games. This transition has led to higher margins and rapidly growing free cash flow, but also raises questions about valuation, competitive pressure, and capital allocation.

The share price has risen sharply since the IPO, with a CAGR return of over 32%:

In this deep dive we analyze Netflix step by step as an investment. Not from enthusiasm or skepticism, but from the question of what the business is fundamentally worth and what assumptions an investor implicitly makes when buying the stock today.

The Empire of Netflix

Netflix is at its core a global digital distribution platform for entertainment. Through one central platform it offers films, series, documentaries, animation, live events, and since a few years also video games. Access comes through a monthly subscription, where users can watch unlimited content within the terms of their chosen package.

Netflix is available on virtually every device with an internet connection, from smart TVs to smartphones and gaming consoles. That universal availability forms an important foundation for the company’s success and makes Netflix a fixed part of the daily media consumption of hundreds of millions of households.

The business model of Netflix has historically been almost entirely based on subscriptions. Users pay monthly for access to the platform, which provides a stable and predictable revenue stream. Netflix uses a differentiated pricing model where subscriptions vary in price based on video quality, the number of simultaneous streams, and the presence of advertisements.

That price segmentation allows the company to serve different target groups, from price-conscious consumers to users willing to pay more for a premium experience. For investors this matters because it enables Netflix to increase the average revenue per user without being fully dependent on new subscriber growth.

The introduction of a cheaper subscription with advertisements marks an important strategic shift. Where Netflix for years positioned itself as a fully ad-free alternative to traditional television, the company has come to understand that advertising can form a powerful additional revenue source.

The cheaper package lowers the entry price for new users and reduces the risk of cancellations when prices rise. At the same time, this group of users, despite the lower subscription price, often delivers high profitability thanks to advertising revenues. Netflix is building its own advertising platform for this, which gives it control over data, targeting, and margins, and positions it as a player in the premium video advertising market.

The largest cost within the business model is content. Netflix invests tens of billions of dollars annually in the production and licensing of films and series. An ever-growing share of this budget goes toward original productions, the so-called Netflix Originals.

That strategy offers important advantages. By owning the content itself, Netflix holds worldwide rights and can keep offering titles indefinitely without depending on external parties. Successful productions can generate value for years, while the cost per additional viewer is very low. That scale advantage forms an essential part of the economic strength behind Netflix.

From an accounting perspective, content investments are largely capitalized on the balance sheet and depreciated over multiple years. This means the expenditures are not immediately visible in full in the income statement. For investors it is therefore important to look beyond earnings and also pay attention to cash flows. During periods of heavy investment, earnings can appear misleadingly low or high, while cash flow provides a better picture of the financial health of the business.

A distinguishing element in Netflix’s strategy is its strong focus on local content. More than half of the content budget is now spent outside North America. Netflix produces series and films in local languages, tailored to regional cultures, but with the ability to break through globally. This model has led to several international successes that were produced relatively cheaply but reached a worldwide audience, such as Squid Game. For Netflix this means an attractive return on invested capital and a further strengthening of the global relevance of the platform.

In terms of regions, approximately 44% of revenue comes from the United States and Canada. This is a mature market with high penetration, where growth mainly comes from price increases, advertising revenues, and the shift of users toward more expensive packages. Europe, the Middle East, and Africa together form the second largest region with around 32% of revenue. This market is characterized by stable growth and relatively high willingness to pay. Asia-Pacific is the fastest-growing region, with a lower average revenue per user but strongly growing subscriber numbers. Latin America is smaller and more volatile, partly due to economic and currency risks.

Beyond video content, Netflix invests in additional forms of entertainment such as games and live events. Games are currently included in the subscription and generate no direct revenue, but increase user engagement. The more time consumers spend on the platform, the lower the chance they cancel their subscription. Live events, including sports and special shows, create urgency and peaks in viewing behavior. They strengthen the value of the platform and provide additional opportunities for advertising.

A market that Netflix has yet to fully tap is sports. The global sports market is enormous, with billions of viewers willing to pay for live broadcast rights. Netflix has already taken its first steps, with boxing matches like the fight between Jake Paul and Mike Tyson and NFL games on Christmas Day. Those experiments show that the platform can handle live sports and that there is a large audience for it.

Sports is strategically smart for multiple reasons. Live events cannot be time-shifted — you watch them in the moment or not at all. That creates a different form of engagement than series or films. Sports also provide an ideal advertising environment: large viewership, a broad audience, and high willingness to pay. For Netflix’s advertising package this is extremely valuable.

The question is how far Netflix wants to go here. Major sports rights like the Premier League or the Champions League cost billions per year. But with a rapidly growing free cash flow and a worldwide platform of 300 million households, Netflix has the resources and reach to compete seriously.

All in all, Netflix has grown into an integrated entertainment company that derives its revenues primarily from subscriptions, supplemented by fast-growing advertising revenues and supported by strategic investments in content, technology, and engagement. The model is scalable and robust, but also capital-intensive. That combination makes Netflix attractive, but requires investors to have a thorough understanding of both the growth opportunities and the risks.

The Market Netflix Operates In: Growth, Dynamics, and Competition

Netflix operates in the global market for video entertainment, a market that has changed profoundly over the past fifteen years. Where television consumption was once dominated by linear broadcasters and fixed schedules, the center of gravity has shifted to on-demand streaming. Consumers decide for themselves what they watch, when they watch, and on which device. That structural change in behavior forms the fundamental growth driver behind Netflix and other streaming services, and is still not fully played out.

The total market for video streaming is still growing, but the pace differs significantly by region. In mature markets like the United States and Canada, penetration is high. Around three quarters of households with broadband have at least one streaming subscription there. Growth no longer comes primarily from new households, but from higher spending per user, more time spent, and the shift of advertising budgets from traditional television to streaming platforms. Netflix benefits from this through price increases, the introduction of advertisements, and a growing share of total viewing time.

Much TV is still watched via linear TV, which represents significant growth potential for streaming platforms like Netflix:

In Europe the market is in a middle phase. Streaming is widespread, but competition between platforms is intense and consumers are more price-sensitive. At the same time, the advertising ecosystem in Europe is well developed, which creates opportunities for advertising-supported packages. Netflix holds a strong position here thanks to local productions and scale advantages, but must carefully balance price and volume.

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The largest structural growth opportunity lies in Asia-Pacific, Latin America, and parts of Africa. In these regions the number of households with internet access is still growing strongly and consumption of digital media is increasing rapidly. The challenge for Netflix is not so much demand, but monetization. The average revenue per user is significantly lower than in North America. Netflix is responding with lower prices, mobile subscriptions, and local content. For investors this means that volume growth is not automatically the same as profit growth, but it does form a solid foundation for the long term, if the company manages to push ARPU higher over time.

The dynamics within the streaming market are characterized by fierce competition. Netflix is globally the largest player by paid subscriptions, but operates in a field with well-capitalized competitors. Amazon Prime Video is an important challenger, partly because it is part of a broader ecosystem. For Amazon, streaming is not a standalone profit goal but a means to bind customers to Prime. This allows Amazon to invest aggressively without direct pressure on returns. Prime can maintain low prices for years without consequences. As a result, customers may switch to Prime or put pressure on Netflix’s margins.

Disney is another key player, with a portfolio of strong brands and franchises. Disney+ has reached significant scale in a short period of time, but struggles with profitability. Unlike Netflix, Disney faces internal competition between linear TV, theatrical releases, and streaming. This makes the strategic focus more complex. Netflix does not have that problem and can direct all its resources toward one platform. Disney also has other segments that require capital investment.

Other players such as Apple TV+, Paramount+, HBO Max (WBD), and regional providers each have their own niche but generally lack the scale and data advantage of Netflix. Apple uses streaming primarily as a complement to hardware sales and services, while traditional media companies struggle with declining revenues from their legacy models.

