Qwen: Qwen3.5 35B A3B — Advanced Investment Memo (IC Memo)
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Advanced Investment Memo (IC Memo)
Qwen3.5 35B A3B'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
INVESTMENT COMMITTEE MEMO TO: Investment Committee FROM: Equity Research Team DATE: October 26, 2024 SUBJECT: LedgerLift (LLLT) – Short Recommendation
1. Recommendation
Action: Short 12-Month Price Target: $25 – $35 Thesis: LLLT trades at a 9x revenue multiple that ignores the drag from high S&M intensity (34%), resulting in a 40%+ downside in our Base Case DCF. While NRR is strong, the valuation assumes margin expansion that cash flow dynamics do not support.
2. Business & Thesis
LedgerLift provides B2B spend management and AP automation for mid-market enterprises. Revenue is 92% subscription (82% GM) with 8% services (25% GM). The stock is priced for perfection, assuming rapid margin expansion from 18% to 26% by FY2030.
Why It Wins: High NRR (123%) and low logo churn (6%) indicate product stickiness in a cost-saving category. Why Now: Valuation is decoupled from cash generation. The market assigns a revenue multiple (9x) similar to peers, but LLLT’s FCF yield is significantly lower due to aggressive sales spending and working capital needs.
3. KPI Quality Check
| Metric | Status | Assessment |
|---|---|---|
| NRR | 123% | Strong. Indicates pricing power and cross-sell success. |
| Gross Retention | 94% | Healthy. Low net revenue erosion. |
| CAC Payback | 18 months | Acceptable. Within SaaS norms, but high absolute cost. |
| S&M Intensity | 34% | Risk. Compresses operating leverage; peer avg likely lower. |
| Concentration | Top 10 = 16% | Safe. Diversified customer base reduces idiosyncratic risk. |
What Could Be Wrong: If growth slows, S&M spend will not decrease immediately, causing a margin ratchet effect. A spike in churn above 8% would break the comp model.
4. Valuation Model (DCF)
Assumptions: Net Cash $1.4B, Shares 190m. WACC/Terminal per scenario.
| Metric ($m) | Base Case (2026-30) | Bull Case (2026-30) | Bear Case (2026-30) |
|---|---|---|---|
| 2030 Revenue | 1,704 | 2,214 | 1,430 |
| 2030 Op Margin | 26% | 29% | 21% |
| 2030 EBIT | 443 | 642 | 300 |
| 2030 FCFF | 314 | 460 | 188 |
| Implied EV | $3.74B | $7.72B | $1.70B |
| Implied Equity | $5.14B | $9.12B | $3.10B |
| Implied Price | $27.00 | $48.00 | $16.30 |
Note: Base Case DCF implies EV/NTM Rev ~4.5x vs. Current 9.0x. Bull Case barely clears current price.
5. Comps Cross-Check
Peer Set Median: EV/NTM Rev 9.0x | EV/NTM EBIT 35x.
- Revenue Multiple: LLLT EV ($7.34B) / FY25 Rev ($0.82B) = 8.95x. Matches Median.
- EBIT Multiple: LLLT EV ($7.34B) / FY25 EBIT ($0.15B) = 49.7x. Premium to Median (35x).
- Adjustment: Trading at 50x EBIT while peers trade at 35x requires superior FCF conversion. Given S&M is 34% (vs likely 25-30% peers), LLLT cannot justify the EBIT multiple. The Revenue Multiple is a "growth premium" that ignores cash drag.
6. Catalysts, Risks & Triggers
Catalysts (3):
- Margin Expansion: S&M ratio drops to <30% while retaining growth.
- Acquisition: Strategic buyout at 10x+ revenue multiple.
- Guidance Beat: FY26 Rev >$1.1B with stable margins.
Risks (5):
- Macro Downturn: Mid-market spend cuts (SaaS is often first cut).
- Churn Spike: Logo churn >8% indicates product failure.
- CAC Inflation: Cost to acquire customers rises, extending payback >20mo.
- Competitive Pressure: New entrants pricing below 20% of LLLT ARPA.
- Working Capital: NWC investment accelerates beyond 1% of incremental rev.
Falsifiable Triggers (What changes mind):
- FY25 Op Margin expands to >22% in Q3.
- NRR expands to >130% for two consecutive quarters.
- Net Debt issuance (cash burn turns negative).
7. Diligence Questions for Management
- What is the blended CAC for enterprise vs. mid-market segments?
- How does S&M spend correlate to incremental revenue growth (marginal CAC)?
- What % of FY25 revenue is recurring vs. one-time services implementation?
- How do you plan to reduce the 34% S&M intensity while maintaining 20% growth?
- What is the weighted average contract length for the top 10 customers?
- Are there any deferred revenue risks regarding the 8% services mix?
- How sensitive is Net Retention Rate to customer size buckets ( <$100k vs >$500k)?
- What is the projected Capex intensity for 2026-27 (beyond 3%)?
- Do you have a plan to monetize the 190m share count via buybacks or M&A?
- How does churn vary by industry vertical (e.g., Healthcare vs. Tech)?
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About Qwen: Qwen3.5 35B A3B
Capabilities
Categories
Specifications
- Provider
- Qwen
- Released
- 2026-02-25
- Size
- MEDIUM
- Parameters
- 35B (3B active)
- Context
- 262,144 tokens
