“Spam” in the US$ 44bio deal-on-hold of Twitter by Elon Musk

Source: Yahoo Finance

If I were a Business School Professor in Finance, I would assign the following exam: ‘How do you value Internet Companies?’ and I would fail any student that did not leave the answer sheet blank.

Warren Buffet, Chairman & CEO of Berkshire Hathaway

Mr. Elon Musk’s Twitter last week (screenshot below) on Twitter deal (US$ 44bio vs market cap of US$31.48bio and enterprise value of US$31.12bio as of 13 May 2022 as per Yahoo Finance https://finance.yahoo.com/quote/TWTR/key-statistics/) was put on hold to get more supporting calculation for spam-fake accounts of Twitter platform users.

Interesting to know that the spam users could put on hold such mammoth deal, as spam or fake accounts are not generally found in the internet-based business valuation metrics, for example, Corporate Finance Institute lists 17 most important metrics to know (Monthly Unique Visitors; Customer Conversion Rate; Bounce Rate; Average Order Value; Monthly Active Users; Average Revenue per User; Monthly Recurring Revenue; Revenue Run Rate; Contribution Margin per Order/Customer; Customer Acquisition Costs (CAC); Contribution Margin After Marketing; Churn Rate; Burn Rate (and Runway); Lifetime Value; LTV/CAC ratio; Payback (# of orders, or time) and Viral Coefficient) ((https://corporatefinanceinstitute.com/resources/knowledge/valuation/startup-valuation-metrics-internet/), related to the valuation of internet-based companies. And even from two IPO Prospectus, Bukalapak and Tokopedia, we will hear more about Annual Transacting Users, Total Payment Value; Net Promoter Score, Gross Transaction Value (from GoTo) and Annual Transacting Mitra/Users; Average Transaction Value; Customer Acquisition Costs and Total Processing Value (from BUKA).

Twitter itself estimated in a filing on early May 2022 that false or spam accounts represented fewer than 5% of its monetizable daily active users during the first quarter of 2022. Let’s say we assume not more than 5% for the spam or bot or fake accounts on Twitter platform, then the estimated spam accounts will be around 20 mio (using total monthly active users of around 400 mio in 2022 (see https://backlinko.com/twitter-users), or 11 mio (using total monetizable daily active users of around 217 mio – (https://www.omnicoreagency.com/twitter-statistics/)]

The interesting stuff about this spam account that it is directly an integral part of the calculation of how many active users on that platform from all total users. We need to be aware that total users here could be seen from several aspects, such as [monthly/daily] active users, monetizable active users, marketing-reach users, etc. To know how it is defined, it is really crucial in the valuation of such e-business.

Elon Musk’s concern seems making a lot of business and finance sense though Elon Musk twitted after the disclosure coming that Tesla Inc. who has inked a deal to buy Twitter for $44 bio (with US$ 31.48 of Enterprise Value as per 13 May 2022, https://finance.yahoo.com/quote/TWTR/key-statistics/), that one of his priorities would be to remove “spam bots” from Twitter platform, yet here spam is considered as one of the risk factors that related to Twitter business and reputation as well. We could read this in Twitter IPO filing which it is said that other than spam that could diminish the user experience on Twitter platform (potentially could damage Twitter reputation and deter their current and potential users from using Twitter products and services), more importantly, spam is mentioned as one of the assumptions being used and relied on calculating certain of Twitter key metrics (see Twitter https://www.sec.gov/Archives/edgar/data/1418091/000156459015004890/twtr-s-3_20150605.htm).

I copy herewith the whole paragraphs to understand the background of this risk factor.

The numbers of our active users are calculated using internal company data that has not been independently verified. While these numbers are based on what we believe to be reasonable calculations for the applicable period of measurement, there are inherent challenges in measuring usage and user engagement across our large user base around the world. For example, there are a number of false or spam accounts in existence on our platform. We estimate that false or spam accounts represent less than 5% of our MAUs as of December 31, 2014. [bold added for emphasis, and Twitter boasted to have 302 million average monthly active users, or MAUs, in the three months ended March 31, 2015. However, this estimate is based on an internal review of a sample of accounts and we apply significant judgment in making this determination. As such, our estimation of false or spam accounts may not accurately represent the actual number of such accounts, and the actual number of false or spam accounts could be higher than we have currently estimated. We are continually seeking to improve our ability to estimate the total number of spam accounts and eliminate them from the calculation of our active users, but we otherwise treat multiple accounts held by a single person or organization as multiple users for purposes of calculating our active users because we permit people and organizations to have more than one account. Additionally, some accounts used by organizations are used by many people within the organization. As such, the calculations of our active users may not accurately reflect the actual number of people or organizations using our platform. (note: bold added for emphasis purposes)

Our metrics are also affected by mobile applications that automatically contact our servers for regular updates with no discernable user action involved, and this activity can cause our system to count the user associated with such a device as an active user on the day such contact occurs. The calculations of MAUs presented in this prospectus may be affected by this activity. The impact of this automatic activity on our metrics varies by geography because mobile application usage varies in different regions of the world. In addition, our data regarding user geographic location is based on the IP address associated with the account when a user initially registered the account on Twitter. The IP address may not always accurately reflect a user’s actual location at the time of such user’s engagement on our platform. We present and discuss our total audience based on both internal metrics and data from Google Analytics, which measures unique visitors to our properties.

We regularly review and may adjust our processes for calculating our internal metrics to improve their accuracy. Our measures of user growth and user engagement may differ from estimates published by third parties or from similarly-titled metrics of our competitors due to differences in methodology. If advertisers, platform partners or investors do not perceive our user metrics to be accurate representations of our user base or user engagement, or if we discover material inaccuracies in our user metrics, our reputation may be harmed and advertisers and platform partners may be less willing to allocate their budgets or resources to our products and services, which could negatively affect our business and operating results. Further, as our business develops, we may revise or cease reporting metrics if we determine that such metrics are no longer accurate or appropriate measures of our performance. For example, we stopped disclosing timeline views as we no longer believed that metric was helpful in measuring engagement on our platform. If investors, analysts or customers do not believe our reported measures of user engagement are sufficient or accurately reflect our business, we may receive negative publicity and our operating results may be harmed.

