In a session that provided a compelling counter-narrative to the prevailing market caution, Christopher Tsai, President of Tsai Capital, outlined his framework for identifying the next generation of multi-bagger stocks. Dubbed “Value Investing 3.0,” his approach moves beyond traditional valuation metrics to focus on visionary, founder-led companies that are building the dominant ecosystems of the future.
From Cigar Butts to Visionary Compounders
Christopher framed his approach as the next stage in the evolution of value investing:
Value 1.0: Ben Graham’s “cigar butt” investing — buying statistically cheap assets for less than their liquidation value.
Value 2.0: Charlie Munger’s insight: it’s better to buy a wonderful company at a fair price than a fair company at a wonderful price.
Value 3.0: An approach for the modern, software-driven economy. This involves investing in companies with massive addressable markets that are intentionally depressing current GAAP earnings to make heavy, high-return investments in technology and market share. These investments create enormous future intrinsic value that is invisible to static valuation multiples like the P/E ratio.
The archetypal example is Amazon (Nasdaq: AMZN) in 2015. The stock traded at a seemingly insane 500x earnings, yet in retrospect, it was a generational buying opportunity. The market’s “water,” as Christopher puts it—the ingrained heuristic of the P/E ratio—prevented most investors from seeing the immense value being created by the company’s investments in AWS and logistics. A key tenet of this philosophy is that durable economic moats are not something you find; they are something that is built over years of visionary leadership, a unique culture, and disciplined reinvestment.
Backing Visionary Leaders
Christopher’s process is centered on identifying and backing exceptional founder-owner-operators. He highlighted two current examples.
Brad Jacobs and QXO: Christopher is a significant backer of serial entrepreneur Brad Jacobs’ latest venture, QXO. Jacobs’ playbook is to acquire a platform company in a large, fragmented industry and use it as a vehicle for consolidation. With QXO, he has acquired Beacon Roofing Supply (Nasdaq: BECN) as the platform to roll up the $800 billion building products distribution industry. Jacobs’ strategy is to professionalize operations, drive margin expansion, and use QXO’s public stock as a highly-valued currency to acquire smaller, cheaper private competitors. Christopher believes Jacobs can deploy capital at 30-40% IRRs and will consolidate the industry much faster than Wall Street expects, potentially raising another $5 to $7 billion in equity within the next six to nine months to accelerate the pace of acquisitions.
Elon Musk and Tesla: Christopher presented a bullish long-term thesis for Tesla (Nasdaq: TSLA), a stock his firm has owned since 2020. He argues the market is making a categorical error by valuing Tesla as a car company. The true thesis—”Tesla 2.0”—is that the company is a software and AI powerhouse. The existing fleet of 8.5 million vehicles constitutes a massive installed base, analogous to the iPhone ecosystem. Tesla’s next phase of exponential value creation will come from selling high-margin software, primarily its Full Self-Driving (FSD) subscription, onto this network. He believes Tesla has a commanding lead, owning roughly 80% of the autonomous vehicle market. Like Amazon in 2015, Tesla’s heavy R&D spending penalizes current earnings but is building a durable, quasi-monopolistic position for the future. On a risk-adjusted basis, Christopher views Tesla as the most undervalued company in his portfolio.
This session crystallized one of the central debates in modern investing. While a top-down analysis of aggregate AI capital spending may suggest a bubble, a bottom-up analysis of a specific, dominant player may reveal a generational opportunity. An investor’s returns in the coming decade may well depend on which of these perspectives proves correct.
Let’s go deeper.
Transcript
The following transcript has been lightly edited for readability.
Christopher Tsai: First of all, to preface that, in our top five holdings is a company called Markel, which we all respect very much. Talking about legacy and building durable moats, Tom has done an incredible job with that company, and we’re proud to have it in our top five. But I came to the conclusion many years ago that the companies that truly wind up being multi-baggers—the companies that might not appear cheap when you’re looking at them but actually wind up being very cheap—usually don’t have any economic moat, none at all.
This concept that we need to look for economic moats in the realm of potential multi-baggers is not accurate. We don’t screen for economic moats. You can’t screen for it anyway, but that’s not something I’m looking at. What I’m looking for are companies that have a truly unique culture and businesses that demonstrate the ability to deploy capital at very high rates of return, particularly on incremental capital, which doesn’t necessarily show up on a total balance sheet level until later. You need to drill down into the unit economics a bit. I’m not talking about CAC or customer acquisition costs; I’m talking about if you’re selling a can of soda, how much profit are you making per can of soda, per share. I like to drill down on that.