This highlights an important distinction. Netflix is one of the very few pure streaming companies in the world. Amazon, Disney, and Paramount all still have linear TV activities or other primary revenue sources to fall back on. That sounds like an advantage for them, but it is also a burden. Their streaming services compete internally with existing business models, which divides focus and complicates investment decisions. It also makes Netflix far more efficient, allowing it to achieve higher margins.

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Netflix has no distractions. The entire company is built around one thing: streaming. That first-mover advantage translates into brand recognition, a large existing customer base, and a business model built entirely around scale. Competitors try to capture market share with low prices and negative margins, hoping to become profitable later. Netflix does not need to play that game.

There is a risk though. In a saturated market, where the battle for new subscribers is intensifying, sustained price cuts by competitors can also put pressure on Netflix. The company is strong enough to withstand this, but it is not immune.

An important reference point is viewing time. Netflix commands less than 10% of total global TV viewing time, but within streaming it is among the largest. This shows that the market still offers plenty of room for further shifting from linear television to streaming. Every percentage point of that shift represents billions in potential advertising and subscription revenues, and Netflix is positioning itself clearly as the primary beneficiary.

The advertising market provides an additional growth opportunity. Globally, the vast majority of video advertising budgets still go to traditional television. Streaming offers advertisers better targeting, measurability, and flexibility. Netflix is entering this market relatively late, but with scale, data, and a premium environment. That makes the platform attractive for large advertisers shifting their budgets from traditional TV to streaming.

The Strong Moat of Netflix

The economic moat of Netflix is less visible than that of, for example, a software company with high switching costs, but precisely for that reason more interesting to analyze. The competitive advantage does not lie in any single element, but in the combination of scale, data, technology, and content ownership. That combination makes it difficult for competitors to structurally attack Netflix, even when they temporarily invest more money.

The first pillar is scale. With more than 300 million paying households worldwide, Netflix can spread the high costs of content production across an unmatched user base. The fixed costs of making a series or film are largely independent of the number of viewers, but the revenues grow with reach. As a result, the average content cost per user declines as Netflix grows. This scale advantage is fundamentally different from that of traditional studios or smaller streaming services, which must earn back the same investment over a much smaller base. In practice this means Netflix can invest more while simultaneously achieving higher margins. This further reinforces the moat.

This is visible in the rising gross profit margin:

The second pillar is data and technology. Netflix possesses an enormous amount of viewing data, not only about what people watch, but also when, for how long, on which device, and in which order. This data feeds a recommendation system that is responsible for the vast majority of viewing time on the platform. The better the recommendations, the higher the engagement, the lower the churn, and the greater the willingness of users to accept price increases. At the same time, Netflix uses this data to make decisions about which content to produce, for which region, and with what budget. This reduces the risk of failed investments and increases the return on content spending.

A third, and increasingly important, pillar is content ownership. Netflix has deliberately built a library of fully owned titles over the past ten years. Where the company was previously dependent on licensed content from others, the focus is now almost entirely on original productions. This means successful series and films remain on the platform permanently and can be leveraged in multiple ways.

Strong titles like Stranger Things and Squid Game are exemplary here. But what distinguishes these titles is not only the quality of the content itself, but also how Netflix builds around them. With Stranger Things, Netflix deliberately created a cultural moment. Merchandise, pop-up events, brand collaborations, and a constant social media presence ensured that people felt they were missing out if they had not seen the series. That sense of FOMO is not accidental, it is strategy. Squid Game showed how powerful that model is internationally. A local South Korean production went viral to become the most-watched series ever on the platform. The costumes, the games, and the imagery spread rapidly across social media, drawing millions of new viewers to the platform without Netflix needing any additional marketing budget.

These titles are important, but not unique. Netflix has built a broad range of successful franchises, including The Crown, Money Heist, Bridgerton, Wednesday, and recent hits such as KPop Demon Hunters. No single title is essential for the survival of Netflix, and that is precisely the strength. The company is not dependent on one blockbuster, but on a constant stream of relevant content that together drives high engagement. This significantly reduces the risk compared to traditional studios, which often rely on a limited number of major releases.

Content ownership also creates strategic freedom. Netflix can decide when and how content is released, distribute globally without additional costs, and add new business models such as games, live events, or advertising integrations. Competitors that license content lack this freedom and risk losing popular titles when contracts expire. Additionally, these series can only be seen on Netflix, making it harder for fans to switch platforms if they want to continue watching their favorite show.

Finally, the brand plays an important role. Netflix has become synonymous with streaming worldwide. In many households it is the first and sometimes only platform people use. Although consumers can technically cancel easily, the actual cancellation rate in practice remains low, even when prices increase. That points to strong brand loyalty and pricing power.

Netflix uses that pricing power deliberately. The company recently raised its prices again, but there is a smart strategy behind it. By making the more expensive package pricier, existing customers are effectively nudged toward the cheaper package with advertisements. And that is exactly what Netflix is aiming for. Because whether a customer chooses the most expensive ad-free package or the cheaper ad-supported package, the margins are high in both cases. It is a win-win for Netflix.

At the same time, the advertising package is a smart tool for attracting new customers. The lower entry price reduces the barrier to trying Netflix, and once people start watching, the probability of staying is high. That is how the flywheel works: more users, more data, better recommendations, higher engagement, and lower churn.

The only risk is that Netflix must not use its pricing power too aggressively. If price increases become too aggressive, that could push customers toward cheaper alternatives. So far Netflix has shown it manages this balance well, but it is a factor to keep an eye on as an investor.

The Potential Warner Bros. Discovery Acquisition: Strategic Opportunity or Capital Risk

The potential acquisition of Warner Bros. Discovery was a widely discussed scenario for some time. Netflix would thereby gain access to one of the most valuable content libraries in the world, with iconic brands such as HBO, Warner Bros., DC, Harry Potter, and Game of Thrones. The strategic logic was clear: combining exceptionally strong IP with the most efficient distribution platform in the world.

But shareholders were not happy, and that is understandable. Warner Bros. Discovery carries an enormous debt load, a complex organization, and declining revenues from traditional television. An acquisition would have cost Netflix billions and significantly weakened its financial position, while Netflix has spent the past few years building a healthy balance sheet and growing free cash flow. Investors would have preferred Netflix deploy that capital toward its own share buybacks and organic growth. The share price reacted negatively to the rumors.

That deal is now definitively off the table. Paramount is acquiring Warner Bros. Discovery and pays Netflix a breakup fee of $2.8 billion as compensation for walking away from negotiations. For Netflix that is a welcome windfall, but the situation also raises new questions.

Because Paramount is taking on approximately $110 billion in debt with this acquisition. That is an astronomical amount for a company that already struggles to make its streaming service profitable. A debt burden of that magnitude puts enormous pressure on cash flow. Any setback, a bad quarterly result, a major production failure, or a further decline in linear TV revenues, could put the company in serious trouble. The question is therefore not whether Paramount will struggle, but when.

For Netflix this is a double-edged sword. On the one hand it gains a competitor with strong brands like HBO, DC, and Harry Potter, brands that Netflix itself would have liked to own. That IP is valuable and can help Paramount attract subscribers. On the other hand, Paramount is structurally far less profitable than Netflix and has almost no room to invest in new content. A competitor struggling with debt and cutting back on content is not a strong competitor. Netflix does not need to win this fight, it just needs to keep growing while Paramount falls behind.

For investors the conclusion is nuanced. Netflix loses the chance of a large, transformative acquisition, but retains its financial freedom and a clean balance sheet. The $2.8 billion breakup fee compensates for part of the missed strategic value.

Personally I found the potential WBD acquisition less concerning than many analysts did. The combination of an enormous content library, strong cross-selling opportunities, and healthy cash flow could have given Netflix an even stronger long-term position. That potential was certainly there.

