Qwen: Qwen3.5 27B — Advanced Investment Memo (IC Memo)
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Advanced Investment Memo (IC Memo)
Qwen3.5 27B's response to the 'Advanced Investment Memo (IC Memo)' challenge.
?Prompt
You are writing an internal investment committee memo for a long/short equity fund. Company (fictional): LedgerLift (ticker: LLLT) – B2B spend management + AP automation SaaS for mid-market enterprises. Use only the information below. Do NOT browse the web. This is a fictional exercise, not investment advice. DATA - Current share price: $46 - Shares outstanding (basic): 190m - Net cash: $1.4B - FY2023 revenue: $560m - FY2024 revenue: $680m - FY2025 revenue: $820m - FY2025 gross margin: 78% - FY2025 operating margin: 18% - Revenue mix: 92% subscription, 8% services (services GM ~25%, subscription GM ~82%) - Customer KPIs: 6,200 customers; ARPA ~$132k; logo churn 6%/yr; gross retention 94%; NRR 123% - CAC payback: 18 months; S&M as % of revenue: 34% in FY2025 - Concentration: top 10 customers = 16% of revenue; top 1 = 3% - D&A: 2.5% of revenue - Capex: 3.0% of revenue - Net working capital investment: 1.0% of incremental revenue - Cash tax rate: 23% VALUATION ASSUMPTIONS (build 2026-2030 forecasts) Base case: - Revenue growth: 21%, 18%, 15%, 13%, 12% - Gross margin: 79%, 80%, 80%, 81%, 81% - Operating margin: 20%, 22%, 24%, 25%, 26% - WACC: 10%, terminal growth: 3% Bull case: - Revenue growth: 25%, 21%, 18%, 15%, 13% - Gross margin: 80%, 81%, 82%, 82%, 83% - Operating margin: 21%, 24%, 26%, 28%, 29% - WACC: 9%, terminal growth: 4% Bear case: - Revenue growth: 16%, 13%, 11%, 10%, 9% - Gross margin: 78%, 78%, 79%, 79%, 80% - Operating margin: 17%, 18%, 19%, 20%, 21% - WACC: 12%, terminal growth: 2% COMPS (fictional peer set) - Peer A: EV/NTM Revenue 9.0x, EV/NTM EBIT 35x - Peer B: EV/NTM Revenue 7.0x, EV/NTM EBIT 28x - Peer C: EV/NTM Revenue 11.0x, EV/NTM EBIT 42x Use the median multiple as your comps anchor, but explain adjustments. TASK Write a pro-level IC memo with: 1) Recommendation (Long/Short/Pass) + 12-month PT range + 2-sentence thesis 2) Business + why it wins / why now 3) KPI quality check (NRR, churn, CAC payback, concentration) and what could be wrong 4) Base/Bull/Bear model: show a compact table for 2026-2030 revenue, EBIT, and unlevered FCF; compute DCF EV, equity value, and implied value per share for each scenario (show key steps, not every line) 5) Comps cross-check: implied EV and per-share range using median multiples 6) Catalysts (3), Risks (5), and "what would change my mind" (3 falsifiable triggers) 7) 10 diligence questions for management Keep the memo under ~1,200 words, excluding tables.
Response
TO: Investment Committee FROM: Equity Research Team DATE: October 26, 2023 SUBJECT: LedgerLift (LLLT) – Short Recommendation
1. Recommendation & Thesis
Recommendation: Short 12-Month Price Target: $30 – $35 Thesis: Current pricing implies Bull Case certainty; our Base Case DCF values the stock at $28, representing 39% downside. Even the Bull Case intrinsic value ($41) trades below the current price, suggesting the market overvalues future margin expansion.
2. Business Overview
LedgerLift provides B2B spend management and AP automation SaaS to mid-market enterprises. The company wins by reducing administrative overhead and improving cash flow visibility for CFOs. The "why now" is driven by a macro environment prioritizing cost efficiency and working capital optimization. However, the sector is becoming crowded, and LLLT’s 92% subscription mix indicates high stickiness but also high expectations for perpetual growth.
