I wish that Combs's talk had been recorded on video. This talk should be on the news; instead, there is mostly the FTX stuff. So
I am a university student in history (...I know...), so I am still trying to understand valuation/finance, but many people have this question on the security analysis Reddit. What does the unit economics approach to valuation look like? Like how do you know what the individual unit is? Then how do you build economics for the individual unit and backtrack?
I can't speak for how Combs uses unit costs but I think about them as a proxy for the returns on incremental capital invested into the business. A good business can reinvest lots of capital at high rates of return. A wonderful business can grow without investing any incremental capital.
I think of unit costs as "how much will the business have to invest to increase production." It is easier to figure out for some businesses than others. Restaurants and retailers are usually straightforward to deduce. How much does a new store cost, how much does a new store do in sales, and what's the margin structure? Other businesses have almost no incremental costs of increased production - Visa/MA, software, asset management, etc. A steel company will require a huge increment to build a new factory to increase production. A shipping company needs to buy a new ship to do more business.
Unit costs might also be important in the context of a low cost producer. What's Progressive's cost to provide car insurance vs GEICO and State Farm? What's Costco's price for a SKU vs Walmart or Target?
Great stuff, thanks. Gotta read more about Grant at some point. 💚 🥃
I wish that Combs's talk had been recorded on video. This talk should be on the news; instead, there is mostly the FTX stuff. So
I am a university student in history (...I know...), so I am still trying to understand valuation/finance, but many people have this question on the security analysis Reddit. What does the unit economics approach to valuation look like? Like how do you know what the individual unit is? Then how do you build economics for the individual unit and backtrack?
I can't speak for how Combs uses unit costs but I think about them as a proxy for the returns on incremental capital invested into the business. A good business can reinvest lots of capital at high rates of return. A wonderful business can grow without investing any incremental capital.
I think of unit costs as "how much will the business have to invest to increase production." It is easier to figure out for some businesses than others. Restaurants and retailers are usually straightforward to deduce. How much does a new store cost, how much does a new store do in sales, and what's the margin structure? Other businesses have almost no incremental costs of increased production - Visa/MA, software, asset management, etc. A steel company will require a huge increment to build a new factory to increase production. A shipping company needs to buy a new ship to do more business.
Unit costs might also be important in the context of a low cost producer. What's Progressive's cost to provide car insurance vs GEICO and State Farm? What's Costco's price for a SKU vs Walmart or Target?
This is really helpful! Thank you so much Matt. :)
Specifically, the transcript subtitle mentions “unit cost centred.” What does that look like?