As mentioned above, “Spam” is not really make it to a public highlight until this Elon Musk is making a fuss on that. Normally we are accustomed to some common metrics that in general linked directly to the platform or web-based business, such as

HIT One count per request for data. Highly subjective and easily manipulated
PAGE VIEW One count per HTML page. A better measure of an advertising opportunity given that advertising banners are changed with each new page served
CLICKTHROUGH Tracks the number and percentage of customers that follow an advertising link. Sites with higher click through numbers/percentages can drive higher advertising revenue. Specific to advertising potential
UNIQUE VISITORS Counts unique IP addresses to determine the number of individuals viewing a site. A useful metric to an advertiser that wants to expose as many people as possible to their product.
REACH The percentage of the Internet population visiting a particular site per month. Based on sample user-groups. Internet population is not well defined or accurately known.
LENGTH OF STAY The average length of stay can identify sites who’s users spend little time per page and are not likely to read ads versus those sites that attract users that absorb the information presented. Could be affected by transfer rates and overall internet performance; slow transfer rates would artificially improve this metric.
REGISTERED USERS Number of users who have registered by providing name, age, and/or other demographic data. The use of cookies and other tools can accurately identify the users who are visiting a site or viewing an ad. User specific ads can be viewed. Provides greater user information, however, many users will not register
REPEAT VISITS A measure of the number of times a user may view a specific advertising banner.

Source: Vonder Haar, Steven, (1999). “Web Metrics: Go Figure”, Business 2.0, June, pp.46-47.

However, this news about Twitter will open our eyes, to be aware of that all above numbers will somehow be linked to how many spam accounts that are there in the platform.

Unrelated but I am thinking about this?

Can we value a internet-based business from collecting the data about how many ping-pong tables that they have purchased for the past one year for their employees’ fun? How about how many pages slide deck do they have prepared for analysts? More pages, better? Or how many rockets do they have launched, landing and re-launched (https://www.spacex.com/launches/)?

Elon Musk to Twitter CEO : In God we trust, and for others, please bring supporting data.

Note: All websites mentioned above are accessed on 16 May 2022.

Terminal Value Mystery

Many finance textbooks and analysis show that Terminal Value (TV) could occupy or contribute more than 50% of total DCF-based value, and in many cases, it could even find it approximately 80-90% of that estimated value. McKinsey on Valuation (7th Edition, Chapter 14, 2020) displays TV as a percentage of total value.

I am wondering, how to interpret this? What is the point to do all this hard-ball exercise of projection, if at the end of the day, most of the value is at the end of that projected period and beyond. The advice is always to extend the projection into more years, but we know there is a danger of doing this. Discount rate probably is not quite impacted in the long run, but cash flow projection, this might as some people call it “voodoo”.

Prof. Ivo Welch in his textbook Corporate Finance (4th Edition, 2017) said that in the long run, error in cash flow projection can’t be compared with error in discount rate estimate. In general, terminal value increases in importance with the growth rate of firm cash flows and decreases with the length of the planning period (Titman and Martin (Valuation, 2016)). Many finance authors will recommend that the length of explicit forecast period will stop when the company business is entering the stable-growth period, and then we could calculate the terminal value under the stable-growth assumption. Before that, the company business is implicitly assumed away to have the high growth. However, the question of how long a company business will be able to sustain high growth is perhaps one of the more difficult questions to answer in a valuation (Damodaran on Valuation, 2nd Edition, 2006). McKinsey gave a very general idea about this “entering the terminal period”, by saying that choosing an appropriate point of transition depends on the company and how it is changing over time. A company undergoing significant change may require a long, detailed window, whereas a stable, mature company may require very little detail in your forecasts (Valuation, 7th Edition, 2020).

We also do know that most analysts will use very limited methods to assess TV, either (1) Moderate Growth-Gordon Method (or assuming very small growth (see Geoffrey Moore’s book Living on the Fault Line using product-life-cycle analysis to tell that the cash flow growth rate somehow will fall under the required rate of return) and also Good to Great by Jim Collins, which it is only below ten percent of the companies being researched that could give superior return in the long run), or (2) (projected or current) Multiple Method.


Will that mean it is somehow “not quite right” about using those methods to assess TV? I know we don’t have any other tools to do this.


Having a large TV portion, will only mean something, that the company business has future “growth options“, not factored into this DCF-based method. For example, the value of WalMart business will include all those stores that they have not opened yet, in addition to the current stores. Yet, using this logic is also problematic, will that mean we will “punish”  those not-yet-opened stores saying that the investment dollars being spent on that to-be-opened stores will not give return above the required rate of return (=superior return)? If yes, then it will not add value under capital budgeting analysis. However, we do know that Wall Mart will keep opening its stores. Expansion is always a main option, if not what else?


I hope you could follow me?


Many believes as well that discount rate has a very limited link to Cash Flow being projected, right? Discount rate comes from investment community, and if using portfolio-based investment, then business risk will not matter so much, except a part of business risk that have a direct contribution to the market risk. More papers now come up that link high equity risk premium with what they call “disaster risk” or “rare event risk“. I guess, the book The Black Swan by Nassim Nicholas Thaleb, a quant, wrote it beautifully. So far Financial Econometrics are still far from solving the equity risk premium puzzle and even Prof. Sheridan Titman said, we don’t even know what is the exact beta, and risk premium further down.


With discount rate factoring disaster risk in its calculation, when we are moving further down into the future, the uncertainty is surely getting higher, and how come we could say that we are ok with that 90% of the estimated value and label it as “Terminal Value”?


Though in different context, Prof. John Maynard Keynes’s words keep buzzing inside my head when I am sitting writing this, …in the long run, we are all dead.