But these kinds of large acquisitions often go wrong. Integration problems, cultural differences, overpaying — history is full of examples. Now that Paramount is doing the acquisition and taking on $110 billion in debt, there is a real chance it will stumble on that. And if that happens, the strongest IP of WBD could well be back on the market, but at a much lower price and without the entire conglomerate attached.

For Netflix this is therefore a favorable development. Had the original deal gone through, it would probably have been bullish over the long term too. But the current situation may offer an even better outcome: the same IP, later, cheaper, without the WBD debt on the balance sheet.

The Financial Strength of Netflix and Q1 Results in Perspective

The financial development of Netflix shows a clear pattern: the company is shifting from a capital-intensive growth machine to a business that is actively converting its scale into earnings and free cash flow. That does not mean Netflix is investing less, quite the contrary, but the investments are generating better returns. The Q1 2026 results illustrate this transition sharply, with a one-off windfall that colors the picture in this quarter in particular.

In Q1 2026 Netflix reported revenue of $12.25 billion, growth of 16% year-on-year, or 14% on a currency-neutral basis. The company thereby exceeded its own expectations, driven by stronger subscriber growth and favorable currency movements. The annual revenue guidance for full year 2026 remains unchanged at $50.7 to $51.7 billion.

Profitability was strong. The operating margin came in at 32.3%, an improvement from 31.7% in Q1 2025. Operating income rose 18% to $4.0 billion. Both came in slightly above the company’s own guidance, driven by the revenue beat.

Net income jumped particularly sharply this quarter to $5.28 billion, a rise of 83% compared to Q1 2025. That sounds spectacular, but has a clear explanation: the $2.8 billion breakup fee received after the WBD deal fell through was booked this quarter as income under interest and other income. Diluted earnings per share came in at $1.23 versus the expectation of $0.76. Without the breakup fee, underlying earnings growth was still strong, but far less dramatic than the current figures suggest.

Where Netflix continued to perform particularly convincingly was on cash flows. Free cash flow rose in Q1 to $5.09 billion, compared to $2.66 billion in Q1 2025. Here too the received breakup fee played a large role. For full year 2026 Netflix raised its free cash flow guidance to approximately $12.5 billion, an upward revision from the previously communicated $11 billion, again largely attributable to the after-tax breakup fee.

An important aspect is how Netflix books its content investments. Content expenditures are largely capitalized on the balance sheet and depreciated over multiple years. This means the income statement shows only a portion of the actual cash outflow. In Q1 2026 Netflix invested $4.85 billion in content, slightly less than the $5.06 billion in Q4 2025, suggesting a slight normalization after a heavy investment quarter.

The balance sheet now shows $33.4 billion in content assets, a slight increase from $32.8 billion at end 2025. The strength lies in the fact that Netflix has full control over its content library. The risk is that these assets only retain value as long as they remain relevant to viewers.

An interesting option that Netflix has yet to exploit is licensing popular original series to other streaming services. Titles like Stranger Things could generate billions at external platforms. Netflix is deliberately not doing this yet, because the exclusivity of the platform currently outweighs the additional short-term revenues.

On the liability side of the balance sheet, Netflix is in a considerably stronger position this quarter than before. Net debt declined from $5.5 billion at end 2025 to just $2.1 billion as of March 31, 2026, a direct result of the received breakup fee. With $12.3 billion in cash and $14.4 billion in debt, the balance sheet is now very solid. That gives Netflix significant financial room for investments, acquisitions, or accelerated share buybacks.

Capital allocation remains an important part of the investment case. Netflix does not pay dividends but invests heavily in share buybacks. In Q1 2026 the company bought back 13.5 million shares for $1.3 billion. During the WBD negotiations Netflix had temporarily paused its buyback program, but after the deal collapsed it has been resumed. There is still $6.8 billion in buyback authorization remaining.

At the same time Netflix continues to invest in new growth areas such as advertising, live events, and games. Advertising revenues grew in 2025 by more than 2.5 times compared to 2024 to over $1.5 billion, and Netflix expects these revenues to roughly double again in 2026. Those are still relatively small numbers relative to total revenue, but the growth rate is impressive and the marginal profitability of advertising revenues is high.

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The Risks of Netflix

Every strong company has risks, and Netflix is no exception. The three biggest risks for Netflix as an investment are disruption of the content model, increasing competitive pressure, and the shift toward short-form video. Precisely because Netflix at the current price offers little room for disappointment, it is important to take these risks seriously.

The biggest and most underestimated risk for Netflix is the shift in media consumption toward short-form video. TikTok and Instagram Reels have fundamentally changed the viewing behavior of an entire generation. Today’s youth already finds a ten-minute YouTube video long, let alone a seven-season series or a two-and-a-half-hour film.

This is not a temporary trend. It is a structural shift in how young people consume entertainment. Attention spans are getting shorter, the need for instant gratification is growing, and competition for viewing time is intensifying. Netflix competes not only with other streaming services, but with every platform fighting for the consumer’s attention.

The danger is not that Netflix becomes irrelevant tomorrow, but that it gradually loses its grip on the youngest generation. Netflix’s current core users are people in their thirties and forties who grew up with long films and series. But if the generation that is now a teenager never develops the habit of watching a full Netflix series, then Netflix has a serious growth problem in ten years. New subscribers become harder to attract, churn increases, and average revenue per user comes under pressure.

Netflix has partly recognized this risk with the introduction of shorter formats, mobile experiences, and vertical video in the app. But it is far from certain whether that is sufficient to engage a generation that grew up with TikTok.

Netflix is the largest pure streaming player in the world, but operates in a market with competitors that have deeper pockets and different motives. Amazon uses Prime Video primarily to bind customers to the Prime ecosystem, not to make streaming profitable. That allows Amazon to invest aggressively without direct pressure on returns. Apple TV+ uses streaming as a tool to sell hardware and keep customers in the Apple ecosystem.

None of these competitors depends on streaming as their primary revenue source. Netflix does. That means Netflix always has one foot on the brake in major investment decisions, while competitors can spend freely without worrying about streaming margins.

YouTube is also a competitor that is often underestimated. YouTube has no content costs in the traditional sense, a proven advertising model, and a reach Netflix cannot match. As YouTube continues to invest in premium content and live sports, the overlap with Netflix only grows. And TikTok and Instagram compete for the same viewing time without spending a single dollar on content production the way Netflix does.

The content model of Netflix is capital-intensive and based on the assumption that long formats, series and films, remain the dominant form of entertainment consumption. That assumption is under pressure. But there is also a deeper disruption risk: AI-generated content.

As AI improves at generating video, stories, and characters, the barrier to entry into the content market drops drastically. Today a Netflix production costs tens of millions of dollars. In ten years a comparable experience could potentially be produced for a fraction of that cost by players that do not yet exist. This undermines one of the core pillars of Netflix’s moat: the scale advantages in content production.

Netflix is itself investing in AI for content production and marketing, but it is not certain the company will be the fastest or best application of this technology. A world in which content becomes cheaper and more abundant is a world in which Netflix’s content cost advantages become less relevant.

The three risks are interconnected. Short-form video threatens the attention of the next generation. Competitors with deep pockets and different business models threaten the market position. And AI disruption threatens the content model itself. None of these risks will sink Netflix tomorrow, but they make the long-term investment case more uncertain than the strong operational numbers of today suggest. Anyone buying Netflix at the current price must be aware of these risks and prepared to accept them.

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The Distinctive Management of Netflix

Netflix has an unusual management structure that is rare among companies of this size. Reed Hastings, the founder of Netflix, stepped back as CEO in January 2023 and was succeeded by a co-CEO structure with Ted Sarandos and Greg Peters. Hastings remained involved as executive chairman, though he has since stepped down from that role as well, and full leadership now lies with Sarandos and Peters.