It’s about looking at businesses that have the culture, the ability to reinvest into large markets at attractive rates of return over a long duration, having the vision as to where a business is going, and trying to understand trajectories as to what those potential outcomes can be. Unlike in physics, where there’s physics envy, you have to get comfortable dealing with shades of gray. You have to handicap that in a way where you’re managing portfolio risk. You’re not doing it across one company, but across many companies—or at least a group of companies that you think have or are in the process of developing massive, durable competitive advantages. Often, that goes unnoticed by the marketplace as it’s being built.
In the case of Amazon, for example, in 2015 Amazon was selling at 200 to 500 times earnings; it actually peaked at 497 times earnings in January of 2015. That was pretty much at the lowest point in the stock price over that period, at about $15 a share. If you were looking at a moat, it didn’t really have one, at least not a perceptible one. If you were looking at valuation, that was a great value stock in 2015 when it was selling at between 200 and 500 times earnings.
John Mihaljevic: Culture underlies moat, and culture itself often comes from the person at the top, especially if they’re a founder. One such person you have backed in the past and back currently is Brad Jacobs. Tell us a little bit about your history with Brad and what you think of QXO, which he is doing at the moment.
Christopher: I first met Brad in 1997. Nobody knows this, but I actually went to work for him for a couple of days in Greenwich, Connecticut. I finished college the same year, and New York was too much of a draw, so I didn’t want to do the reverse commute. I decided to move back to Manhattan. But I spent a few days working with him and a lot of time with him outside of the office.
There was one moment when I was meeting him in his living room early one morning. He came down and he looked a little stressed, and I said to him, “What’s up? Is everything all right?” He said, “Everything’s great. I’m just extremely anxious about the markets and the world.” I said, “That’s probably not the best way to live life every single day. You’ve done very well for yourself.” He said, “Actually, I think it’s a great way to think about your capital. You want to be anxious, you want to be on your toes every single day.” As I was thinking about this and talking to him for about an hour, I realized how much importance he places on downside protection.
I was fortunate to have a backseat in the formation of United Rentals because my late father was one of the original seven or so investors. United Rentals, by the way, was formed with $5 million. That was it. The whole company was $5 million, and then they did another round with Merrill and some other firms. I had the opportunity to watch Brad work and admire how he treated people and how he was building a culture there. I saw that later at XPO, which I was involved with.
Now, for his latest venture, QXO. For those who don’t know, QXO is his latest venture and probably his last. If history is a guide, he’ll be involved for about a decade or so. He tends to get bored after about a decade and moves on to the next thing. QXO was formed by a group of investors, primarily his own family. Brad and his family put in $900 million. They then raised about $100 million from firms like 3G, Sequoia Heritage, and Jared Kushner put some money in from Thrive. They launched with about a billion, then raised another $4 billion pretty much immediately, had $5 billion of cash, and then took on some debt and took over a company called Beacon Roofing Products. Beacon is the core asset for QXO today. It is the largest company in North America in roofing, complementary building products, and waterproofing. This is the platform for Brad’s next venture, which is to consolidate the building products distribution industry.
John: Can we go a little deeper into that thesis? How big is that market, how fragmented is it, and what kind of pace do you expect to see from Brad in terms of rolling up the smaller players?
Christopher: In terms of pace, I don’t think Wall Street has it right. If you go through the sell-side research reports, you can get an idea of where Wall Street is mentally. They probably handicap it a bit to be conservative, but QXO is going to grow much faster than the street expects. My guess is they’re going to do a raise of another $5 to $7 billion within the next six months. That will surprise a lot of people. I don’t think the market is anticipating that big of a capital raise, but that’s what I’m thinking.
There are 20,000 players spread across North America and Western Europe, so it’s super fragmented. They probably have their eyes on many companies right now, including about nine or 10 large publicly traded companies. What’s interesting about this industry—besides its size, with an $800 billion TAM—is that many of the players are smaller. In the building products distribution space, the smaller players just don’t get the scale. Only 3% of the business is done via e-commerce.
Brad’s playbook is to acquire a business—in this case, Beacon—and improve its efficiency. I think he takes EBITDA margins up from 9.5% or 10% to roughly 15% in three years, which would be in line with his playbook. Then, he not only does bolt-on acquisitions but acquires other companies using a currency—the publicly traded QXO—to buy companies at roughly half the multiple of the private companies. He’s one of the few people that has executed this kind of an approach successfully over multiple ventures.