Response from Wiley Finance author and international finance trainer


Your email is brilliant Karnen.


First, I think about that Keynes Quote a lot.  But Investors focus on the very short-run is even worse.


Second, I like reading Taleb.  I think by far his best book is “Fooled by Randomness”.  In that book he called the CAPM like somebody selling a magic potion on the internet.


Third, I cannot agree with the terminal value mistakes more.


  1. When investors use the EV/EBITDA they are ignoring the bias in this ratio caused by different asset lives.
  2. When using Gordon’s model, they completely ignore the completely obvious fact that higher growth must come along with higher capital expenditures.  It is mind boggling that they can change the terminal growth and not change the capital expenditures in the terminal period.
  3. The McKinsey Value = NOPAT x (1-g/ROIC)/(WACC-g) seems to be a good method, but it is very easy to prove that this method does not work when the current ROIC is different from the long-run ROIC.

I really believe that you can do better by adjusting the value driver formula and explicitly assume gradual growth and ROIC versus cost of capital to the mean.  It is not so difficult.


Fourth, we all know the cost of capital has a big impact on valuation.  That is first why you should always put a table together with cost of capital and growth.


Fifth, I really believe that Taleb is correct about the CAPM.  It is not about the theory B(lue)S(ky) published by academics, but it is about inputs – EMRP, Beta daily or monthly; Rf short-term or long-term which is not risk free; adjustments for country risk; small company premiums or private companies.


So, if you use the correct terminal value and are really careful about it, you could get a reasonable value.  Then you can back out the cost of equity capital from the price.  I have been thinking about this a long time and I am so happy that you think about it.


We need to write this up Karnen.

Respondent 2 (Consultant and author for several books and articles on Valuation and Cost of Capital)

I agree with you that TV has “heroic” assumptions and one has to be careful with all of them. I have given my readers and/or firms several options about what happens beyond the last period. One of them is to assume 0% growth up to several scenarios for different G’s. And yet, it’s crystal ball guessing. (bold and italics added for emphasis from Karnen)

I have proposed from the most conservative approach that means a perpetuity with G=0% up to an interval of very conservative scenarios with REAL growth 0% (only inflation that is another crystal ball guessing to a limited range of real growth). Indeed, it is VERY difficult, even, IMPOSSIBLE to foresee which innovations, policies, world or local market scenarios could be considered. On one extreme it is also unrealistic that the firm will shut down in the next N= 5, 7, 10, 12, 15, 20 years or worse, that it will not obtain any economic profit in those future years.

I remember a book by [Prof. Aswath] Damodaran which showed % of TV on total value and clearly it’s crazy to accept that TV be 50% or more of actual estimated value of a firm. Usually one can do is to extend the explicit projection period and/or examine % of TV value on total value and adjust Growth and other items in a TV formula in other to keep TV as a conservative % of total value. How would be that % for you to be satisfied with the calculation? 10%, 20%… 50%. Well, that would be a kind of reverse engineering: set the maximum acceptable % of TV on total value and define the G to get that goal. In some consulting work a few years ago we did that, trying not to have more than 15%-30% of total value attributed to TV. Of course this might be something arbitrary, but you have to show explicitly to the “customer” “buying” the valuation, a kind of scenarios for different assumptions of G. (bold added for emphasis).


See the paper by Felipe Mejia-Pelaez and Ignacio Velez-Pareja (2010): Cost of Capital and Value without Circularity for Constant Growth Perpetuities (http://papers.ssrn.com/abstract=1659446.

Karnen : am playing with this thought:

I am wondering whether all those ups and downs in the stock market (taking out all those market sentiments), might be related to those “growth options” element of the business valuation. Forget this TV, by excel, we could calculate that easily but it is most slippery and elusive idea, meaningless for taking conclusion?

Bukalapak : Seeing Beyond Fantastic Q1 022 Financial Results (Part 2)

Second, acquisitive profit/loss (some might call it as non-organic profit/loss), which comes from the investments it has made so far, the biggest paper gain came from BBHI’s shares stake. This acquisitive profit may come from the longer-term strategic move of BUKA. In its information announcement to the public, BUKA said that:

As for the Company, by performing this transaction via their Mitra business and their connectivity into the new verticals of the MSME market, it is expected that this partnership can enhance the offering and the accessibility of credit to these rural entrepreneurs which allows for an even deeper and wider penetration into all corners of Indonesia. With mobile phone penetration at 80%, the country is well set for digital banking. Combining the tech capability with the offline touchpoints, we can really accelerate the roll-out of these banking services across the country – very much in line with the Government’s financial inclusion policy. (bold added for emphasis).

Quoted from this news link (https://keuangan.kontan.co.id/news/ini-tujuan-bukalapak-buka-berinvestasi-rp-119-triliun-di-allo-bank-bbhi, accessed on 30 April 2022), it is said that such investment in BBHI was made with the aim to create the economic equality and to keep adding value to its partners and the users of BUKA ecommerce. It is expected that BUKA will be able to bring forth the financial services proffer and credit accessibility to their ecosystem. It is said as well about the synergistic potential between BBHI and BUKA which could have been a complementary to the digital products that BUKA has had so far, they are digital banking, lending and domestic remittance.

Personally, I believe this is a good strategic move, knowing that by end of 2021, BUKA ecosystem has had a massive TPV of Rp 122 trillion, a fat jump by 44% from 2020 TPV of Rp 85 trillion. It is the money turnover in that ecosystem that the move to strategic partnership with digital banking system will make the whole Mitras-Merchants-End-Customers (M2C) be really in one ecosystem strategic-financially and this is their commerce-distribution grid as well. The underlying argument might be that so far M2C has not yet reached their buying capacity or something has to be done to push them up the purchasing power ladder. At the end, we are talking about the consumer demand, and the majority of Indonesia’s consumers are in the growing phase of middle class. By bringing into the fintech platform into BUKA ecosystem where digital banking and lending being provided to M2C, will enable them to tap into larger buying capacity pool (pushing up their willing to buy), and also larger cohort of buyers and users of BUKA platform. While it is growing bigger in scale, it opens up the option to cross-sell to boost user’s dependence, furthering more in terms of scope and scale. Along the way, it is expected the trust will be more strengthened further as all cash flows all being flowing in and out inside the same ecosystem. We expect promising increase in average transaction value, transaction processing and then top line sales and growth.