Ted Sarandos has been with Netflix since 2000 and was for years the architect behind the content strategy. He is the man who built Netflix Originals into what they are today, from House of Cards to Stranger Things and Squid Game. Sarandos understands entertainment from the inside and has proven that he can make bold content bets that pay off at scale. Greg Peters comes more from the product side and was previously COO. He is responsible for the technological and operational strategy, including the rollout of the advertising package and international expansion.

The combination of Sarandos and Peters is logical. Netflix is now a company that must do two things simultaneously: make great content and run a technology platform serving hundreds of millions of users. One CEO who is equally good at both is rare. The co-CEO structure solves that problem, but also carries the risk of unclear responsibilities and slower decision-making. So far that risk appears limited, given the strong operational performance of recent years.

Reed Hastings still holds a significant stake in Netflix, worth several billion dollars. That is a strong indicator that his interests as founder remain aligned with those of shareholders. Sarandos and Peters have also built substantial positions through compensation packages consisting largely of stock options and restricted stock units. Management compensation is therefore directly tied to long-term share performance, indicating meaningful skin in the game.

What is also notable is that Netflix does not pay dividends and has not taken on large debt positions for acquisitions that benefit management personally. Capital allocation is consistently focused on growth and share buybacks, indicating that management thinks like a shareholder.

The track record of Netflix management is genuinely impressive. The transition from DVD rental to streaming was one of the most difficult strategic transitions in business history, and Netflix navigated it almost perfectly. Blockbuster, the dominant player of that era, disappeared entirely while Netflix grew into one of the most valuable companies in the world.

What distinguishes this management is the ability not only to recognize disruption but to actively anticipate it. Netflix has reinvented itself multiple times: from mail order to streaming, from licensed content to original productions, from a single price point to differentiated packages with advertising. Each of those transitions required letting go of a profitable existing model in favor of something new and uncertain. That demands courage and strategic insight.

The introduction of the advertising package is a recent example of this. For years Netflix deliberately positioned itself as ad-free. That change of course required accepting that the earlier position was no longer tenable in a competitive market. That kind of self-criticism is rare in large companies.

There are also points to watch. The co-CEO structure is unusual and can lead to tensions in major strategic decisions. Moreover, Sarandos is primarily a content person, while the future of Netflix is increasingly determined by technology, advertising, and data. The question is whether the current structure remains the right one over the long term as the company continues to transform.

Additionally, the departure of Hastings as CEO introduces some uncertainty. He was for years the strategic mind behind Netflix and his presence as executive chairman is no guarantee that his influence remains equally strong. He will be leaving Netflix entirely by the end of 2026. At many technology companies we see that the founder is difficult to replace, not because capable successors are absent, but because the combination of vision, authority, and ownership is unique.

All in all, shareholders have little reason to complain about the management of Netflix. The track record is strong, the skin in the game is present, and the ability to recognize and act on disruption has been demonstrated multiple times. The co-CEO structure is an experiment that has worked so far, but deserves attention as the strategic challenges become more complex.

The Valuation of Netflix

Netflix is without question one of the strongest companies in the entertainment sector, which this research also makes clear. At the same time, the quality of the business is often already largely priced in. It is precisely with companies like this that returns can disappoint when the valuation is very high.

After the WBD acquisition rumors disappeared, sentiment around Netflix improved strongly and the share price moved considerably higher. As a result, the valuation has become higher rather than lower, which makes the question of whether the stock is still attractively priced a relevant one.

To answer that question, the valuation is built around three components:

• a short analysis of pricing multiples such as the P/E and P/FCF, looking at how expensive the business is relative to its own history and comparable companies;

• a DCF valuation worked out in a bear, base, and bull case to make different scenarios transparent;

• and a valuation based on an exit multiple over a ten-year period, to assess what kind of return is possible under different assumptions.

Note: this valuation was completed before the quarterly results. The current debt position and share price therefore differ from what is described here.

The Relative Valuation

At the time of writing, Netflix trades at a price-to-earnings ratio of approximately 42 based on 2025 earnings. That is a significant increase compared to the 33 at which the stock was trading during the uncertainty around the potential WBD acquisition. Now that deal has fallen through and sentiment has recovered, the market has quickly revalued the stock upward. Historically a P/E of 42 is on the high side, but Netflix is also not a traditional media company. It is a technology-driven platform with global scale, high margins, and strong cash flow growth. Classic entertainment companies typically trade between 12 and 20 times earnings, while high-quality technology platforms structurally trade above 30 times. Netflix sits exactly between those two worlds.

Looking at ROIC, we see a figure of 27%. That is lower than the best technology platforms like Microsoft or Google, but still very respectable for a company that invests tens of billions annually in content. A ROIC of 27% shows that Netflix deploys its capital efficiently and creates more value than the average competitor. That justifies a higher valuation than the P/E alone would suggest.

Looking at free cash flow, a more nuanced picture emerges. With a P/FCF of 47, Netflix is expensive, even in historical context. That is higher than the P/E suggests, which at first glance is surprising. The explanation lies in the content investments: Netflix invests approximately $17 billion annually in content, a large portion of which leaves the business immediately as cash but is depreciated over multiple years in the accounts. As a result, the actual cash outflow depresses free cash flow more than reported earnings. As investment growth stabilizes as a percentage of revenue, free cash flow will grow faster than earnings and the P/FCF will naturally decline.

The core question for investors is not whether Netflix is expensive in absolute terms, but whether expected growth can justify this valuation. Analysts expect average earnings per share growth of approximately 18% per year in the coming years. That growth comes from multiple sources: further increases in average revenue per user, growth in advertising revenues, scale advantages in content production, and a declining share count through buybacks.

To make this concrete, a simple growth model is useful. Suppose Netflix manages to grow earnings per share at an average of 18% per year over the next five years. That means earnings per share roughly doubles over that period. At the same time, suppose the market values Netflix lower in five years than today, for example at a P/E of 27 rather than 42. That scenario of multiple compression is realistic for a company that continues to mature.

Total return in this model is determined by three factors: earnings growth, change in valuation, and shareholder returns via share buybacks. The 18% annual earnings growth contributes directly to the return. The decline in the multiple works in the opposite direction and costs several percentage points per year on average. Net of these, this scenario produces an annual return of roughly 9 to 11%, depending on the pace of buybacks.

That is an attractive but not exceptional return. It implies that Netflix at the current price is primarily suited for investors who believe in the predictability and durability of the cash flows, not for investors looking for extreme multiple expansion. The upside potential lies primarily in the scenario where advertising revenues grow faster than expected, or where new activities like live events and games actually contribute materially to earnings.

The downside risk lies mainly in disappointing growth or structural pressure on content costs. In that case the current valuation is vulnerable and the multiple can decline faster than anticipated. At a P/E of 42 and a P/FCF of 47 there is little room for disappointment.

Netflix is not a bargain, but it is also not built on air. It is a qualitatively very strong company trading at a price that assumes continued, consistent execution. Those who buy in are not doing so because Netflix is cheap, but because they believe Netflix can convert its dominant position into persistently high cash flows.

DCF Valuation

For the DCF I work with a bear, base, and bull case. Two things need to be determined: the expected growth and margin development in each scenario, and the required rate of return.

Analysts expect Netflix revenue to grow from $51.4 billion in 2026 to over $100 billion by 2035, a CAGR of approximately 7 to 8% across that full period. In the early years growth is higher: analysts model 13.7% revenue growth for 2026, declining to 11.7% in 2027 and further toward 10% in 2028 and 2029. From 2030 onward growth gradually fades toward the high single digits. The scenario assumptions are built around these expectations, deviating per scenario based on optimism or pessimism about the key growth drivers.