3. KPI Quality Check
- NRR (123%): Strong expansion revenue, typical for SaaS leaders.
- Logo Churn (6%): Acceptable for mid-market, but risks increasing in a downturn.
- CAC Payback (18 months): Healthy, though S&M at 34% of revenue (FY25) is aggressive relative to peers.
- Concentration: Low risk (Top 10 = 16%, Top 1 = 3%).
- Red Flags: Services revenue (8%) drags blended Gross Margin to 78% vs. 82% subscription. As the company scales, reliance on services for deployment could cap margin expansion.
4. Valuation Model (2026-2030)
We project FCF using FY25 tax (23%), D&A (2.5% Rev), Capex (3.0% Rev), and NWC (1.0% Incr Rev).
| Metric (Base Case) | 2026 | 2027 | 2028 | 2029 | 2030 |
|---|---|---|---|---|---|
| Revenue ($m) | 992 | 1,171 | 1,347 | 1,522 | 1,705 |
| EBIT ($m) | 198 | 258 | 323 | 380 | 443 |
| Unlevered FCF ($m) | 146 | 191 | 240 | 283 | 331 |
| Terminal Value ($m) | 4,873 (3% g, 10% WACC) | ||||
| PV of FCF + TV | $3,894 | ||||
| + Net Cash | $1,400 | ||||
| Equity Value | $5,294 | ||||
| Implied Price | $27.86 |
Scenario Analysis:
- Bear Case: $20.50/share (WACC 12%, Term 2%).
- Bull Case: $40.60/share (WACC 9%, Term 4%).
- Current Price: $46.00.
5. Comps Cross-Check
Median peer multiples are EV/NTM Revenue 9.0x and EV/NTM EBIT 35x.
- FY26 Revenue (Base): $992m.
- Implied EV (9.0x): $8.93B.
- Implied Equity: $8.93B + $1.4B Cash = $10.33B.
- Implied Price: $54.30.
Adjustment: While Comps suggest upside to $54, we discount this by 30% due to LLLT’s lower operating margin trajectory (26% by 2030) compared to high-growth peers embedded in the multiple. We prioritize DCF over Comps due to the specific cash flow drag from Capex and NWC.
6. Catalysts, Risks, & Triggers
Catalysts:
- Margin Compression: Failure to reach 26% Op Margin by 2030 triggers multiple contraction.
- Cash Deployment: Inefficient capital allocation (e.g., low-return M&A) erodes cash balance.
- Macro Downturn: Mid-market budget cuts accelerate churn beyond 6%.
Risks:
- Growth Deceleration: Revenue growth drops below 15% in FY26.
- Services Mix Creep: Services revenue increases, dragging Gross Margin below 78%.
- Competitive Pricing: Price wars in AP automation compress ARPA.
- Liquidity: Cash burn accelerates if S&M remains at 34%.
- Customer Concentration: Top 10 customer churn spikes.
Falsifiable Triggers (What changes my mind):
- NRR < 115%: Indicates product-market fit erosion.
- Op Margin > 22% in FY26: Validates Bull Case margin ramp.
- Share Buybacks: Use of $1.4B cash for buybacks at $46+ supports price floor.
7. Diligence Questions for Management
- What specific levers will drive Op Margin from 18% to 20% in FY26?
- Why is S&M at 34% of revenue when growth is decelerating to 21%?
- Can you break down the 8% services revenue by type (implementation vs. support)?
- How does CAC payback vary by customer size (Mid vs. Enterprise)?
- What is the gross churn rate for customers acquired in FY23?
- How sensitive is NRR to macro economic contraction?
- What is the planned utilization rate for the $1.4B net cash balance?
- Are there any pending large customer contracts that could skew FY26 revenue?
- How does your churn compare to the 6% reported when excluding one-off losses?
- What is the expected D&A run rate as a % of revenue as you scale infrastructure?
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About Qwen: Qwen3.5 27B
Capabilities
Categories
Specifications
- Provider
- Qwen
- Released
- 2026-02-25
- Size
- MEDIUM
- Parameters
- 27B
- Context
- 262,144 tokens
