Model like a HF Pro (Excel Attached) - Unit Economics
How do top long/short hedge fund analysts model? Part 2.
The absolute best long/short analysts sketch out unit economics, whether they are at a multi-manager or a Tiger Cub. It helps you ramp up on the company but more importantly does the heavy lifting of the model building, helping you identify the core drivers of the model, the key debates around the stock and where to dig deeper.
I have fully sketched out the unit economics of Apple (AAPL) ahead of earnings on Thursday. You can download the full Excel file and flex your own assumptions, including sensitivity to long-term consensus or your own expectations. If there’s a specific stock you want me to sketch out next, just reply to this email and let me know!
Note key drivers are redacted in the screenshot above. Download excel to view.
I wanted to start with the unit economics of a tech company that has a good story with a lot to dig into. I will be putting out a video on phoenixlearning.io, where I will walk through the full AAPL unit economics build (with key assumptions) and give you the framework you can apply to other companies. I will cover how top analysts forecast the core drivers of the model - what data they track and how they approach it. We have already seen one way of breaking down services revenue, which is becoming an even more important revenue segment. I will also go over an alternative approach shown in this excel sheet, how some analysts use it and the pros and cons of each method.
Why build out unit economics?
Remember that in our discussion about retailers and what drives their revenue and profit growth, we covered all the core drivers of the business. The next step is putting those frameworks into math, and unit economics is the best way to do that.
Imagine going straight into model building without doing unit economics first. Some people do it, but it is an incredibly daunting task. We discussed in our previous post How Top Hedge Fund Analysts Build Models that you can strip down any business to a few critical drivers, especially as it relates to how value is created in the stock over time. That’s the point of unit economics, and ultimately completing it inside the model.
Unit economics allow you to translate your understanding of the business into initial math, identify key drivers, see how impactful they are on business performance and earnings and start thinking about what metrics you can do research on. You see what the company reports, what it guides, how accurate that guidance is, whether they report operating income by segment or not and start asking: “if X changes, what is the impact on Y (our sensitivity analysis)?”. It guides your attention to the right place.