It is important to emphasize that the analyst consensus for 2032 to 2035 is based on only two to four analysts. Those figures are therefore far less reliable than estimates for the next two to three years, where 44 to 48 analysts provide input. The further out we look, the greater the uncertainty.

Through operating leverage, profitability can grow faster than revenue. Netflix has already built much of its cost structure. As revenue rises while content costs as a percentage of revenue stabilize, a larger share of incremental revenue can fall to the bottom line. The operating margin was 29.5% in 2025 and Netflix expects to improve it further to 31.5% in 2026. Over the longer term, further margin improvement is realistic but not guaranteed.

Content costs can be spread across a much larger user base, generating scale advantages:

There is an important uncertainty here. Content is and will remain Netflix’s largest cost, and content performance is inherently unpredictable. Even with the best data and the most sophisticated recommendation system, a run of disappointing titles can put viewing time and engagement under pressure. Disney is the most striking example: a company with one of the strongest content libraries in the world struggled for years with streaming profitability, partly due to high content costs and disappointing adoption of new titles. Netflix has a better track record and a far more efficient platform, but it is not immune to content underperformance.

Competition and potential disruption also remain a risk factor. The streaming market is capital-intensive and attracts large players willing to operate at a loss to gain market share. YouTube, TikTok, and social media also compete for the same viewing time without depending on expensive content production.

The Required Rate of Return

For the required rate of return I use the US risk-free rate, currently around 4.5%, and add an equity risk premium of 4.5%. This brings the base required return to 9%.

Two company-specific premiums are added on top. The first premium of 0.5% relates to content risk. Netflix invests approximately $17 billion annually in content whose success can never be fully predicted in advance. A period of disappointing titles can put viewing time, engagement, and ultimately subscriber numbers under pressure. The second premium of 0.5% relates to competition and disruption. The streaming market remains attractive for large technology and media companies with deep pockets, while new forms of entertainment consumption via social media and short-form video structurally compete for viewing time.

In the base case this results in a total required return of 10%. For the bull case I use 9.5%, in the scenario where advertising revenues grow faster than expected and Netflix further strengthens its dominant position. In the bear case I raise the required return to 10.5%, for the scenario where content performance disappoints or competitors become more aggressive.

Time Horizon and Model Choices

The DCF uses a 15-year time horizon. The reason is twofold. On one hand Netflix is still very much in a growth phase where a shorter horizon would understate intrinsic value. On the other hand the entertainment sector is subject to potential disruption, making a very long horizon unrealistically optimistic. A 15-year period offers a good balance between capturing the growth phase and acknowledging long-term uncertainty.

Explicit growth assumptions are made per scenario for the first ten years. After that, a five-year transition period follows in which growth gradually declines toward a terminal growth rate of 3.5%. This transition reflects the expectation that Netflix will, like every mature company, eventually move toward average market returns. The entertainment sector has enough historical examples of companies that appeared dominant for decades but ultimately experienced mean reversion. That risk is deliberately incorporated into the model.

A deliberate choice was made to keep the model at the consolidated level rather than splitting it by individual revenue streams. The different revenue streams are used as a reference to underpin assumptions about future growth and profitability.

All scenarios must pass Damodaran’s 3P test: possible, plausible, and painful enough to take seriously.

Bear Case

In the bear case I deliberately push toward the outer edge of what still seems realistic. It is a clearly negative scenario, but one that remains within the bounds of probability, based on the three most important risks currently facing Netflix: disappointing content performance, increasing competitive pressure, and a saturating subscriber market in mature regions.

Analysts currently model 13.7% revenue growth for 2026, declining to around 8% by 2030. In the bear case I assume structurally lower growth of 7% per year for the first ten years, fading further to 5.2% at the end of the model horizon. That is not a catastrophic scenario, but it reflects a world in which Netflix struggles to maintain its growth momentum. Revenue grows from $48.35 billion in year 1 to $119.09 billion in year 16.

The primary cause is a combination of three mutually reinforcing factors. First, content performance structurally disappoints. Netflix produces hundreds of titles annually, but a significant share fails to attract enough viewers to justify the high production costs. Without a constant stream of hits, engagement declines and cancellations rise. Disney has shown how quickly this can happen: despite strong IP and an enormous budget, it struggled for years with disappointing retention and high content costs that eroded profitability.

Second, in this scenario Netflix fails to scale its advertising business quickly enough. Advertising revenues fall well short of expectations as major advertisers remain hesitant to commit budgets to a platform that still has a relatively limited track record in premium video advertising. At the same time, YouTube gains ground with a proven advertising model and enormous reach, pressuring Netflix to offer its advertising packages more cheaply than planned.

Third, consumer price sensitivity increases. In an environment where multiple streaming services simultaneously raise prices, households become more deliberate about which subscriptions to keep. Average revenue per user therefore grows more slowly than expected, while content costs per subscriber remain relatively high.

The impact on margins is significant. The current operating margin of 29.5% declines in the first years to 24% by year 4, under pressure from higher content costs per subscriber, lower advertising revenues, and increased marketing investment to keep up with competitors. As growth stabilizes and content investments as a percentage of revenue decline, the margin gradually recovers toward 26% from year 6 onward, where it stays for the rest of the model. That is structurally lower than the current level, but still profitable, which keeps this scenario realistic.

ROIC declines from the current 35.1% to approximately 30% in steady state, as lower margins are partially offset by a declining reinvestment rate as growth slows. The reinvestment rate declines from 20% in year 1 to 13% at the end of the model. The tax rate stays stable at 17% in the early years and rises to 22% in the terminal phase. Terminal value is calculated with a perpetual growth rate of 3.5%, a terminal ROIC of 12%, and a reinvestment rate of 29.2%.

This is explicitly not a scenario in which Netflix runs into serious trouble. It is a scenario in which growth disappoints, margins are under pressure, and the market needs to revise the high expectations currently priced into the stock. That is precisely what makes it painful for investors: not because the business performs badly, but because expectations were too high.

When all free cash flows over 16 years are discounted at a required return of 10.5%, the intrinsic value of Netflix in the bear case comes out at $43.25 per share, after a correction for net debt of $4.39 billion, a correction of $1.02 per share. That is 52.0% below the current price of $90.

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This number needs to be put in perspective. The bear case is deliberately the most negative scenario that still seems realistic. It combines structurally lower revenue growth, margins that are durably below the current level, and a higher required return. This is not a forecast, but a stress test. What it does show is how vulnerable the current valuation is when multiple things disappoint simultaneously. At a company trading at a P/E of 42 and a P/FCF of 47, there is little room for structural disappointment. The bear case makes that visible in concrete terms: not because this scenario is likely, but because it is possible, and because investors need to consciously factor that risk into their thinking.

Base Case

In the base case I assume a scenario in which Netflix maintains its strong position and the key growth drivers gradually materialize, without everything going too optimistically. It is a realistic middle ground in which advertising revenues grow as expected, content performs reasonably well, and the market position remains stable.

Revenue grows at 11% per year in the first five years, in line with the bottom of analyst consensus. Growth then slows from 11% in year 6 to 9% in year 10, and further toward 5% at the end of the model. Revenue grows from $50.15 billion in year 1 to $156.83 billion in year 15.

The operating margin starts at 30% in year 1 and gradually improves to 32.5% by year 5, driven by scale advantages and growing advertising revenues. The margin then improves further from 33% in year 6 to 35% in year 10 and stabilizes around 36% at the end of the model. This improvement reflects a world in which advertising represents a growing share of revenue, content costs as a percentage stabilize, and the operating leverage of the platform continues to manifest.

ROIC starts at 37% in year 1 and rises to 45.5% around years 13 and 14, driven by higher margins and a declining reinvestment rate as growth slows. The reinvestment rate declines from 31% in year 1 to 9% at the end of the model, indicating Netflix needs increasingly less capital to finance its growth. The tax rate remains stable at 17% throughout virtually the entire model. The EBIT CAGR over the full 20-year period is 7.63%, the NOPAT CAGR 7.19%, and the revenue CAGR 6.60%.