With more M2C commerce-distribution grids being established in BUKA ecosystem, not only this will be growing to eConnectivity-Point among M2C but more importantly, BUKA could leverage each Point to become mobile Point of Business (first-mile-last-mile-logistic/reverse-logistic–buyer–seller–reseller–goods&service-agent, etc. etc.). This will lead more repeatable transactions coming through BUKA, and this might sound that BUKA is chasing up the network effects and economies of [scope and] scale, two key words that keep buzzing in BUKA’s IPO Prospectus, which I could read one on page 25-26 of that Prospectus.

Network effect dari basis pedagang dan Mitra Perseroan yang berkembang membentuk suatu siklus, di mana Mitra memiliki akses ke produk-produk yang baru dan lebih kompetitif untuk dijual, yang seterusnya membantu Mitra mendapatkan lebih banyak pelanggan dan akses ke platform Perseroan, terutama di daerah non-Tier 1, yang menghasilkan peningkatan pertumbuhan basis pedagang Perseroan, seperti yang digambarkan di atas.

Perseroan yakin bahwa model bisnis Perseroan memiliki operating leverage yang signifikan dan memungkinkan Perseroan untuk merealisasikan penghematan biaya struktural. Misalnya, karena basis pengguna Perseroan yang besar, Perseroan dapat menarik banyak pedagang, yang kemudian menghasilkan sumber permintaan yang kuat untuk pemasaran online Perseroan dan layanan pedagang lainnya. Seiring dengan berkembangnya skala bisnis Perseroan, Perseroan yakin bahwa peningkatan skala, ditambah dengan network effect Perseroan, akan memungkinkan Perseroan untuk mendapatkan keuntungan dari skala ekonomis yang semakin tinggi. Misalnya, biaya yang terkait dengan pengoperasian platform Perseroan serta biaya operasional Perseroan tidak meningkat dengan kecepatan yang sama dengan pertumbuhan TPV, karena tidak diperlukan peningkatan yang proporsional dalam jumlah tenaga kerja Perseroan untuk mendukung pertumbuhan Perseroan. Perseroan mencapai skala ekonomis dalam operasi Perseroan karena pilihan barang dagangan yang lebih banyak akan menarik lebih banyak pengguna, yang kemudian mendorong peningkatan skala volume penjualan Perseroan dan menarik lebih banyak pedagang ke platform Perseroan. Selain itu, skala Perseroan menciptakan nilai tambah bagi pedagang dengan menyediakan saluran efektif untuk menjual produk dalam jumlah besar dan dengan menawarkan kepada mereka wawasan data yang komprehensif tentang preferensi pengguna dan permintaan pasar. Perseroan percaya nilai manfaaat ini akan membuat platform Perseroan lebih menarik bagi pedagang dan lebih meningkatkan penjualan dan pengeluaran mereka di platform Perseroan. Model bisnis ini juga memungkinkan Perseroan untuk menghindari biaya, risiko dan persyaratan modal yang terkait dengan pengadaan barang dagangan atau penyimpanan persediaan. Seiring dengan pertumbuhan bisnis Perseroan, Perseroan yakin dapat memanfaatkan skala ekonomis untuk lebih meningkatkan efisiensi operasional Perseroan seiring dengan berjalannya waktu.

As a note that operating leverage is relevant when a company has large preproduction costs. The profitability will be low at low levels of sales, yet it will increase as sales grow. At the other side, economies of scale exist when a company can pursue activities as it gets bigger in size and operation reach. So operating leverage depends both on preproduction costs and sales, whereas economies of scale are driven primarily by sales. (Alfred Rappaport and Michael J. Mauboussin, Expectations Investing: Reading Stock Prices for Better Returns (Boston, MA: Harvard Business School Press, 2001), p. 42-44). Further, getting bigger is not always consistent with greater economies of scale. This means that companies commonly fail to create value beyond a certain size, practically limiting the level of the market that they could address.

On the network effects (=the more users, the more valuable that platform to users), of course, BUKA is not operating on the island itself, another marketplace platforms will also do the same thing scraping for the same ground, though for Mitra business model (online to offline, On2Off), I have heard many years ago that BUKA had started that first, and Nielsen survey made in June 2021 gave the results that with 14.8% market penetration of On2Off in Indonesia, Mitra BUKA has come up as a leader so far with 42% penetration (source: https://www.liputan6.com/saham/read/4654007/mitra-bukalapak-jadi-pemimpin-pasar-o2o-indonesia, accessed on 5 May 2022). W. Brian Arthur, an economist who has studied the networked economy extensively, likes to say, “Of networks, there will be few.” (see article : Increasing Returns and the New World of Business, Harvard Business Review,  July–August 1996). From a practical point of view, this means that companies will fight early on to become the network of choice, forcing them to spend considerable amount of money to do so.

III. So What is Going Forward?

What BUKA will do with its huge amount of cash and cash equivalent?

Post IPO in 2021, BUKA was bathed with cash, pocketing Rp 21,9 trillion, boosting its cash and cash equivalent balance from Rp 1,5 trillion as of December 31, 2020 to Rp 23,6 trillion as of 30 September 2021 (unaudited). Of course, logically no investors will give money to the company just to have them to keep the money as cash and cash equivalent. Professional investors could “do-it-yourself” (=homemade) for such action (referring to the well-known Miller-Modigliani (MM) proposition. It means, the management has to do something on that abundant cash.

