Why We Model

High-Level of Thoughts

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• When you own a stock, you own a fractional piece in an underlying business
• The price of stock will not always accurately reflect the underlying per/share value of the business - those deviations are your opportunity as an investor
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Think of the model & your process as the weighing machine. What does the market think this asset is worth versus what we think it's worth?

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6 Reasons Why We Model

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1. Understand the business in depth
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   A model forces you to spell out how the company actually makes money: price × volume, mix, costs, working capital, and capex. You see how each product, region, or customer type flows into revenue and cash.
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   Example: For a SaaS firm, you separate new logos, upsell, churn, gross margin, and sales & marketing payback.
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   Quick check: Could you change one input (e.g., churn +1pt) and explain—numerically—how revenue, margin, and cash change next year?
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2. Assess the health of the business (today)
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   By laying out growth, margins, capital intensity, and cash conversion, the model shows if the economics are strong or getting worse. It becomes a single dashboard for “is this business high quality right now?”
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   Example: Retailer with rising same-store sales but shrinking gross margin—net health might be flat once promotions are accounted for.
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   Quick check: Can you point to 3 metrics that summarize current health (e.g., FCF margin, ROIC spread, growth ex-price hikes)?
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3. Analyze business momentum (direction of travel)
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   Updating the model over time reveals trend, not just snapshots: are KPIs improving, stalling, or deteriorating? It helps you separate one-off noise from a real change in trajectory.
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   Example: A chipmaker’s utilization improves for three quarters—your model shows the operating leverage turning EPS faster than revenue.
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   Quick check: Do your last three updates tell a consistent story (better/worse/unchanged) with numbers, not opinions?
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4. Derive an independent valuation
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   You don’t have to “take the market’s word for it.” The model lets you value the company via DCF, comps, or SOTP and then see what today’s price already implies about growth and margins.
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   Example: At $50, the price implies 18% CAGR and 25% EBIT in three years—if your work says 10% and 20%, the stock is likely expensive.
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   Quick check: Can you finish this sentence: “For today’s price to be fair, X and Y must be true by YEAR”?
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5. Identify earnings-revision opportunities
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   Most stocks move when expectations change. A living forecast helps you spot quarters where beat/miss odds are high—because a key driver is inflecting, a cost is falling, or a new product is scaling.
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   Example: You see freight costs rolling off faster than consensus models; your EPS is 8% above the Street next quarter.
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   Quick check: Do you have a calendar of 2–3 upcoming catalysts where your numbers differ from consensus—and by how much?
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6. Put news flow in proper context
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   Headlines are just inputs. The model translates “company wins contract” or “regulator raises fees” into dollars and valuation impact, so you act with math instead of emotion.
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   Example: A price hike of 3% drops straight through at 70% gross margin—your model shows a ~150 bps EBIT lift and +$2 to fair value.
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   Quick check: When news hits, can you update a few cells and say, “This changes fair value by ~X%,” within minutes?