When all free cash flows over 15 years are discounted at a required return of 10%, the intrinsic value in the base case comes out at $88.61 per share, after a correction for net debt of $4.39 billion, a correction of $1.02 per share. With a 20% margin of safety, the buy price comes out at $70.89. The current price of $90 is well above that.

That is an important signal. The base case is not a pessimistic scenario. It assumes 11% revenue growth in the early years, improving margins, and a ROIC that remains structurally high. And even then, the outcome does not justify the current price. That means the market is currently pricing in a scenario closer to the bull case than to the base case. Those who buy in at the current price are not doing so based on average expectations, but on the belief that Netflix will structurally outperform its growth targets.

What is also notable is that during the uncertainty around the potential WBD acquisition, the share price temporarily traded below the base case fair value of $88.61. At that point Netflix was correctly valued based on these assumptions. Now that sentiment has recovered and the price has moved significantly higher, the stock is once again well above intrinsic value in this scenario.

Bull Case

In the bull case I assume a scenario in which Netflix not only maintains its strong position, but maximally benefits from it. Advertising revenues grow faster than expected, live sports attract new subscribers, and international expansion proceeds more smoothly than the consensus anticipates. It is deliberately an optimistic scenario, but one that stays within the bounds of the possible.

Revenue grows at 14% per year in the first five years, well above analyst consensus. Growth then gradually slows from 13% in year 6 to 9% in year 10, and further toward 6% at the end of the model. Revenue grows from $51.51 billion in year 1 to $200.13 billion in year 15.

The operating margin starts at 31% in year 1 and gradually improves to 35% by year 5, driven by higher advertising revenues and scale advantages. The margin then improves further toward 40% in year 10 and stabilizes there for the rest of the model. This improvement reflects a world in which advertising structurally contributes high margins, content costs as a percentage of revenue decline, and Netflix fully exploits its pricing power.

ROIC starts at 38.7% in year 1 and rises to over 51% in subsequent years, driven by higher margins and a rapidly declining reinvestment rate from 40% in year 1 to 10% at the end of the model. The EBIT CAGR over the full period is 9.01%, the NOPAT CAGR 8.57%, and the revenue CAGR 7.69% over a 20-year horizon. The tax rate remains stable at 17% throughout.

When all free cash flows over 15 years are discounted at a required return of 9.5%, the intrinsic value in the bull case comes out at $134.48 per share, after a correction for net debt of $4.39 billion, a correction of $1.02 per share. With a 20% margin of safety, the buy price comes out at $107.58, virtually exactly the current price of $90.

That is a striking outcome. Because these are not average assumptions. Revenue growth of 14% per year, margins rising to 40%, and a ROIC of over 50% — these are exceptionally strong assumptions for a company of this size. And even then, the fair value barely exceeds the current price.

At $90, the current price sits between the base case fair value of $88.61 and the bull case fair value of $134.48. That means the stock is roughly fairly valued on base case assumptions, with meaningful upside if the bull case plays out. The key question is whether the bull case assumptions, 14% revenue growth and margins rising to 40%, are realistic.

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How the Share Price Might Move

With every deep dive I show a simulation of the possible share price trajectory per scenario, because the terminal outcome of a DCF tells only part of the story. Prices never move in a straight line, and the path along which a return is generated is at least as important as the final outcome.

If the bear case plays out, the share price would decline over the first two years toward the fair value of $43.25, a decline of approximately 52% from the current price of $90. It would not be until year 7 that the price returns to break-even relative to the entry point. That is seven years without any return, while a global ETF like VWRL has historically delivered 7 to 8% per year. Clear opportunity costs.

After year 7 the price gradually recovers and moves toward $241 in year 15, representing a CAGR of only 5.5% per year from the current price. Very little for a company of this quality, and certainly very little given the downward path an investor must endure before achieving that 5.5%.

What the combination of all three scenarios shows is how wide the range of outcomes is. In the bear case the price ends at $241 in year 15, a CAGR of just 5.5% per year. In the base case the price rises to $392, representing 9% per year. And in the bull case the price reaches $590, a CAGR of 12% per year.

That is a difference of over $440 between the worst and best scenario, starting from the same current price of $90. That width says everything about how sensitive Netflix is at the current valuation to the outcome of its operations.

What is also notable is that the base case at 9% per year delivers an attractive return, but that requires Netflix to consistently deliver 11% revenue growth and improving margins for 15 years. In the bear case, where the company keeps growing but more slowly than expected, buying at the current price delivers only 5.5% per year.

At the same time, you have to accept that a valuation can never be fully correct. Major events like recessions, new competitors, or disruption in the entertainment sector simply cannot be modeled. The most important thing is being aware of that and applying a margin of safety that fits the uncertainty that comes with this stock.

What all three scenarios together make clear is that Netflix at the current price offers little room for disappointment. Even in the bull case, the upside potential is limited to 12% per year, while the downside risks in the bear case are considerable. Those who buy in do so not because Netflix is cheap, but because they believe the company will structurally outperform the base case and sustain that for longer than the 15 years assumed in the model.

Multiple-Based Valuation

I am not a strong believer in multiple-based valuation. Yet this method, applied conservatively, can help build intuition around expected returns. By making assumptions about revenue growth, profit margins, the development of the share count, and an exit multiple over ten years, you can estimate a share price in year ten. That future price is then translated back to the current price of $90 to arrive at an expected return.

The most important input is the exit P/E. It has by far the greatest influence on the outcome and must therefore be estimated carefully. Small changes in the exit multiple can have a large effect on the final return. A DCF determines intrinsic value based on cash flows, while a multiple-based valuation is sensitive to sentiment. Over the long run the price always follows intrinsic value, but in the interim the multiple can swing significantly. We saw this clearly following the WBD acquisition rumors.

In the bear case I model 7% annual revenue growth over ten years. The net margin rises from 22% to 25%, structurally below the current level due to disappointing advertising revenues and higher content costs per subscriber. The share count declines slightly at 1% per year, as buybacks broadly offset dilution from stock-based compensation but not completely. For the exit multiple I use a P/E of 20, well below the current level, reflecting a scenario where the market has less confidence in Netflix’s growth outlook. The forward P/E declines from 36.28 in 2027 to 25.29 in 2030. Based on these assumptions, the average annual return over ten years comes out at just 0.8%. Barely more than a savings account, for a stock where investors must absorb sharp price declines along the way.

In the base case I model 11% revenue growth in the first five years, slowing to 9% thereafter. The net margin rises from 30% to 33% through scale advantages and growing advertising revenues. The share count declines 1.5% per year through consistent buybacks. For the exit multiple I use a P/E of 25, slightly below the historical average for Netflix but fitting for a company that continues to mature. The forward P/E declines from 23.47 in 2027 to 15.18 in 2030, showing how quickly valuation normalizes when growth continues. Based on these assumptions, the average annual return over ten years comes out at 14.7%, an attractive return for those willing to accept the volatility along the way.

In the bull case I model 14% revenue growth in the first five years, slowing to 11% thereafter. The net margin rises from 32% to 38% through successful monetization of advertising, strong content performance, and further scale advantages. The share count declines 2% per year through more aggressive buybacks, possibly accelerating as free cash flow approaches $11 billion. For the exit multiple I use a P/E of 30, consistent with earlier periods when Netflix traded at a premium for its dominant streaming position. The forward P/E declines from 20.01 in 2027 to 10.99 in 2030, showing how quickly the valuation becomes attractive in this growth scenario. Based on these assumptions, the average annual return over ten years comes out at 34.9%, but that requires virtually all the positive assumptions around advertising growth, content performance, and buybacks to actually materialize.