Cash and cash equivalent (cash hereinafter referred to) is a unique asset item, its value is what is it is now, and it is fungible as well. The market might even “punish” this low-returns-earning cash and value Rp 1 in cash at roughly lower than that of Rp 1. Cash in general will not generate returns equal to its investor’s required cost of capital (or arguably it doesn’t bring value accreting , meaning if the company borrows money from bank at 5% and then put the money in the bank or other short-term time deposit, it might not be able to generate returns of above 5%, or  most likely, much much lower than that 5%. As the company management’s task as a steward of capital being trusted to them, then they are expected to generate an appropriate return on all of the capital (above its cost of capital). The company should only carry assets that maximize value (Principle 4, 10 Ways to Create Shareholder Value, Alfred Rappaport, Harvard Business Review, September 2006, p. 66-77

For analysts, it will be familiar that cash will be assessed separately from the operating cash flows, as it is assumed that cash will not generate value and profit and value in the future (not shown as being part of free cash flows calculation, and in many exercises, this cash is just net off against the interest bearing debt (=net debt)). So with a big “unless”, it is to be transformed to other items that could potentially hit higher return. So it is really critical that the company could utilize its cash to earn more than its cost of capital and to exploit all identifiable and credible value-creating opportunities to invest in the business. So here, BUKA will be pushed to focus on how to allocate its capital and make assessment about the prospective returns it may look like, presenting value creation for the investors.

Talking about the value creation, bring me remember of what Mr. Warren Buffett, the chairman and CEO of Berkshire Hathaway, in his 1984 letter to shareholders, said about passing $1 test which in his words, “Unrestricted earnings should be retained only when there is a reasonable prospect – backed preferably by historical evidence or, when appropriate, by a thoughtful analysis of the future – that for every dollar retained by the corporation, at least one dollar of market value will be created for owners. This will happen only if the capital retained produces incremental earnings equal to, or above, those generally available to investors”.

In other words, investors expect that one dollar being invested in the business will generate value of more of one dollar in the market, to create [shareholders’] value, which here we will not only talk about the spread between the returns above cost of capital, but it is also the size of the investment that the company will deploy. This will require the management to look again how to allocate their capital among its assets. And the speed of growth will boost even higher the value being created. So there will be three components being involved: (1) positive spread of Return on Invested Capital – ROIC (and/or RONIC, Return on New Invested Capital) over the cost of capital; (2) amount of investment (and/or new investment or incremental investment); and (3) the growth rate of business.

This question might lead us to look up to its balance sheet, especially traditionally we call on the right side of the balance sheet, Assets, or deeper asset (or capital allocation). A company is always to be judged by how good the management is allocating the capital into the income generating asset items that could, hopefully, pass the $1 Test. At the current level, investors just priced in its cash level (of Rp20.7 trillion post investment in BBHI and AlloFresh, excluding bank loans) and BBHI investment (of Rp14.8 trillion), as shown below.

Source : BUKA 1Q_2022_Results presentation deck page 10.

Stewart Myers originally suggested the important role of growth options (=opportunities. Here for decades,  financial economists have used the term growth options to describe the business opportunities with future upside potential) in the valuation of the firm. See his paper, “Determinants of Corporate Borrowings,” Journal of Financial Economics, 5:146-175 (1977). Myers decomposed a firm value into 2 parts, they are the [present] value of “assets-in-place” and the [present] value of [future] “growth options”, the latter is the rights to undertake new investments. Options is supposed to grow are like call options on new and uncertain businesses. Growth options, or options to enter a business, are call options on the underlying business activity, and like call options, in general growth options tend to be most valuable in good times and have implicit leverage. They are more value the longer the life of the option, and the greater the uncertainty about the value of the underlying assets. It will be interesting to wait and see how BUKA management will translate that Rp 20 bio of cash and cash equivalent into growth option assets. So its present value of Growth Options will get bigger as part of Market Value of its Balance Sheet position, as depicted below.

Following the information disclosure by BUKA, it appears that BUKA has taken potential strategic investments in the following key investment moves:

  • BBHI Shares;
  • The establishment of a joint venture company named PT Buka Investasi Digital, introducing BMoney which BMoney is the latest investment application owned by PT Buka Investasi Bersama presented and supported by the Company and PT Ashmore Asset Management Indonesia; and
  • The establishment of a joint venture company named PT Allo Fresh Indonesia with PT Trans Retail Indonesia and Berani Investment Pte. Ltd. PT Allo Fresh Indonesia itself is a company having its business activity of trading daily necessities online through a platform called AlloFresh. This might be one strategic move from BUKA to enter more specialty marketplaces, which might lead them to higher take-rate and ultimately TPV growth, as buying groceries online has become mainstream and fresh groceries might carry margin on double-digit space. Additionally, I could sense that this will bring trust-heavy business model offering subscription to consumers as there is a recurring type of platform-buyer relationship.

While BUKA trying to keep pace in this fast-growing market with fierce competition environment, they will be constantly facing whether they should pursue the projects that could create valuable strategic opportunities in the future, or should they stick with more projects with more immediately profitable ventures? Seems like they have chosen to have such kind of mix in between. Along with this strategy, is their speeding up to reach EBITDA positive also is crucial (still showing minus Rp 372 billion for Q1 2022 results).

At the end of the day, BUKA’s value will hinge on its long-term ability to generate cash to fund value-creating growth and pay pay-offs to its shareholders.