Many people fail. Base rates for rolling up companies are low. But in this case, the stars align because he’s buying quality assets. He’s buying businesses that are throwing off lots of free cash flow, with 50% free cash flow conversion. Put it this way: it’s one thing to compete against Mark at Meta, and a totally different thing to compete against Brad in roofing. I’m positive about the approach he’s taking. He’s built an incredible team already, and they’re going to move very quickly—faster than people think.
John: How do you think about the long-term return you can get there, given the price to be paid today?
Christopher: They’re extremely price sensitive. Brad will walk away from a deal if it’s 1% away from his targeted price. In the case of QXO, I am confident they’ll be able to deploy capital at between a 30% and 40% IRR. That doesn’t mean that’s the IRR on the whole business, but it does mean they’re deploying it in new deals at that rate. When you look at the entire company, that translates to roughly a 17% to 22% return on capital for the entire company. I think they can do that at scale for quite a long time, given the size of the market. If we have a recession, they’re in an advantaged position because there are so many people willing to put money into this business that Brad has turned down. They have access to capital if they need it.
John: Other than Tom Gainer and Brad Jacobs, who are some other great leaders that you respect and like to invest alongside?
Christopher: I made the huge mistake of selling our Spotify position way too early, so Daniel Ek would certainly be one of them. I clearly made a mistake exiting that one too early. I do like founder-owner operators.
John: Let me touch on Tesla. You’ve been a long-term shareholder there. Help us understand what you see—or what you have seen for a while—and why that company is so special.
Christopher: Perhaps we can talk about Tesla in a few layers. The broad theme today regarding Tesla is very similar to the thesis I had when I first spoke about it publicly in 2020. We’ve owned it since February 2020, and it’s done well for us. We’re up around 11 times now, but I think it goes much, much higher—a lot higher. The broad theme is that they have massive competitive advantages across multiple verticals. Those advantages are cost, cultural, and scale advantages, and those elements still remain today.
What’s misunderstood is what’s happening behind the scenes, and it’s a very similar situation to what was happening with Amazon in 2015. There’s a story by the American author David Foster Wallace from a commencement speech at Kenyon College. He starts it off something like this: There are two young fish swimming along, and an older fish comes by and says, “Hey guys, how’s the water?” The young fish nod and swim off. A few minutes later, one of the young fish turns to the other and says, “What the hell is water?”
In the context of investing, I think a lot about this, because the water that investors swim in—the market dogmas, the heuristics, the ingrained assumptions—are all around us. They’re like water: essential, ubiquitous, but invisible, and they make us behave in certain ways.
One of the problems with a heuristic like a price-earnings ratio is that it works great in most cases because most companies converge over time. There are base rates we have to pay attention to, but it doesn’t work well with potential multi-baggers—the 100-baggers of the world. It just doesn’t work. Ron Baron, who became a mentor of mine, explained this to me. He explained that companies redefining ecosystems, building something, or disrupting an existing business model might be doing so in a way that hugely penalizes current earnings. As we know, multiples are static—a one-year number, past or forward earnings—but the value of a company is the discounted cash flows all the way out into the future.
You have to think about that. These transformative companies like Tesla are redefining entire industries. They’re creating an ecosystem that will have lasting durable value, as Amazon has done. This is what we can call Tesla 2.0. After it has gone up quite a bit in the past five years, the next iteration is going to surprise a lot of people. That next iteration is that you have 8.5 million units in the installed base, and it’s like an iPhone. The car is the installed base on which software is being sold. With the flip of a switch, as a result of years of developing the software behind it—which has been invisible to many people—you have a company that owns roughly 80% of the autonomous vehicle market. I think that winds up creating exponential value. We figure the value on each car is five to 10 times the current value.
There’s a lot happening that is not in the numbers yet, just as what Amazon was doing in 2015 was not evident in the numbers. To capture that, you need to be thinking about where the earnings are going, not where they’ve been. Stan Druckenmiller said it best: you need to know where the earnings are going to be in three, five, or 10 years, not where they were. That requires vision.
John: I’ll push back a little bit. How do you think about the price that you’re willing to pay? Surely you have to connect the two, and there has to be a limit at some point. What’s the thought process there?
Christopher: It’s a great question. I was just talking about this with my friends Josh Tarasoff and Chris Begg, and I think we all think in terms of vectors. We’re looking out at what we think the company is going to be worth. And are we okay with a bearish case scenario? Again, there’s no physics envy; in investing, there are shades of gray. We need to get comfortable with what the base rates are—the lowest-case outcomes. If I can underwrite the company based on my most bearish forecast, then I will underwrite it.
