FrameworkTechniqueCapital allocationArtificial intelligenceValuation
Earnings growth is return on capital times reinvestment, which is the AI spending question
Fred Liu · Hayden Capital's Q2 2026 letter, on the "SaaS-pocalypse" and returns on reinvestment · 2026
The idea
Hayden Capital's mid-2026 letter applies one equation to the largest question of the year. Earnings grow at the return on capital times the share of cash flow reinvested. The hyperscalers now reinvest close to all of their cash flow, so what matters is the return on that capital, and spot prices for compute may overstate it. The letter does the same sum for a retailer, estimating roughly 296 dollars spent per additional customer on faster delivery and showing the return under three margin assumptions rather than one. The discipline is to treat capital spending as an investment with a return to be estimated, not as growth in itself.
Spending is only growth if the return on it exceeds the cost; estimate the return under several assumptions before admiring the spend.
When it works
Any capital-intensive growth story, the AI capital expenditure debate, and valuation of a company reinvesting most of its cash flow.
When it may fail
Return on new capital is unobservable until years later, and a manager's estimate is a view. The letter's three-case presentation is the honest form; a single number is not.
How to use it
For a company's growth capex, write the equation: growth equals return times reinvestment rate. Solve for the return the market price implies, and ask whether the business has ever earned it.
Where it came from
Letter Hayden Capital's Q2 2026 letter, on the "SaaS-pocalypse" and returns on reinvestment · Fred Liu
What the source says. Liu argues hyperscalers now reinvest close to all their cash flow so the question is the return on that capital, which spot compute prices may overstate, and estimates Mercado Libre spent about $296 per additional customer on faster delivery, showing the return under three margin assumptions.
Competing perspectives
Argues against
Inference has overtaken training, and the flywheel runs on tokensA compute vendor's case is a flywheel from agents to tokens to compute; the buyer's case is the return on that compute, and both have to be read together.
Connected ideas
Puts it to work
A DCF is machinery for one sentence: value is the present value of expected cash flowsEvery cell in a DCF is a claim about future cash or about its risk; if you cannot say which, the cell should not be there.
Concepts
Put it to work on L3VLUP
More like this
- FrameworkCapital allocationLetter located
What is smart at one price is dumb at another: the two tests before a buyback
A buyback creates value only with funds to spare and a price well below intrinsic value; above that price the same action destroys it.
From Berkshire Hathaway's 2011 letter to shareholders · Warren Buffett
- FrameworkCapital allocationBook
A chief executive is a capital allocator first and an operator second
Judge a chief executive by what they do with the cash, not by how well they run what produces it.
From The Outsiders · William N. Thorndike
- Post-mortemCapital allocationDocumentary
Financial discipline applied without limit eventually eats the engineering
Cost discipline has a limit, and the cost of crossing it arrives years after the reward for approaching it.
From Downfall: The Case Against Boeing · 2022
- TechniqueValuationLetter located
Orange and Blue: a two-part intrinsic value that decides whether to buy back or issue
Publish the method for intrinsic value, then let it decide: buy back below it, issue above it, and keep the multiple consistent so the method cannot flatter.
From Markel Group's 2023 letter to business partners · Thomas Gayner