Would i buy Netflix?

Netflix has entered a new phase. Where for years the company was judged on subscriber growth, the investment case today revolves around something fundamentally different: the ability to convert scale into earnings and free cash flow. On that front Netflix has delivered convincingly over the past few years. Margins are rising, cash flows are growing, and the balance sheet is getting stronger, despite continued high content investment.

Strategically Netflix is well positioned. It has a unique combination of global distribution, strong original content, advanced technology, and a brand deeply embedded in the viewing habits of consumers. Stranger Things and Squid Game show that Netflix can build globally relevant franchises, while advertising and live events open additional growth paths.

At the current price of $90, Netflix trades almost exactly at the base case fair value of $88.61. That is a very different picture from when this analysis was first written. The stock has come down meaningfully and is now roughly fairly valued on realistic assumptions. Around $70 I would consider this genuinely attractive, with a proper margin of safety.

But even then the stock is not cheap. Netflix truly requires long-term conviction, and that conviction must rest on an assumption I honestly cannot answer with certainty: can Netflix keep pace with how people consume content?

Because that change is moving fast and only accelerating. The current generation of teenagers watches differently from the generation that built Netflix. TikTok, Instagram Reels, and YouTube Shorts have fundamentally changed viewing behavior. A ten-minute video is already long, let alone a seven-season series. Netflix is responding with vertical video, podcasts, and games, but whether that is enough to capture a generation that grew up on TikTok, I genuinely do not know.

That said, Netflix still has an enormous growth runway: the share of linear TV consumption will keep declining, and streaming services like Netflix will keep benefiting from that shift.

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That is ultimately the core of the investment case. Netflix is an exceptionally strong company, with proven management, strong cash flows, and a dominant market position. But at the current price the market demands perfect execution over a long period, in a sector that is changing faster than ever. Those who have that conviction, and are willing to wait, can be rewarded. Those who are uncertain about what content looks like in ten years are better off waiting for a more attractive entry point.

A Critical Perspective: Two Takes on the Analysis

The bearish view: you have been too soft

The bear case is the most underestimated scenario in this analysis. A fair value of $43 at 7% growth sounds like a nightmare scenario, but it is really just a world in which Netflix grows the way many mature technology companies grow. Seven percent is not a disaster, it is normalization. And that normalization is more likely than the analysis suggests.

The biggest problem is that the analysis approaches the advertising business too positively. Netflix is doubling advertising revenues from $1.5 to $3 billion in 2026, but that is still less than 6% of total revenue. YouTube generates over $30 billion per year in advertising revenue on a platform that spends nothing on content production. Netflix pays $17 billion annually to produce content that keeps people watching. The question is not whether advertising grows, but whether margins will ever be high enough to justify that content cost base. That answer is missing from the analysis.

Then the content risk. The analysis mentions Disney as a cautionary example but draws insufficient conclusions from it. Disney has IP that Netflix will never have: Marvel, Star Wars, Pixar. Yet Disney still failed to make streaming profitable without years of losses. Netflix does not have comparable franchise depth. Stranger Things is excellent, but it is not the Marvel Cinematic Universe. The analysis assumes Netflix will keep producing a constant stream of hits. The history of the entertainment industry shows this almost never works structurally. Every studio has periods of strong content followed by periods of weak content. Netflix is not immune, and at a P/E of 42, one bad content year is enough to significantly hit the share price.

Finally the short-form risk. The analysis mentions it, but treats it as a peripheral risk. It is not a peripheral risk. The shift from long to short is a generational change that will not be reversed. Netflix is launching vertical video, but that is defensive reaction, not offensive attack. TikTok has no $17 billion content budget and still captures more daily viewing time than Netflix in most markets. The only way Netflix structurally addresses this risk is by building or acquiring a short-form platform. That appears nowhere in the strategy.

The conclusion is harder than the analysis suggests: at $90 you are paying for a scenario that even the bull case barely justifies, while the bear case is more realistic than it is presented in this analysis.

The bullish view: you missed the biggest opportunity

The analysis is conservative precisely where it should have been ambitious. The bull case is not ambitious enough, and the most underestimated element of the entire case is only mentioned in passing: licensing.

Netflix has a library of fully owned content worth over $33 billion on the balance sheet. Stranger Things, Squid Game, Bridgerton, Wednesday, and dozens of other franchises that have become global cultural phenomena. Right now Netflix keeps all of that content exclusive. But the moment Netflix decides to license those titles to other platforms, media parties, or international broadcasters, the economics of the business change fundamentally. The costs are already sunk. Every licensed dollar is essentially pure margin. This is a dormant profit bomb that is barely quantified in the analysis.

Then the advertising business. The analysis treats $3 billion in 2026 as a milestone, but the real target being worked toward is $10 to $15 billion over five years. Netflix has 300 million paying households, a viewing time share that is still growing, and an advertising platform that is only now being properly built. The YouTube comparison is right, but draws the wrong conclusion. YouTube actually shows how large the advertising opportunity is for a platform with high engagement. Netflix has better demographic data than YouTube, a premium environment, and advertisers willing to pay more per impression. If the advertising business generates $10 billion in five years, the entire valuation changes.

And then the most underestimated factor: penetration. Netflix has itself stated that it reaches less than 45% of the addressable market of broadband households. That means more than half the people who could take Netflix do not have it yet. Combined with growing broadband penetration in Asia, Africa, and Latin America, the growth runway is longer than analyst consensus suggests. The bear case of 7% growth assumes Netflix is already nearly saturated. That is hard to defend at 45% market penetration.

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Finally: the analysis completely misses the optionality value. Games, live sports, video podcasts, potential licensing, a growing advertising business, and a strong cash position after the WBD breakup fee. Netflix is not a static company. It is a platform actively building new revenue streams. Each of those initiatives carries an implicit value of zero in the current valuation. In the bull case, together they could make the difference between $134 and $200.

The conclusion is that the bull case in this analysis understates the real upside, and that the analysis too quickly settles for conservative assumptions on precisely the areas where Netflix is most likely to surprise.

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The 14-step method gets a certain weighting, after which I assign a score. If a company scores well across multiple criteria, it might reach an 8.5/10 and qualifies as sufficient quality to investigate further. The scores are also tailored to three strategies: GARP, value, and quality. It is therefore possible that a stock seems uninteresting for a value investor but attractive for a quality investor. For GARP I use a combined angle, grouping growth and GARP together under this strategy.

Going forward, every new company I cover will be structured around these 14 criteria. The detailed explanation of these steps will only be given once, here in this piece. In later analyses you can refer back to this to refresh the criteria being used. That way I can keep future reports shorter and more concise without repeating the entire methodology every time.

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Step 1 — Do I Understand the Business?

This is the first and perhaps most important step for any investor: you need to understand what you are investing in. Buying shares in a company you do not understand is asking for trouble. It is therefore essential to be clear about exactly what a company does and how it makes money. In other words: what is the business model, and how robust is that model over the long term?

Ideally the company falls within your circle of competence, the sectors in which you have built up sufficient knowledge to properly see through the dynamics, risks, and opportunities. When you understand a business, you can make better decisions than the market, because you see nuances that others might miss. That can give you a structural edge.

In this step we therefore look at the core of the business: how is revenue generated, which segments contribute the most, and how is revenue distributed geographically? A company does not need to be extremely simple, but it does need to have a clear and strong business model that you as an investor can follow and assess.

Step 2 — Is the Business Well Positioned in a Growing Market?

A strong market position in an attractive market is one of the most important conditions for sustainable growth. Ideally we assess whether a company holds a leading position in a growing market, or, when still small, has the potential to grow into an important player in a large market.

