Weekly Reads - April 3, 2023
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Non-GAAP measures obfuscate the true earnings power of a company and incorrectly incentivize management to grow metrics that don’t drive the most important financial metric return on capital.
After years of monitoring the use of non-GAAP earnings measures the SEC is finally taking action in stopping this practice. In December of 2022, the SEC expanded its rules to prevent companies from using non-GAAP measures to make its figures look better. One example is the practice of changing a company’s accounting for revenue from an accrual GAAP basis to a cash basis which is very misleading to investors. Non-GAAP are increasingly being used across multiple sectors to present an overly optimistic picture of profitability even if real profitability is worsening or stagnating. The most worrying trend is management compensation being tied to these non-GAAP measures which incentivizes management to focus on metrics that distract focus away from GAAP profitability and returns on capital. Many of these measures can be manipulated at management’s discretion muddling investors understanding of the underlying earnings power of these companies which increases the possibility of fraud across the entire financial market. The worst offenders even present these non-GAAP measures more prominently than GAAP measures in their financial reports with very little disclosure on the calculation of these figures. It is very important that the SEC continues to champion more non-GAAP disclosures and create roadblocks to prevent companies from abusing this practice to protect unsophisticated investors from potential fraud.
The bidding war for Pismo shows how far behind traditional banks are in Brazil in creating their own competitive digital offerings forcing them to outsource development in order to protect their market share from disruptive neobanks.
Tech valuations in the public and private space have shrunk over the last few months with investors looking to derisk their portfolios amid a worsening macroeconomic backdrop. We have seen a handful of public tech companies taken private at a fraction of their peak price as investors have soured on investing in unprofitable growth focused tech companies. Despite this shift in sentiment there is a bidding war for Brazilian fintech Pismo going on right now with Visa and an unreported second company. It is reported that bidding has reached $1.4 billion with Visa’s first offer of $1 billion refused by the company. Pismo is seen as valuable to Visa’s overall Brazil strategy with Pismo having partnerships with the largest banks in Brazil. Pismo helps banks and fintechs quickly launch financial services such as cards, payment product, digital wallets, and lending platforms. Essentially, Pismo helps startup neo banks and traditional banks get new financial products to the market much faster than creating it themselves. With the banking space in Latin America extremely fragmented and competitive it is key for banks to get products into the market quickly to protect or gain market share from other online and traditional banks. For Visa, buying Pismo could be an entry point in creating deeper relationships in the large Brazilian market and further diversifying their business outside of payments. Visa could see Pismo as a way to ingrain themselves deeper into the payment and financial services infrastructure of their partner banks creating a wider competitive moat.
The war on Ukraine has resulted in loss of top tech talentin Russia to rival countries across the globe setting the country back decades..
We are the seeing the largest loss of local talent in modern history in Russia as the war on Ukraine is driving away workers to other countries. According to government numbers Russia has seen 100,000 IT specialists leave the country in 2022, a staggering 10% of the total tech workforce in the country. These numbers are vastly underestimated and likely to cause a crisis in the local tech industry in the upcoming decade. Prior to the war on Ukraine, the Russian tech industry was flourishing with the country inviting foreign companies into the country which spurred the local tech economy and development of local talent. Post invasion the Russian government decided to take more control over internet activity and media forcing the largest local tech firm Yandex to advertise government propaganda on their platform. This led to the company’s Israel born CEO to resign and over one third of employees leaving the country in just the first two months after the invasion. These problems have spread to other industries such as semiconductors in which the country is 10-15 years behind the rest of the world. The war on Ukraine is creating irreparable damage that will haunt the country in the upcoming decade putting the country further behind the globes remaining superpowers.