The question becomes, how do you think about not overpaying? You want to have conservative numbers in your assumptions and then discount that. We won’t touch anything unless we’re happy with the bearish case scenario. With the numbers I’m looking at today, I don’t see how we wind up with something that is not very attractive, even from these levels. In fact—and I’ll get a lot of pushback on this—if I go through our portfolio of 20 companies, I think it’s probably the most undervalued company in our portfolio today. By undervalued, I mean it has the highest rate of return relative to the risk we’re assuming.
Audience member: Going back to QXO, I agree that Brad will build the company and buy growth. But do you think about what kind of revenue he’s buying? For instance, the non-discretionary roofing revenue versus other housing-adjacent distributors that don’t sell non-discretionary products? I’ve looked at it thinking about whether this is a recurring revenue company or a company buying growth that might be a bit more lumpy.
Christopher: What’s interesting about roofing is that you can only look up at a leaking roof for so long before you do something about it. For their Beacon business, 80% is repair and remodeling. I can’t say for certain which direction they might go because they can go into many areas, but in terms of roofing, it’s a much more stable business than many other areas within building products.
I can say that he doesn’t buy growth for growth’s sake. I’ve read somewhere that Brad buys only great companies; I don’t think that’s true. I think he purposely buys companies that are not great so he can fix them. His goal is to double EBITDA in roughly three to four years. In the case of Beacon, I think it’s three and a half years, and they’re very much on track. Beacon, by the way, had a scary, nine-level org chart that has been dramatically simplified in just a few months. So, stability of revenue is very important to this playbook. I wouldn’t be surprised if they continue to grow within that space, but then they’ll hit other adjacencies and focus on companies that have that more recurring revenue element.
Audience member: Also on QXO, for the roofing manufacturers, which I believe are fairly consolidated, especially on the commercial side: what is his approach to setting terms and managing that relationship? I imagine it’s part of how he would expand margins.
Christopher: Yes, the manufacturers, like the GAFs and the Carlisles of the world. He’s trying to create value not just there but also among the home builders. With all the companies he’s built, it’s about creating win-win-win ecosystems. If you think about biology, the most durable relationships are those that have a win-win-win framework, like the sea anemone and the clownfish. That’s the kind of thing Peter Kaufman at Glenair would talk about, and it’s what Brad thinks deeply about: making sure he’s taking care of all constituents. The manufacturers are key to that equation.
How is he adding value to the home builders? By making sure they get product efficiently and without delay. Land for the home builders is hugely important, and there’s not a lot of it to go around. So when a delivery arrives at the wrong time or there’s nowhere to put it, that’s a huge problem. Smaller players can’t capitalize on that. Larger players can, specifically when they’re using AI and machine learning to make the whole distribution cycle smoother. Brad is trying to add value to the manufacturers and distributors in a whole bunch of ways and become more integral not just to home builders but to commercial as well. Commercial is another vertical that’s not talked about a lot, but there’s basically $2 trillion of infrastructure spend happening in this country over the next two decades.
John: On QXO, how will the growth be financed? You mentioned they raised $5 billion. Will it be additional equity capital from here on out, or will it be debt and then delever? What’s the formula?
Christopher: I’m not on the management team and I don’t have a board seat, so I can only speculate. Brad’s not afraid of using debt; he structures it very well. When you have built massive relationships with so many investment banks over the years, your use of debt is a little different than the average person’s. People have talked about John Malone having too much debt, but he doesn’t because he has certain structural advantages. Brad has structural advantages because of his relationships, but he is cautious about debt.
I anticipate a massive capital raise in, say, six to nine months. What is massive? Between $5 and $7 billion. That’s the equity piece. I think he’ll leverage that with another $5 billion or so. I wouldn’t be surprised if he raises another $10 billion pretty quickly. The publicly stated roadmap is that they go from zero to $50 billion within roughly 10 years. I think they get to $50 billion much faster because they’re still buying companies at attractive rates.
There are really only two companies on the planet buying building product distribution companies at scale: Home Depot and QXO. He’s attracted some attention. GMS and Ferguson got away from him—Ferguson is still publicly traded, but GMS was bought by Home Depot. There are only those two players right now doing this at scale. I anticipate him moving very quickly, and it will be done in a highly accretive way as long as valuations don’t get out of hand.
Audience member: You spoke about looking for a truly unique culture. As part of your research process, who do you speak with, and what key questions are you trying to answer to figure out if a culture is truly unique? And when you look at company A versus company B, what helps you decide that one culture is a winning culture and another is not?