Market leaders typically have scale advantages, a strong brand, and a structural lead over competitors. It is therefore essential to understand well what position a company occupies relative to its rivals. Is it in a market with fierce competition and low entry barriers? Or does it operate in an oligopoly, where only a handful of strong players are active and entry for new parties is virtually impossible? The answers to these questions largely determine the predictability and stability of future earnings.

The end market itself is at least as important. A company active in a growing sector has the wind at its back. It can grow naturally with the market while simultaneously winning market share, reinforcing its growth further. Investing in a stagnating or even shrinking sector is something we want to avoid, it is swimming against the current.

We therefore look for businesses that are active in markets growing at a minimum of 5% per year. For smaller companies we sometimes accept a lower growth rate, provided there is clear room to capture significant market share. It is also important that the company benefits from secular trends that are structurally changing society, such as the shift from cash to digital payments, the electrification of mobility, or increasing urbanization.

For a value investor this factor often plays a smaller role, since the focus there is more on current valuation. For a GARP investor it is crucial, because growth is the core of their strategy. For a quality investor the growth market is certainly relevant, but less decisive than profitability or the strength of the moat. Market share does matter.

Step 3 — Does the Business Have a Durable Competitive Advantage?

In this step we investigate whether the company is able to defend its competitive advantage, also known as a moat. A business will naturally face competition, especially when it achieves high margins. To protect these margins it must defend itself against competition. This can be done through:

Network effects. A strong brand. High switching costs. Cost advantages. Specific knowledge that others do not have. Patents or regulation.

It is not only important that a company has a moat today, but also that it can maintain and preferably expand it in the future. This protects the business against competitive pressure and declining margins. For shareholders this is a crucial factor: when the moat disappears, the quality of the business, the margins, and ultimately the returns tend to disappear with it.

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How do we measure this? A company can only achieve a high gross profit margin and ROIC if it naturally possesses a moat. We therefore look at:

• A ROIC above 15%, which shows the company can invest above its WACC and thus achieves above-average returns. This is only possible with a strong moat.

• A ROIIC above 15%, which demonstrates the company can keep expanding its moat. ROIC says something about the past, while ROIIC looks more toward the future. If a company can achieve similarly high returns on incremental invested capital, this expands the moat. A declining ROIIC on the other hand points to a weakening moat.

• A gross profit margin above 40%, which points to clear pricing power. Only companies with a moat can offer their products or services at higher prices while still maintaining strong margins.

For value investors and to a lesser extent GARP investors, this criterion is often less important. For GARP investors it is however crucial that moat formation can occur in the future.

Step 4 — The Business Is Led by Good Management With a Strong Culture

Management and corporate culture are the most determining factors for long-term share performance. In the short term, valuation, revenue growth, and margins play a larger role. But those who want to own a stock for the long term must focus primarily on management quality. This applies to all types of investors, including value and GARP investors.

Management can make decisions that look favorable for the share price in the short term but are value-destructive over the long term. As a shareholder, especially as a long-term investor, you want the interests of management, shareholders, and ideally employees to be as aligned as possible. Ideally management therefore has significant skin in the game, for example by holding a large equity stake or because the CEO is the founder of the company.

Managers who are rewarded solely on short-term targets risk making decisions that are harmful to the future of the business. A manager with skin in the game is instead more likely to focus on the long term, just as a founder who often has strong personal involvement and genuine passion for the business. Also important are stability within the board, no excessive CEO turnover over short periods, and a healthy corporate culture with a high employee approval rating.

How do we measure this? The business is still led by its founder, or the founder has a meaningful role on the board. Management owns more than 5% of the share capital. The CEO tenure is more than 3 years. The Glassdoor score is above 3.5 out of 5.

Step 5 — The Business Has Good Capital Allocation

This step could also fall under the previous one, but the most important task of management is making good decisions about the capital made available to them from operations and shareholders. This capital must be invested in new growth projects that generate profit. In this step, ROIC is therefore again an important criterion.

Running a business means constantly solving problems. That requires capable management: executives who can see and seize opportunities but also have an eye for risks and threats. You do not want a company to be sidelined by technological developments such as AI. For a quality investor this is of great importance, as it is for a GARP investor. For a value investor the emphasis is less on this aspect, but it still matters that management understands which assets can unlock value.

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What constitutes good capital allocation? Growth is preferred over share buybacks, dividends, or acquisitions. The company does not cut R&D or marketing to artificially protect margins. The company does not pay out an excessively high dividend. The company achieves a good return on equity. Share buybacks are not done at too high a price.

How do we measure this? R&D and marketing costs remain around their five-year average. The dividend to FCF payout ratio is below 80%. Share buybacks clearly translate into a declining share count and take place at a reasonable valuation. Return on equity above 15% and ROIC above 15%.

Step 6 — The Business Earns a Healthy Profit

Profitability is of great importance. A quality business often earns its status through the combination of high profit margins and a strong moat that protects those margins over time. For a value investor profitability is less central, as the focus is mainly on things the market is ignoring. For a GARP investor profitability is important, but this depends heavily on the stage of the business. When a company is not yet very profitable but already achieves high gross profit margins and thereby shows great potential to become profitable in the future, that can be sufficient.

For profitability we ideally look for businesses that achieve a gross profit margin above 40%, a net profit margin above 15%, an EBIT margin above 17.5%, and a net profit to free cash flow conversion above 90%, meaning 90% of earnings are converted into free cash flow.

For GARP companies the following applies: if they do not meet the EBIT and net profit margin criteria, they must achieve a gross profit margin above 65% and show sufficient potential to reach the desired profitability through scale advantages in the future.

Step 7 — The Business Has a Healthy Balance Sheet

A healthy balance sheet is the foundation of every business. Without a solid balance sheet, even a profitable company can run into trouble when economic headwinds arise. Companies with too much debt risk seeing profits largely consumed by interest charges, or being forced to raise capital on unfavorable terms during a recession, which comes at the expense of shareholder value.

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For a quality investor a strong balance sheet is essential, because you want to own companies that can maintain their profitability and dividend through multiple crises. For a value investor a slightly weaker balance sheet can be acceptable, as long as the valuation is extremely low and the debt remains manageable. For a GARP investor it is equally important, because growth on a shaky balance sheet often ends in disappointment.

How do we measure this? Net debt to FCF below 2.5, meaning companies must be able to repay their debt within 2.5 years from free cash flow. A current ratio above 1, meaning companies must be able to meet their short-term obligations with short-term assets. This can be deviated from when a company has strong power over its customers, such as Amazon, which pays suppliers only after products have been sold. It is however important that inventories are not too large and preferably do not grow faster than revenue. An interest coverage ratio above 5, meaning EBIT must be able to cover interest charges at least five times. Intangible assets including goodwill not exceeding 50% of total assets, to avoid a balance sheet that leans too heavily on difficult-to-value items.

Step 8 — The Business Is Not Inherently Capital-Intensive

Companies that need to invest heavily in capex and fixed assets are at a disadvantage compared to competitors that do not. Businesses that require less capex to grow generate higher free cash flows. These can then be deployed for further growth, dividends, share buybacks, or acquisitions.

Capital-intensive businesses such as airlines, steel producers, or traditional utilities must constantly invest large amounts in factories, machines, or infrastructure. This makes them more sensitive to economic cycles, interest rate movements, and inflation. Software companies, platform businesses, and asset-light models by contrast often have very low maintenance investment requirements and can therefore scale much faster.

For quality and GARP companies this aspect is particularly important. Low capex requirements allow a business to retain more free cash flow and thereby strengthen its competitive position, especially when the company simultaneously achieves a high ROIC. For value investors this is less important, as capital-intensive companies can contain hidden value in their assets such as machinery or real estate not yet fully discovered by the market.

The other side of the coin: it is not a problem when a company invests heavily in capex, as long as it achieves an attractive ROIC from those investments.

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