The distribution moat and the question underneath it

It traded at 338.38 this morning, -3.55% on the session. I like this business, and the thing I worry about is not the one that gets written about.

Two kinds of moat

Some moats are habits. People do a thing because they have always done it and switching requires effort they have no reason to make. Those decay slowly and are very hard to attack.

Others are contracts. A default position secured by paying for it. Those work exactly as well, for exactly as long as the contract holds, and their cost rises with the negotiating power of whoever is on the other side.

The distinction matters because the second kind can change on a date rather than over a decade.

What I actually watch

• Traffic acquisition cost as a share of revenue, which is the price of the default
• Whether that share is rising, and against which counterparty
• Segment disclosure quality, since the interesting parts are the ones grouped together
• Cash generation after all of it, which is the number that funds everything else

Why I still like it

Because the cash generation is enormous and it funds a portfolio of businesses that are not being valued at much. Some of those will be worth nothing. If one or two are not, they are being acquired cheaply inside the current price.

A conglomerate discount on a business with this cash flow is a reasonable thing to accept, as long as you know that is what you are buying.

The risk to the view

That the distribution arrangement changes materially, whether by regulation or by the counterparty deciding it can extract more. That would not end the business but it would reset the margin, and the market would reprice it quickly rather than gradually.

Priced accordingly, which means I want more of a discount than the cash flow alone would justify.