Christopher: Typically, there isn’t a company B. We act very infrequently. I’m trying to find situations where, at least to me, it’s obvious. I might get it wrong, but I’m trying to find companies where I believe there isn’t a number two. In the case of Tesla, I don’t think there’s a number two. When you have somebody who’s an engineer’s engineer, an extremely intelligent person, an extremely skilled capital allocator, who gets over 3 million job applications per year, there’s clearly a certain attraction to the SpaceX and Tesla ecosystem where the brightest people want to work. That’s very powerful. Nobody else has that. I’m trying to look for those situations.
Daniel Ek at Spotify is another example. Brad creates this unique culture in a different way, from a very human standpoint. In QXO, the Q is for quality, and the X and O are for love. He thinks about treating his employees and his constituents with love. That’s a very interesting ecosystem, and it brings people into the workplace in an energized way with a mission-driven purpose. I’m looking for mission-driven businesses.
John: How do you decide when to part with a holding?
Christopher: That’s the hardest question. All great growth companies go through challenging periods and growing pains. For the compounding process to work properly, you need to give companies the ability to work through those growing pains. I’ve found through my own costly mistakes, and by speaking to great investors, that the biggest mistakes are often from selling compounders too soon. I try to give companies the benefit of the doubt once I’ve decided to invest in them.
It would be very hard to do this as an investor, and even harder as a professional money manager, if you only owned one, two, or three companies. There will inevitably be periods where companies go sideways or down, and it would be very hard to hold through those periods. The way I’ve structured things to get around that is to own more than a few companies. We own 20 companies today. They’re weighty in the top five and still weighty in the top 10. Owning 20 companies allows us to weather certain periods, and I give the benefit of the doubt to management teams that have shown the ability to reinvest capital attractively over time.
A metric I use in all cases is, on a rolling five-year basis, how much market value have they created for every dollar of retained earnings? I then adjust that to make sure we’re looking at a valuation that makes sense at that time based on my estimate of the company’s intrinsic value. This helps avoid distortion from periods where you might have a bubble.
Audience member: As you were talking about Tesla, I thought about something I’ve heard about recently: value investing 3.0. Do you have any brief thoughts on that and how it would fit into your framework?
Christopher: There are different roads to success. I believe that to be successful, you have to be true to your heart and your inner constitution, and a lot of that has to do with how you look at the world. For those of you who may not have heard about the idea of value investing 3.0, I’ll give my friend Chris Begg and maybe Josh Tarasoff credit for coining that term.
The idea is that value investing 1.0 would be Ben Graham. You’re buying companies at less than their net asset value, or “net-nets.” You’re buying companies that are cheap—cigar butts, in a way. They are trading for less than 100 cents on the dollar, and you wait until they get to 100 cents and then you exit and move on. Clearly, that worked very well during a particular time. It may work well in certain markets today—not in America or other developed markets—but it doesn’t work very well at scale.
Then Charlie Munger comes in and says there are better ways to invest capital. Let’s think about how to deploy capital at scale within Berkshire in a way that makes sense and is true to the Ben Graham discipline. Charlie says we need to buy quality. Sometimes we have to pay up for quality, but not too much. We might have to pay up for it because that’s the price to get into the party, but we do it in a way where we still think we’ll get an attractive rate of return. That’s the Costco and Coca-Cola of the world. I think Buffett paid a fairly lofty multiple, relatively speaking, for Coca-Cola at the time.
Then there’s the idea of 3.0, and it makes sense. I don’t think it’s a term we’ve created to make the discipline not a discipline anymore; I think there’s a lot of merit in it. Value investing 3.0 is important to understand because the nature of our economies has changed. We’ve moved from manufacturing to service and increasingly from service to software. The economics of software companies, in particular, don’t get reflected accurately in GAAP income statement accounting as a traditional manufacturing company would.
Value 3.0 is about thinking about investment, very much in line with how Ron Baron—who’s been hugely influential to me—thinks of the world. It’s about investing in companies that have large addressable markets where you can deploy capital at high rates of return, but that might depress earnings now and create higher intrinsic value later. What happens is the more you invest, the lower your current earnings go and the higher the multiple goes. But if your investment thesis is correct, you’re creating more intrinsic value, so you’re actually getting something at a cheaper price. That’s where a heuristic like a price-to-earnings multiple falls apart for a specific kind of company, though it works well for more mature companies and probably always will.
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