Sources :

Various BUKA’s information disclosures posted at IDX website (https://www.idx.co.id/perusahaan-tercatat/keterbukaan-informasi/)

BUKA’s IPO Prospectus (https://about.bukalapak.com/en/investor-relations/prospectus/)

BUKA’s Quarterly Results and Presentation Decks (https://about.bukalapak.com/en/investor-relations/quarterly-results/)

Bukalapak : Seeing Beyond Fantastic Q1 022 Financial Results (Part 1)

Source: Google Finance (screenshot on early May 2022)

  1. Introduction

Bukalapak (or short as BUKA) Q1 2022 financial statements have been published, and from e-news reading recently it appears that with its Q1 2022 financial results, it might be welcomed with high-profile coverage, as BUKA have booked a fantastic positive bottom line at Rp 14,5 trillion (vs loss of Rp 323 billion in Q1 2021). Looking instantly into its vertical income statement (unaudited), that paper gain has been ever been mentioned though the figure had moved up (see the news of initial paper gain totaling Rp 12.98 trillion) https://investor.id/market-and-corporate/277669/jadi-investor-strategis-allo-bank-bbhi-bukalapak-buka-siang-ini-bisa-cuan-rp-1679-triliun, accessed on 30 April 2022). There is not much new information, as mostly that blue massive bottom line being posted shows that the equity investment in digital bank PT Allo Bank Indonesia Tbk (BBHI) – a listed company – had brought a paper gain of approximately Rp 13.5 billion (based on Note 8 to the Financial Statements) using its fair-value investment in BBHI at Rp 14.9 billion by end of March 2022. Since this has been  a publicly announced information when BUKA made the entry to BBHI to acquire through the rights issue process by taking 11.49% equity ownership (at a price of Rp 478 per share or in total of Rp 1.19 trillion) in January 2022, the upswing of that market price of BBHI  share could be followed by public investors.  BBHI market price per share has been hovering around Rp 5,775 by March end of 2022 (and Rp 6,500 per share at the time of this writing), a significant increase from the beginning of this year. As that 11.49% stake might not render BUKA the power to participate in the financial and operating policy decisions of BBHI, then by default, BUKA will book that equity investment at fair value, which by taking the number of shares BUKA owns multiplied by the market price per share of BBHI. Whatever the spread between the resulted number with the original rights issue exercise, will go straight to BUKA financial statements. Interestingly, BUKA has displayed that unrealized gain on investment under Income from Operations (the one that usually I call it,  the “top” half).

I need to touch a bit on the accounting side of this reporting of this paper gain flowing into the Profit or Loss, which might expose BUKA’s Income Statement to the market sentiment affecting the market price of BBHI shares, though such massive positive swing does not impact at all to the free cash flows (and its Cash flows from Operating Activities under BUKA’s Statement of Income) for the current period. IFRS has a view on having such changes of fair value of BBHI’s shares reflected into the Profit and Loss of BUKA. However, with such massive paper gain, we will see whether this will be reflected in the future expected increases in the net cash inflows? If yes, this could result in an increase in share price.

First, International Financial Reporting Standards so far (IAS 39 and IFRS 9), still believe that reporting at fair value of an equity investment on the balance sheet, and recognize its changes of fair value into the profit or loss (the default), will give better information about the value creation over time, even though it is arguably that BUKA’s equity investment in BBHI has taken a longer-term view.

Second, taking from the information disclosure being made by BUKA, we might think that by expanding its offering of financial services to its ecosystem, it might be critical value driver in the mid-term and even longer-term for BUKA’s business performance. So this could be seen as made for ‘strategic’ reasons, as specific competitive advantage, and the focus for BUKA is of course to get the synergistic economic and ecosystem benefits from such investment, and increase the value of its ecosystem, and not just a matter of seeing that investment will grow in value (through the market price of BBHI shares). Alternatively, IFRS 9 allows companies to choose to recognize changes in the value of equity investments under Other Comprehensive Income.

Although the above is more accounting focus than economic focus, I am suggesting that the relevant question is whether this equity investment performance that BUKA has made is relevant to measure the company performance. If that synergistic either contractual or non-contractual benefits could really come into reality, then somehow we will see that this will impact BUKA level of its core-operating business’ Net Operating Profit down the road in the future, an expected economy reality.

  1. Income Statement

Onside its income statement, we could distinguish two profit & loss items:

First, core operating profit/loss, which so far, still shows negative ink, split into:

  • gross loss of Rp 278 billion (vs gross margin of Rp 346 billion in Q1 2021), and
  • after of Selling-General-Administrative-Others expenses, will stand at loss of Rp 1,071.8 billlion (or if we took out the stock option cost of Rp 666.9 billion, resulting to Rp 405 billion in Q1 2022 (vs loss of Rp 328 billion in Q1 2021).

Behind these abovementioned results, BUKA has indicated a strong push on overall Total Processing Value (TPV), both overall Mitra and Marketplace growth of +25% to Rp 34.1 trillion (with target for 2022 of Rp 180 trillion, or +/- 19% achievement for the first 3 months), and with a better overall take rate to 2.31%, the top line reached Rp 787.9 billion (with 2022 target at Rp 3 billion, 26% achieved), another big jump of 86% from the same quarter last year. We need to factor as well there any seasonal cycle contributing to this higher jump in all TPV and revenue numbers for Q1 2022 as the Merchants and Mitra (M2) might load more stuffs to their warehouse to anticipate the upcoming upsurge demand for Ramadhan and Idul Fitri long holidays in April and early May 2022?

Source : BUKA 1Q_2022_Results presentation deck page 15.

I am also intrigued to know the proportion of this higher TPV whether it has come from the following sources:

  • how many that comes from new M2 and as a result of penetration efforts?
  • How many that comes from repeat orders from M2 (or its “replacement cycle”)?

BUKA could boost more on the second point above, while jacking up its new and penetrable market M2. For the latter, there is probably more challenging as BUKA’s challengers might include those conventional distributors in the market. If the industry overall does not grow or is growing at rate lower than that of BUKA, arguably BUKA’s growth has been shifting away some existing competitors’ shares in the market. It is likely they will not just sit nicely, right? Let alone, there will always be a threat of more competitors in the wings.

Using slide No. 23 of the BUKA Q1 2022 presentation deck as displayed below, we see that

Source : BUKA 1Q_2022_Results presentation deck page 23.

