🗞 How To Find Growing MOATs

Happy Sunday! (Unless you’re TD Bank 😬)

Here’s what’s on the docket for this week’s newsletter:

• 🕹️ Is Roblox Inflating Users?

• 🏦 TD Bank Fined ~$3 Billion

• 🏰 How Pat Dorsey Finds Growing MOATs

And much more, let’s dive in!

News of the week

• 🕹️ Roblox Inflating Metrics? On Tuesday, short selling activist firm Hindenburg Research released a scathing report on popular gaming platform Roblox which sent the stock down nearly 9% immediately after. The stock recovered most of its losses by the end of the week, but the accusations are quite concerning for shareholders if true.

  Among several issues flagged by Hindenburg (insider selling, executive turnover, and lack of platform safety protections), the most alarming allegation was that the company is inflating two of its key metrics in Daily Active Users (DAUs) and Engagement Hours.

  After interviews with former Roblox employees, Hindenburg claims that Roblox is overstating its DAUs by 25-42% and engagement hours by more than 100%. Hindenburg states that these elevated statistics are likely due to the company’s choice not to disaggregate bots or multi-account users from its true count.

  Representatives from Roblox responded to the report stating “The financial claims made by Hindenburg are misleading. The authors are short sellers and

  have an agenda”.

• 🏦 TD Bank Fined $3 Billion: After months of investigation, Toronto-Dominion Bank (the 2nd largest bank in Canada by assets), has received multiple charges from the US Attorney General’s Office resulting in fines of more than $3 billion.

  The investigation found that TD Bank had “significant, systemic breakdowns in its transaction monitoring program” that allowed criminal organizations to launder hundreds of millions of dollars through TD Bank accounts over a multi-year period.

  Employees were aware of the illegality of these actions and internal auditors even raised concerns for the transaction monitoring program, but both the transactions continued to flow nonetheless. The CEO of TD Bank Group Bharat Masrani stated “This is a difficult chapter in our bank’s history. These failures took place on my watch and I apologize to all our stakeholders.”

  TD Bank’s stock dropped 10% this week.

Earnings Roundup

• 🥤 Pepsi: Food and beverage giant Pepsi reported a mixed bag for earnings on Tuesday as the company continues to grapple with lower traffic to convenience stores in the US. Pepsi’s earnings per share came in ahead of analysts expectations while revenue missed forcing the company to lower its overall sales guidance for the year.

  Despite reporting its 9th consecutive quarter of declining sales volumes, Pepsi was able to deliver 1% sales growth thanks to continued price increases.

  In response to an analyst’s question regarding the declining convenience store traffic in the US, Pepsi’s CEO Ramon Laguarta seemed to still be positive on the long-term trajectory: “I think it's part of the economic cycle that we're in. And that will reverse itself in the future once consumers feel better.”

  Pepsi’s stock was up 4% this week.

• 🍕 Domino’s: The world’s largest pizza chain and 5th largest fast food chain overall Domino’s reported 3rd quarter results on Thursday that came in ahead of expectations.

  Domino’s grew its total retail sales and operating income by 5% compared to the same period a year prior, but provided slightly underwhelming guidance for the full-year due to “the challenging macroeconomic environment”.

  The pizza giant continues to see positive same-store sales growth in both its US and international stores, but is reporting pressure from certain cohorts. During the company’s Q3 conference call, CEO Russell Weiner stated “Where we saw maybe a little softness was with lower income customers on the delivery side”.

  Domino’s stock closed up 5% after the report.

Platform Update

Introducing Stock Lists and Insider Trades 🚀 

This week, FinChat launched two brand new features that can help investors discover new opportunities.

Stock Lists:

FinChat now has hundreds of real-time lists that are updated every day to help investors discover potential new stocks.

• Best Performing Stocks Year-to-Date 📈 

• Highest Dividend Payers Globally 💰️ 

• Biggest Companies in Sweden 🇸🇪 

And much, much more!

Insider Trades:

With Insider Trades, you can now track all buys and sells from insiders in a single place.

Want to see which CEOs have been buying the most stock? Want to see which companies have the most insider sales?

You can now see all of that with the Insider Trades tab on FinChat.

Pat Dorsey: Finding MOATs

Pat Dorsey is the founder of Dorsey Asset Management and former Director of Equity Research at Morningstar. Dorsey has made his name by focusing on competitive advantages, or as they’re commonly referred to “moats”.

His talks, letters, and books are all centered around competitive advantages and the elements of a business that allow a company to generate outsized cash flow, profit margins, and high returns on capital for an extended period of time.

Dorsey and his team at Morningstar and Dorsey Asset Management have identified four key moat categories that can drive outsized profits for companies. Let’s take a look at each:

1.) Intangible Assets

An intangible asset is a non-physical asset that helps power a company’s business. Dorsey defines intangible assets as either brand value, regulatory licensing, or patents.

Example: When US tobacco companies like reached their Master Settlement Agreement in 1998, it was agreed that there would be no more marketing for cigarettes. This made it impossible for new brands to pop-up, so the incumbents like Altria and British American Tobacco maintained market share and raised prices above the inflation rate every year.

2.) Switching Costs

Switching costs exist when it would cost more for a user to switch to a new service instead of sticking with an existing one. But “costs” in this case does not always refer to money.

From Dorsey’s book The 5 Rules for Successful Stock Investing: “Remember, a switching cost does not have to be monetary – in fact, it rarely is. Much more frequently, what deters customers from dropping a product or service in favor of a competing product or service is time.”

Example: Medical device firms like Stryker have high switching costs which ensure customer retention. Since surgeons are trained on how to implant Stryker products like artificial knees or hips, they tend to develop preference for Stryker products as it’s time-consuming to learn the implementation process for other brands.

3.) Network Effects

Dorsey defines a network effect as a product or service that increases in value as its number of users expands. Generally speaking, as long as engagement on the service continues to grow the network effect can be maintained.

Example: The most obvious example is Meta, or formerly Facebook. Not only is Meta home to more than 3 billion daily active users across its family of apps, but those users generate content every day which continuously attract the next potential users. It’s perhaps no surprise then that Meta has been Dorsey’s largest holding for more than 8 years.

4.) Cost Advantages

Cost advantages, also commonly referred to as economies of scale, exist when a company has created a cheaper way to deliver a product or service that can’t be replicated easily.

Example: In this case, Costco would be an obvious example. Thanks to Costco’s size, they’re able to command lower prices on a per-unit basis from suppliers, which they continuously pass through to customers. In exchange, they’re able to offer a high-margin membership program so that customers can continue to access those low every day prices.

Pat Dorsey’s Current Holdings:

Given Dorsey’s extensive work around defining competitive advantages, you’re probably curious what stocks he himself owns.

Here’s a look at his latest holdings on FinChat:

Meme of the week

In perhaps one of the most unhinged Linkedin posts of all time, this week, the former Co-CEO of FTX announced his “new position” as an inmate at a Federal Prison.

After the fallout of FTX’s 2022 collapse, Salame was charged with violating campaign finance laws and operating an illegal money-transmitting business, and ultimately sentenced to more than 7 years in prison.

While most people might let that get them down, Salame seems to be in decent spirits as he was able to make a little fun of the situation.