1/n I'm trying to challenge my historical bias on valuation

In a digital-first economy, barriers to entry are low, but barriers to scale are high.

Scale =Terminal value

The Q: How many businesses hit 'escape velocity' in 2020?

h/t @JohnHuber72 for highlighting $ETSY

2/n COVID-19 represents the biggest 'pull-forward' in scale **in history** for affected companies. (Also - This is not true for every business, but for a network, the value increases exponentially with increased users, not linearly. See metcalfe's law.)

3/n With that in mind, I think a large part of multiple expansion we've seen for these names is due to the fact that these companies have a **much** higher probability of winning their respective markets than they did 6 months ago. This is not a controversial thought obv.

4/n Everyone knows growth rates will be high. What they are trying to figure out is what customer retention will look like in 5-10 years. Whereas it seems everyone is focused on growth rates (dw, I am too), I think retention isn't being discussed enough.

5/n By pulling forward scale and entrenchment, many businesses may see a step change in long-term retention rates. Perhaps this is what the market is debating now, and what multiples are reflecting.

6/n I've listened to @BillBrewsterSCG @Greenbackd @farnamjake1 talk about how they're unwilling to underwrite 10-year growth rates on their podcast (which I enjoy immensely btw). I find a lot of difficulty doing that as well.

7/n But what was true pre-covid may not be true afterward. The pull-forward in scale has a profound impact on the likelihood that affected businesses win or lose. If multiples DIDN'T expand to reflect higher terminal value it would be weird, no?

h/t @JohnHuber72 & @packyM

8/n This is true for traditional businesses as well. See $NKE, $EL, $DIS for examples. We're seeing multiples expand as the market prices in different unit economics, specifically on retention.

h/t @GavinSBaker on scale

9/n Anecdotally, Nike has increased my ARPU since I've downloaded the app, and I do feel that its targeted offers make me less likely to order elsewhere. The longer this relationship lasts, the more data, the more likely I stay a Nike customer. Loyalty + ARPU

10/n I'm looking for biz' w/ loyal customer bases & the opp. to maintain/win wallet share in the future. DTC for scale players enhances their intangible advantages beyond what they could imagine in the past. The hist. P/E chart is doing nothing for me here, its almost a diff biz

11/n The market (I think correctly) is assigning higher terminal values for the strongest intangible assets in the world as acceleration into the digital realm entrenches customers more deeply.

TLDR: The market is pricing in step changes in customer loyalty