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MyCo, Part 1

Imagine an unusual company. MyCo is in the reviews businesses. It initially made its mark by using machine learning to develop its proprietary MYCO score, which quickly toppled Fair Isaac’s dominant standard for credit ratings. But MyCo didn’t stop there. It expanded its algorithms far beyond credit, purporting to provide ratings on almost anything you might conceivably measure about a person: Sociability, punctuality, hygiene, you name it. Its most popular incarnation, however, combines all its categories into a grand, unified Personal MYCO score. Personal MYCO scores have become pervasive. These days, it’s rare to see a LinkedIn resume, college application, Tinder profile, or campaign ad that doesn’t include one. And yes, quite a few people do consider this development rather dystopian. So much so that expanding its algorithm to rate the bona fides of competing dystopian objectors became a nice little growth market for MyCo.

Unlike FICO scores, MYCO users pay an annual fee to be rated. MyCo has had a monopoly on this score for many years and no credible competitive threats have emerged. Its user agreements surrender rights to enormous amounts of personal information that feed into and supposedly improve its AI ratings system. Unsurprisingly, MYCO has become a household name with powerful brand recognition. Penetration approaches 100%. It is so dominant, however, that its high-growth days are behind it. You can only win so much until you’ve won.

But, MyCo is an unusual company. Let us count the ways.

1. MyCo has a strange governance structure:

A. MyCo’s voting rights are not proportionate to its economic ownership. This of course is not that unusual. But MyCo has a class of shares with no economic interest that controls all the voting rights. These shares, called “U” shares, are distributed to every fee-paying MyCo customer. U shares are not apportioned by volume. As long as you are a current customer in good standing, you have one U share and one vote. U shares are inalienable. Shareholders, who own “A” common shares, do not have any voting rights (except to the extent they are also customers with U shares).

B. MyCo’s bylaws contain a unique directive:

“The Company’s primary objective shall not be maximizing shareholder value. The Company will serve shareholder interests by ensuring their investments provide extraordinarily safe and stable returns. The Board shall always endeavor to consider and promote the interests of MYCO users everywhere and to meticulously maintain MyCo’s stellar reputation.”

In practice, MyCo’s Directors have interpreted this provision by vowing to never let its stock drop by a Significant Amount. Beyond that, it prioritizes the other goals identified in the Charter. A “Significant Amount” is generally taken to mean a low single digit annualized percentage. What this means is that MyCo aims for its stock price to reliably decline a little every year. Why actually aim for an actual annual stock decline rather than, say, setting it as a floor? Because once shareholder safety and stability is assured, the Board believes its main priority is to protect MYCO users and the MYCO brand. It believes that allowing stock price increases would violate both their first directive of stability and their secondary directives by implicitly favoring shareholders over users and the overall MYCO brand.

2. MyCo loses money.

While many firms lose money, MyCo has a monopoly position and has reached growth maturity yet still loses money. In fact, while MyCo has had some years of positive operating income, more often than not it has lost money. Here are MyCo’s revenues and expenses over the last five years:

(billions)
Revenue 300 310 320 330 340
Expenses 310 325 345 335 350
__________________________________________
Earnings -10 -15 -20 -5 -10


Now, many argue that a significant portion of those expenses are discretionary and largely orthogonal to revenue. For example, a big chunk of MyCo’s expenses, around $100 billion a year, consists of its annual contributions to the MYCO Foundation. The Foundation serves millions of low MYCO score users, subsidizing fees, providing free training on ways to improve your score, and offering proactive restitution to any groups that it deems inherently disadvantaged by the MYCO scoring system. The Board believes the MYCO Foundation is crucial to fulfilling the directives of its Corporate Charter, and it is popular with many MYCO users (Class U shareholders). Most analysts believe that these Foundation expenditures (along with a lot of MyCo’s other expenses) could be substantially reduced without significantly affecting sales, though there is no clear consensus on this issue.

Moreover, few believe that MYCO scores are priced at a level that would maximize MyCo’s potential monopolistic profits. MyCo has generally, though not smoothly, raised prices over time. While there is some evidence that revenues are sensitive to price increases, most observers agree that MyCo could raise prices meaningfully without a full offset from lower sales. Of course, raising MYCO usage prices tends to incur the wrath, if not the attrition, of MyCo customers.

3. MyCo common “A” shares have a special feature.

If you hold MyCo common A shares, you are permitted to display your MYCO score in a proprietary golden font anywhere it is used or queried. This has become known as your MYCO Flair. The more shares you own, the fancier your Flair gets.

Although not everyone cares about their MYCO Flair, many people do. The relative fanciness of your Flair is often considered a premium signal, like Porsche or Rolex, over and above the actual MYCO score. Academic studies have generally found some evidence that, given equal MYCO scores, greater Flair seems to modestly increase your chances of getting a loan, job or date. MYCO does not sell Flair separately. You can only access it by holding its common A shares.

There are one billion MyCo A shares outstanding. As a result of its past losses, it has a near-infinite NOL carryforward with no expiration. MyCo does have some debt, but for now pretend it is debt free and holds no excess cash. The Company proudly trumpets its current streak of complying with the Significant Amount clause for 89 consecutive quarters, the longest stretch of its multi-decade operating history. So...

How do you value a share of MyCo?

***

This is the first in what I hope will be a series of notes about MyCo, assuming there is at least a modest level of interest. Why? I have this model in my head about some things that are tricky to think about, or at least have been for me. It’s an uncommon approach, and I’ve found it much more useful than conventional frameworks. So maybe other investors will find it useful, too.

I thought this strange semi-socratic method might be more effective than just trying to flatly spell it out. I could be wrong about that, though. I’m just experimenting with the best way to tell this story. For now, I recommend thinking about the question above -- how would you value a share of MyCo given these unusual dynamics and with such limited information, and maybe also what other information you would want if it were attainable? It might help if you think out loud on this thread. I might not answer questions where information was intentionally held back, but I’d like to gauge interest/willingness in playing along before continuing.
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