5 Idea Friday: Chopping Block; No Booze; PE Hard(er) Mode; One Neat Trick for More Robots; Housing Shortage, Interrupted
20 some-odd charts to carry you through the weekend
Chopping Block (and the cuts to come), plus a new system-of-record mantra
Laying off the sauce
PE goes from hard to harder
One neat trick for more automation
housing shortage, interrupted (again)
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Some quick-ish hitters for your weekend reading pleasure.
1. Chopping Block
Yesterday, in my Citrini critique, I closed with this:
I do believe layoffs for SaaSCos are coming.
It’s got little to do with AI and everything to do with growth and margin pressure. The “adjusted EBIDTA” jig is up. If you want multiples befitting Rule of 40 companies with 20% growth and 20% FCF, then you actually have to have 20% FCF, and not “20% FCF if you ignore all the money that goes out the door to compensate our employees.”
High operating costs are so last-year:
Companies with a low SG&A ratio have diverged even more strongly of late from those with a high SG&A ratio.
Right now, there’s a Capex supercycle over on the industrial side that is gushing cash, so if you’re a “capital lite” techco, you’ve got to sing for your bread a little. It’s a brave new world.
If you’re Benioff over at Salesforce CRM 0.00%↑, you try this:
Before
After
Look Ma, everything is AgentForce now. We’re doing AI!
Obviously, the street was not impressed.
If you’re Jack Dorsey at XYZ 0.00%↑ Block, you do this, instead:
40% of the workforce gone.
Massive cuts to headcount, and the crowd goes wild:
XYZ 0.00%↑ shares surged on the fat-trimming news.
Sure, Dorsey said the only reason he’s doing it is because AI’s transformative productivity makes this all possible, but no one believes that (and anyone claiming vindication for Citrini neither read Citrini, nor knows anything about Block). AI didn’t make Block 40% more productive overnight, and if saying “it’s the AI” was good enough, then Salesforce would be up 20% too.
What people see is a multi-headed Hydra business that quadrupled its headcount over Pandemania, and is in desperate need of some focus and housecleaning, and so when the CEO says “we’re doing some big time housecleaning,” the market approves.1
Block is somewhat unique, given its history and structure, but not mostly not. And given the market’s reaction, I continue to think that we will see more of this, going forward. CEOs will cite AI-driven productivity gains, but the truth is that they massively overhired, and have been running fat for a while now (while “adjusting” the fat away).
Up until recently, no one seemed to care, so management had little incentive to run leaner, but the price-signal is hollering that the incentives have changed.
‘Monitor, Meter, and Monetize’
While on the subject of levers for SaaSCos to pull, here is another nice little tidbit, that I expect we’ll see more of:
Hubspot CEO says Agents can definitely access the CRM’s data, but, of course, not without a fee.
Many have pointed out that incumbents have the advantage of being “systems of record.” Others have said, “well agents can do so much more with that data, and heck, making a database is easy now.” Still others have said, “actually the better resolution here is some nimble pricing adjustments that take into account READ, and not just WRITE.”
And that’s what we have right here, with HUBS 0.00%↑ “monitor, meter, and monetize.”
In other words, a lot of seat-based software businesses priced-around Write access, but didn’t really care about Read. You want to make changes, enter records, set up sequences? You gotta pay. But, if you want to just see stuff? No charge.
But, now that the data (and all the relationships) are valuable in and of themselves, and especially valuable in a different application, well, Read Access is gonna be gate-kept.
TripleM is the new mantra.
ICYMI
2. Laying off the sauce
This is really just a fun little observation, to take or leave.
Getting wasted is far less popular, especially amongst young folks then it used to be:
The share of “binge-drinking” 20-somethings dropped ~25% since 2017 (although 2019 appears to have been the real inflection point, and ‘23 was an acceleration).
Older folks actually binge-drink a bit more (and that started in 2022). It’s interesting in both cases that this doesn’t appear to be a “lockdown” driven phenomenon, as the “binge-drinking” share is now at- or lower-than the ‘21 nadir.
In terms of what it means, who knows, exactly. Surely, “binge-drinking” probably isn’t the best, but (a) the 20-somethings are the time to do it; and (b) socializing in public is a good thing. They don’t call booze a social lubricant for nothing.
What are Gen-Z folks doing instead?
Apparently, they’re working out a lot more:
Gen-Z have ramped up their gym-spending, far more than their bar-spending (while older folks have done the opposite).
Working out is good too, but balance in all things, right?
In general, as a society, we’re drinking a lot less, it would seem (and 2000 really was the drop-off):
Alchoho’s share of consumer spending is now the third-lowest in 40 years.