BUKA, though seems focusing on driving the Mitra TPV, it just posted a single digit growth of 6% in terms of TPV from Q4 2021. Having showing improving trend of its Mitra take-rate to 2.73% (note: BUKA’s administration fee for Mitra is 3% (https://www.bukalapak.com/bantuan/mitra-o2o/tentang-mitra/syarat-ketentuan-mitra-bukalapak)) and TPV per Mitra, BUKA gained more revenue and growth at 47%, while managed to maintain its revenue contribution to total Q1 2022 revenue at around 60% (Mitra : Marketplace = 60%:40% roughly).

BUKA seems doing something to bring back the lower revenue achievement for Marketplace business that just hit Rp 173 billion in Q4 2021, to the level higher than Q1 2021 by 15%. The prominent increase is at its take rate, which was down before to 0.94% in Q4 2021 to now 1.74% in Q1 2022, or 80 bps higher. Nonetheless, this is not sufficient to bring more TPV and revenue, as Marketplace TPV Q1 2022 is even lower than that of Q1 2021 by 4%, or bigger 9% compared to Q4 2021. Marketplace competition is probably very challenging in view that another 3 leading marketplaces such as Tokopedia, Shopee and Lazada, in the arena while maintaining BUKA take-rate that at lower end of single digit. In view of the website visits, these 3 marketplaces have really had the upper hand, as shown below for Q4 2021.

Source: https://iprice.co.id/insights/mapofecommerce/ (being accessed on 1 May 2022)

Bukalapak’s website visits by Q4 2021 of 25.8 million was even lower that visited in Q3 2021 (Rp 30.1 million), sliding down by 14%. From BUKA slide deck as well, we observed that from Q4 2021 to Q1 2022, roughly there is no significant increase for its online merchants that stood at 6.8 million. If we include the micro-small-and-medium-enterprises (MSMEs) totaling at 13.1 million by end of Q1 2022, then BUKA has more than 20 millions. This might give a self-reinforcing network effect, if BUKA could tap into further this 20 millions of M2. This is why we see that BUKA is keen to forge an equity partnership with digital bank BBHI in early January 2022 to untap and explore BUKA financial services and solution that could be made available to this 20mio+ M2. We could see the whole picture of its open and synergistic ecosystem on Page No. 7 of slide deck, which the presence of BBHI collaboration and its financial platform might be the bloodstream of the whole BUKA ecosystem.

Source : BUKA 1Q_2022_Results presentation deck page 7.

Start-Scale Up Tech Companies, Customer Acquisition – Monetization, and Path to Profitability

For the past one year, there were two giants that initially started as a start up growing to post unicorn status and even more, which floated their shares to the public in the Indonesian Stock Exchange (IDX). First, Bukalapak and then GoTo recently.

The news about the fear for the down-trend in this post-IPO tech company valuation could be read here and there (including the use of green shoe to stabilize the price, see GoTo has equipped its share offering with greenshoe, a mechanism for price stabilization (https://insight.kontan.co.id/news/tahan-kejatuhan-harga-lewat-greenshoe-cgs-cimb-borong-12-miliar-saham-goto, read on 22 April 2022).

If we looked at those techie companies listing its shares in US market, being posted by Chris Conforti in his twitter on 13 March 2022, with his comments below, this trend was there.

If you need to raise at a down round (they’re coming), show your team this chart. It says the most efficient weighing machine in the world (the public market) is valuing 1/3+ of tech co’s that went public over the last 4 years below their pre-IPO private round TODAY.

Source of picture and comments : https://twitter.com/Chris_Conforti/status/1502705415779409921, read on 22 April 2022.

As a caveat : I took this chart as the secondary data, without digging more to the source of data being reflected into that chart.

There might be many reasons as to why the pricing is on down-trending, however, the key is always about the question of the Path to Profitability. This made me remember to the press release being made by Grab, after Fourth Quarter and Full Year 2021 Results of Grab being released in early March 2022, and the statement by Peter Oey, Chief Financial Officer of Grab that they remain laser focused on Grab’s Path to Profitability and will continue to improve their unit economics (source: https://www.grab.com/sg/press/others/grab-reports-fourth-quarter-and-full-year-2021-results/, read on 22 April 2022).

Public investors might have questions about the company heading for the stock market with no profitability and no clear sight of future profits to show. We could read this as well in GoTo prospectus (https://www.gotocompany.com/en/investor-relations/prospectus, accessed on 22 April 2022), under page 94 (as part of Risiko usaha yang bersifat material baik secara langsung maupun tidak langsung yang dapat mempengaruhi hasil usaha dan kondisi keuangan perusahaan), that “Perusahaan telah mencatatkan rugi bersih sejak didirikan, dan Perusahaan mungkin tidak dapat mencapai profitabilitas”. Further reading of that section, GoTo elaborated more about what it is meant.

Perusahaan tidak dapat menjamin bahwa Perusahaan akan dapat membukukan laba bersih di masa mendatang. Keberhasilan perusahaan teknologi lain tidak dapat digunakan sebagai indikasi kinerja keuangan Perusahaan di masa mendatang. Kemampuan Perusahaan untuk mencapai profitabilitas sebagian besar bergantung pada kemampuan Perusahaan untuk mengembangkan dan memasarkan bisnisnya secara efisien serta mengoptimalkan sumber dayanya. Sejalan dengan pertumbuhan skala bisnis Perusahaan, profitabilitas Perusahaan juga bergantung pada bauran produk, pengembangan marketplace online, dan penawaran layanan yang memberikan nilai tambah (value-added services) dengan marjin yang lebih tinggi. Oleh karena itu, Perusahaan bermaksud untuk terus berinvestasi di masa mendatang seiring dengan upaya Perusahaan untuk mengembangkan dan meluncurkan penawaran dan fitur platform yang baru, memperluas bisnis baik di pasar saat ini maupun pasar baru, meningkatkan upaya penjualan dan pemasaran serta terus berinvestasi di platformnya. Upaya-upaya ini mungkin membutuhkan biaya lebih besar dan waktu lebih lama dari yang diharapkan Perusahaan, dan hasilnya tidak pasti. Perusahaan tidak menjamin bahwa Perusahaan akan sepenuhnya mendapatkan kembali biaya investasi, dan investasi yang telah dilakukan akan menghasilkan peningkatan pendapatan atau pertumbuhan bisnis dan profitabilitas di masa mendatang.