It could be that part of what’s happened is the price of everything else went up, while alcohol has stayed relatively cheap, but the anecdata do corroborate: people are drinking less (and they’re looks-maxxing, instead).
Social media creates some different incentives, I’m telling ya.
3. PE goes from hard to harder mode
Bain did their big PE Outlook and it’s mostly covered territory for Random Walk, but there were still some fun charts.
First, here’s a striking visual for how the game done changed:
The annual EBITDA growth required to generate a target 20% IRR has increased by almost 2.5X, relative to a decade ago.
No more multiple expansion, and no more cheap leverage. You gotta grow profits to win, and that ain’t easy. You see now why PE is reluctant to sell? They bought these assets under fundamentally different assumptions (and if they bought the assets in ‘21-’22, they paid peak prices). To generate returns in this regime, PE must actually make these companies much more profitable than before.
And, if it was tough a few months ago, it’s surely gotten tougher now that software companies have all re-rated downwards:
PE is massively over-indexed to software, relative to the public markets (where hardware is now the majority of the sector).
The private marks on the equity might not move much, but the debt markets are telling you which way the wind is blowing:
Junk “speculative grade” loans backed by software companies have been selling off, as the equity gets repriced.
The point is that for PE funds to generate returns on their assets, EBIDTA growth (and not the adjusted kind) is more important than ever, and even more important than its already more-important status of the past year or so.
And how is profit-growth going?
Well, not bad, but it’s far cry from 12%/year:
Adjusted EBITDA growth for the LPI (which aggregates a universe of private cos) has been ~5% since 2024.
~5% won’t cut it, and growth is increasingly concentrated amongst the slow-growers, so there are relatively fewer stand-out cos to lift all boats.
PE isn’t easy. It’s full of smart, hardworking, competitive people, and the game has gone from hard to harder. Again, the recent vintages are just going to be duds, in the main. It’s hard to see any path around it.
The result is fewer funds with concentrated capital and compressed fees, and that’s just the new-normal, at least for now.
4. One neat trick to accelerate automation
Many (including Random Walk) have observed that China is way-ahead in the robot game.
Among other things, it reflects China’s different approach to their demographic winter. If you’ve got to do more with less, then robots are a plausible fix.
Well, some research suggests that one way that the US might speed up automation is with regulation. More specifically, the regulatory unlock appears to be minimum wage laws:
A 10% increase in the minimum wage increases robot adoption by roughly 8%, relative to the mean.
Increase the cost of labor, and incentivize the robotic substitute. Good stuff, I guess.
Maybe tariffs will have the same effect?
5. Housing Shortage, Interrupted
And finally, because I cannot help myself, the NaTIonAL HoUSiNg SHoRtaGe crisis continues to unravel.
20% of listings with a price cut:
29 straight months of declining median asking rents:
A majority of metros are now “renter friendly” or “balanced” and metro vacancy rates are now higher (7.6%) than they were before the pandemic (6.9%):
More price cuts, declining (and negative) rent growth, more vacancy . . . it’s gotta be the strangest shortage in the history of shortages.
But, wait, there’s more:
Colorado experienced a “surge in the number of housing units [which] has saturated the market,” according to the KC Fed:
In Pittsburgh, Detroit, and Miami, clearing prices are ~10% below asking:
Anyways, it probably won’t stop people from casually referring to a housing shortage, but yeah, there’s no housing shortage.
A nice place to live shortage? Yeah, that I can get behind. But there’s no shelter shortage, that’s for sure.
Also, this would be a heckuva wrinkle.
Apparently, Japan has become a very active player in the homebuilder M&A market:
Japanese investors have become one of the larger acquirers of US homebuilders, and now own slightly more than 5% of the market.
In my conversation with Lance Lambert, he pointed out that the builderverse was ripe for consolidation and M&A.
If Japanese investors (who famously lost a lot of money in Japanese real estate when Japan’s population rolled-over and the bubble popped) pile into US homebuilding right as US population growth begins to rollover? Oh well.
Previously, on Random Walk
Private Credit and Insurance, two peas in a pod (reprise), and a chart dump on default rates
five charts on the rise of private credit in life insurance
Energy in 1776
It’s July 4th, so Happy Birthday America, and we’re going to keep it light and only semi-topical.
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Block combined Cash App (consumer finance), Square (PoS merchant payments+software), Afterpay (BNPL) and Tidal (Jay-Z’s music streaming business), plus a whole bunch of crypto-maxxing. No one has any idea what is going on. Just try to make sense of their earnings supplement. You can’t.
SaaS monetizing your read access is the California Billionaires tax. Big incentive to get out sooner rather than later. What's the Miami?