If we look further on the business model that relies on heavy investment towards and to sustain high growth, profitability might remain a key challenge. Such investment might be made to keep incentivizing the users (be any body) of that platform, or incentive-based platform. The platform needs to give “sweetener” to users to keep coming back and sticky to that platform. Such “sweetener” might come in many forms, such as cash back, slashed price, free delivery cost, first-time user incentive, collectible points, etc.

Such incentive-based platform model might not be viable to bring the business to profitability, as the customers might be getting used to that sweetener, and expect this to be always there on the platform. I guess, the platforms nowadays have done many things as well to limiting the sweetener tier, for example, slashed price on certain hour, for certain products, for certain targeted users, for first-time user, for second buying, for etc. etc.

On the other side, at the same time, this platform’s big success with its exponential growth will breed competition (and tougher) competition coming into the market, and as the new competitors manage to seek an edge to grab market share, then they might do the same pouring the money into heavier promotion. Let alone, in certain platforms, the moat is not that high, for example, low switching costs for its users (customers, merchants, and in certain ride-hailing services, its drivers), which will leave such business model susceptible to fierce competition. The incumbent platform might do the same thing, and this might make them potentially fall into what Prof. Thomas Einsenmann called the speed trap (see his book : Why Startups Fail, a new roadmap for entrepreneurial success (Random House, 2021). The next customers of the platform will become more costly to acquire, leading to lower LTV/CAC metrics.

I did remember attending one of the meetings many years ago being held by one of the popular marketplace platforms at that time, which meeting speaker was its Co-CEO and he mentioned that one of the pain points of that marketplace journey is to keep their CAC low.

As someone spending sometime in retail industry at the forefront, heavy promotion definitely is not new, and as it is said “everybody (retailer) is doing that”. We could see this while we are walking into the shopping centre, the discount percentage that could make our eyes popping out, is up to 70% (with its big and conspicuous printing), is clearly displayed on the store glass.

The question further is who is going to pay that promotion costs (note: there is no such thing called “free lunch”, right?). We need to pick up from somebody’s pocket!

The option available is, either from the retailer itself or from the supplier of the goods. I guess, the marketplace platform had done the same thing, either (1) they are pushing these promotion costs back to the e-store or e-service (such as delivery costs) owners, or alternatively, (2) reaching deep into their own cash vault; or even (3) having recurring customers to cover new customers. However, the pressure for the high growth in near term to be delivered coming from the investors that joined the financing round with its higher valuation to justify it, we might see the possible door to go is for the business to keep “pouring gas on the fire” to boost the sales growth further and further. We heard more and more frequently now that the platforms will talk about Gross Merchandise Value (GMV), Gross Transaction Value (GTV), and Total Processing Value (TPV) and also Customer Acquisition, Retention and Nurturing (short as Customer Acquisition). I might have these two questions out of my head:

  • Can this fantastic amount and growth in GMV, GTV and TPV pave out the road to profitability?
  • Is there any direct and indirect relationship (cause-and-effect or relational) from TPV to Profitability?

Under the “old economy”, “losses” have negative connotation, and even it is called “red” print, and of course in that old economy, a business that was not generating enough profit and good return (above it weighted average cost of capital) could not last long.

Then, Customer Acquisition has been increasingly echoed out everywhere, and might be the all-important nowadays. We could find this Customer Acquisition big-bang in all start-ups language, but of course, we also know that this Customer Acquisition is only half of the story to Path to Profitability. The other half, is, the platforms will only acquire the customers, in order to Monetize them. If we heard startup founders pitching its startup ideas, the first comments from the potential investors are : Cool Idea, how are you going to make money with that? In other words, I don’t see any other making-business-and-finance-sense other than to Monetize them, and it only means one thing, the platform should be able to make money out from its customers. Units economy becomes more crucial and the platform should come up with proper monetization strategy that will be time-tested in its Path to Profitability. However, we don’t hear this “Monetization Strategy” much more frequently that “Customer Acquisition”.

Traditional financial metrics, such as EBITDA, free cash flow, reinvestment rate, contribution margin, and cost behaviours (stuffs that you might learn in your MBA class), the recommendable tools for understanding the business drivers. Nonetheless, with this “new economy” in the picture, understanding the Unit Economics (=how much profit the platform will earn per unit (could be its customer, product, etc.) sold) is undisputable and unavoidable. For a healthy business, cash earned per transaction multiplied by the number of transactions will yield sufficient total cash flows to cover 1) marketing costs and overhead expenses; 2) investments (and re-investment) that must be spent to support further higher growth; 3) interest payments on any debt; 4) business taxes; and 5) moderate profit for equity investors—that is, enough to encourage them to provide more capital when needed (or when the well is getting drier).

Under this “new economy and its new business models”, we will hear more and more now key performance metrics, for example, CAC, LTV, cohort tables, Net Dollar Retention, DAU/MAU, ARR, ARPU, MRR, Expansion MRR, etc., in order to grasp the true value drivers of such business, and to accept the new reality (and new normal), that such platform business might not be sustained- profitable for foreseeable time horizon. However, as said above, with its large ecosystem, strong market positioning, and more importantly huge customer base, this might open the door to allow such business to speed up transferring the big chunk of the Customer Acquisition Costs (+retention+nurture) to other parties, including its recurring paying customers, and if we see other world marketplace, such online ecosystem will exploit its platform to be more of prominent window of marketing, promotion and advertisement.

Don’t forget, GMV, GTV, TPV is all vanity, but profit is sanity!

Note : all is my personal opinion.